5G : A Tech Revolution needing Capex...Paradigm Shift thinking !!
When you have time you must read this book : Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, by Carlota Perez.The Author talks about “techno-economic paradigms and Big Bang” .According to the Author a revolution needs a highly visible attractor to appear ie BIG BANG , symbolizing the new potential and sparking the imagination of pioneers.
Which ofcourse brings me to 5G : is it possible, that 5 G will trigger a new era that is defined by connectivity and intelligence that enables us or machines to interact with physical or virtual objects in ways that were just not possible before ? By all accounts 5 G will lead us to design better robots , self drive cars , data mining and analysis, medical diagnosis, stock-trading analysis and “other smart human-interactive systems and machines in the future .
Telcos and ISP giants are already implementing an end-to-end, software-defined networking layer that dynamically connects distributed and diverse workloads, networks and devices, and creates end-to-end virtual network paths or slices . Till finally behold ...the creation of a new ultra-high capacity and continuously reconfigurable network fabric, with the reimagining of the core, metro and access layers and architecture.
Marc Andreessen penned his famous “Why Software Is Eating the World” essay in The Wall Street Journal years ago. Today, the idea that “every company needs to become a software company” is considered almost a cliché. The introduction of 5G will allow operators to become more flexible and efficient by moving from a rigid network to an agile one that can meet many diverse needs with new, as-a-service business models using network slicing. A network slice conceptually decouples a network from the underlying physical infrastructure, thereby providing individual, isolated and elastic virtual networks on demand, with unique defined characteristics.
According to Perez technological revolutions happen in predictable cycles, spanning ~50 years in phases which is what I would expect with 5G to start with an Installation Phase.A new promising technology sees explosive growth as venture capitalists, seeking high profits, invest in new activities and firms.Investments reach irrational exuberance level.
Many early expectations will be disappointed, leading to collapse of bubbles created by financial speculation.However, this boom installs the infrastructure that paves the way for…Deployment Phase. A robust growth occurs, built on the infrastructure of installation. The technology becomes widely adopted across the economy and leads to fundamental growth in a “new economy.”
In any case piles of Financial capital is crucial in the installation and deployment of new technology. As the revolution matures, technological innovation shows decreasing returns and markets become saturated. Growth and profits are threatened. Social unrest reoccurs when the growth that was promised does not materialize. So whats the way forward for Telcos and 5G ?
While telcos might be drawn to retain network advantages by owning and individually implementing 5G networks, they would be presented with major challenges and discover that they would not be able to replicate the success of previous generations of networks under this similar model. This beckons the consideration of alternative implementation models of sharing or leasing access to a single 5G network.
Telcos which perpetuate the network ownership model would be presented with two main challenges. Firstly, they would be laden with gargantuan capital outlays – required to enhance current telecommunication infrastructure – estimated to be 2.5x of current levels over the next five years. Their diminished cash flows might also hamper their ability to obtain financing for these capital expenditures at a feasible cost.
Secondly, additional expenditure from operating the 5G equipment would cause a drag on their earnings. As a result, these telcos would experience a reduced return on invested capital (ROIC) of 12% according to savvy insiders in the Investment community.
Comparatively, under the 5G network-sharing model, where telcos would collectively contribute towards the 5G infrastructure roll-out, there would be less additional capital outlay and savings on operation costs from industry-wide economies of scale. This would improve the ROIC to 15% from 12%.
Under the leasing model, telcos would access 5G networks from a single network provider, and achieve a ROIC of 15%, comparable to that under the 5G network sharing model. This occurs as the absence of additional capital outlays is mitigated by lease payments to the single network provider. Under this structure, the single network provider – likely to be a telco equipment provider – would take on the 5G infrastructure assets under favourable financing conditions due to the stability of cash flows generated.
The value from the lower costs of financing of the single network provider underpins the difference between the 5G network leasing and sharing models. Notably, even with the carve-out of 5G infrastructure assets, telcos under the leasing model are capable of achieving comparable earnings as telcos which possess their own 5G networks
One would certainly expect that telcos under the 5G network-sharing and leasing models to judiciously manage their 5G-related capex savings by investing in fast-growing and established digital businesses. This is preferred to small investments scattered across a wide range of digital services, which tend to yield less favourable results.
Digital business' should be the focus, as it represents approximately 7x the market size of providing incremental connectivity services. This transformation toward digital businesses as a diversified source of earnings could potentially elevate telcos’ ROIC further. Telcos must convince their Investors with some innovative business models to poney up the billlions.
Promising innovations such as 5 G will attract idle capital because the big-bang event kicks off a flywheel effect of capital and labor that leads to the next revolution cycle…we are already talking 6 G and Terraherz wirless…its gets better and better !!
Sadiq Malik