2018 Year-End Review and Industry Predictions for 2019

 

Finally, after all the hype and excitement, commercial 5G mobile services have gone live. South Korea was first out of the gate, with local operators SKT, KT and LG Uplus all launching commercial services on 1 December. However, Koreans will need to wait until next March before 5G handsets become available; the service is limited to mobile routers for now.

 

Elsewhere, there has been no shortage of press announcements detailing trials and launch plans. While many operators have been claiming “mine’s bigger than yours”, others have – perhaps wisely – cautioned against over-optimism in the short term. The truth is, 5G networks will come in a variety of shapes and sizes depending on MNOs’ spectrum choices, cell site design, backhaul options, and network configuration. On top of this, each MNO has its own strategic priorities, whether that’s offering the best mobile broadband experience, reducing last-mile costs for fixed broadband, or gaining a foothold in Industry 4.0. Just like a Swiss Army knife, 5G offers many different tools. The winners will be the operators that find best use for them.

 

 

In fixed networks, we reached 1B broadband connections worldwide and investment in fiber continues at pace. As we wrote last year, key drivers for fiber include mobile backhaul, growing enterprise demand, along with a land grab for consumer broadband in some countries. Even the UK – long seen as a fiber laggard – is now in a fiber construction boom, with CityFibre, Hyperoptic, Openreach, TalkTalk and Virgin Media announcing investment plans totaling £billions. Elsewhere in Europe, Spain and France reported impressive growth, each with a run-rate north of 1M connections/year. While over in the US, AT&T has added 3M new fiber connections this year – with a target of getting to 14M by mid-2019. China, however, is in a league of its own… adding about 1M connections each week!

 

All this fiber growth is being fueled by interest from financial investors, particularly from infrastructure funds who now have confidence in fiber as a stable, long-term play. In addition to new entrants, there’s also interest in existing assets: Altice’s sale of a major stake in its French FTTH network for €1.8B and Elliott’s agitation for Telecom Italia to spin off its network show there is appetite where a deal can be done.

 

 

It was a bumper year for TMT bankers, with a raft of deals announced and/or completed this year. Familiar investment themes included vertical integration, geographic expansion, scaling-up, and fixed-mobile convergence. Leading the pack was AT&T’s $85B acquisition of Time Warner, followed by Comcast’s $27.9B winning bid for Sky. Meanwhile in April, Sprint and T-Mobile announced their romance was back on – they’re now awaiting the FCC and DoJ to bless their nuptials before they tie the knot. Over in Europe, LGI sold its cable businesses in Germany, the Czech Republic, Hungary and Romania to Vodafone for €18.4B; and in the Netherlands, T-Mobile and Tele2 merged in a rare 3-to-4 MNO deal with no conditions. 2018 also saw further consolidation in the Nordics with Tele2 completing its acquisition of ComHem in Sweden, Telia acquiring GET and TDC Norway, and TDC itself being acquired by a group led by Danish pension funds for $6.7B following investor pressure.

 

In IPO news, two of the world’s largest music streaming services had their market debuts this year. Spotify and Tencent music both listed on the NYSE and both achieved $20B+ valuations. Interestingly, Spotify chose a direct listing over the traditional IPO path, leveraging its strong brand to bypass the banks and sell direct to investors. One wonders whether other tech unicorns may follow Spotify’s example in the years ahead.

 

 

If we could pick one word to describe the telecoms industry in 2018 it would be “transformation”. However, while pretty much every telco CEO has a plan, there is no single view of what transformation means for a traditional network operator. On the cost side, BT, DT and Vodafone all have plans to trim €1B or more off their operating expenses; many firms announced job cuts in the thousands; and, automation and AI are seen as key enablers. Huawei went as far as saying it could reduce Network Operations by 90%. To get to these savings, telcos desperately need to hire engineers with software and SDN/NFV skills which are, paradoxically, in short supply.

 

Looking beyond cost, we see many telcos now pursuing “digital transformation” which combines the automation/AI mentioned above, more use of digital sales and support channels, and greater internal agility and innovation. The most ambitious are looking hard at how to reposition their firm, e.g. as a platform provider (think “Edge Computing”), or as developer of over-the-top applications, no longer tied to the operator’s own network.

 

 

 

Three narratives stood out for us in digital media this year. First, in online video, the arms race for high-quality content continued to escalate. Competition for consumers has inflated budgets for original content, and there’s probably never been such a good time to be in production. Netflix said it would spend $8B this year, Amazon is estimated to be in for $5B, and Apple is just getting started at around $1B. This is before we even get to the Hollywood studios, Disney’s acquisition of Fox, and the planned launch of Disney+ next year. Clearly there’s a big question on sustainability and it’s going to take some deep pockets to stay in the game.

 

Second, in broadcast TV, the remarkable tale of industrial-scale piracy in the Middle East. Qatari broadcaster BeIN Sports is seeking $1B in damages from Saudi Arabia for its alleged involvement in a pirate satellite channel that was illegally re-broadcasting premium content including the FIFA World Cup and the Formula One World Championship. Called BeoutQ, the pirate channel had its own set-top boxes, overlaid its own digital on-screen graphic over the BeIN logo, and no doubt benefited from the alleged Saudi ban on imports of BeIN’s own set-tops. The action is widely seen as a spillover of the 2017 deterioration in diplomatic relations between Saudi Arabia and Qatar.

 

And third, in video games, we had the runaway success of Fortnite. Released in 2017, Epic’s multi-player, online shooter had notched up 200 million registered users by November, a 60% jump in 6 months. With revenues exceeding $1B/month, Fortnite is a great case study in free-to-play gaming. As anyone with teenage children will attest, this game is incredibly addictive and – much like “the floss” dance – a lot harder than it looks.

 

 

Our expectation that privacy and data security issues would only get worse in 2018 did not disappoint. Top prize this year goes to the Facebook/Cambridge Analytica scandal in which the personal information of millions of users was harvested and traded for political advertising. Quite remarkably, all the data had been obtained from Facebook’s platform without any need for hacking. Other notable mentions go out to Marriott Hotels (details of c.500 million users stolen), Under Armour (150 million), Quora (100 million) and myHeritage (92 million) which all suffered security breaches of one form or another.

 

2018 also saw the EU GDPR legislation come into effect, setting new, harmonized requirements for the handling of EU citizens’ personal data. Maximum penalties for non-compliance are the higher of €20M or 4% of global revenues, which is hopefully sufficient to focus minds. We’d like to believe that this will lead to fewer incidents like those above, but sadly think that there’s not going to be much improvement in the near-term.

 

 

Returning to our opening theme, we’ve picked a couple of examples to illustrate the impact of politics and government. First up, in April, US action against Chinese vendor ZTE precipitated an extraordinary sequence of events. When ZTE was found to have broken the terms of its settlement for Iranian export violations, it was blocked from trading with US firms, many of whom were key suppliers. Unable to purchase vital components, ZTE soon shut down its operations causing serious knock-ons for both its suppliers and customers worldwide. The ensuing chaos was only halted when the US later rescinded the ban and instead imposed a $1B fine and changes to ZTE’s board.

 

Our second example is from the tech sector and concerns the failed attempts at consolidation between the giants of the semiconductor industry. We’ll spare you the twists and turns of this long-running saga. The tl;dr goes something like: Broadcom’s $140B offer for Qualcomm gets blocked by the US; Qualcomm then later tries to buy NXP for $44B and gets blocked by China.

 

If nothing else, the political focus on TMT this year shows the strategic importance of the sector, and also how reliant the whole industry is on global supply chains.