History scholars will no doubt look back on 2018 as a turbulent year in international politics. For those of us that obsessively follow the telecoms, media and technology (TMT) industries, it has been a long time since geopolitics had such an impact on our sector. Tensions between the US and China have featured large in 2018, with trade tariffs, export sanctions and security concerns providing a steady flow of news throughout the year.
2018: The Year That Was
5G goes Live!
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.
Investors on a full fiber diet
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.
Another year of mega-deals
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.
Transformers – Telcos in Disguise
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.
Predictions for 2019
Looking forward to the year ahead, here are our predictions for 2019:
Fiber assets will attract more investment
Investment in FTTP networks will continue to gather pace with renewed confidence from the financial sector and a desire to capture first-mover advantage. Mobile backhaul will play a crucial role in new build, with demand for multi-Gbps backhaul at macro sites and, at least in the US, dense networks for small cells. Meanwhile, FTTP consolidation will start to play out in the most mature markets.
We’ll start to see differentiation in 5G strategies
The launch of 5G services during 2019 will start to show clear differences between mobile operators in how they view this new technology and how they want to use it. MNOs will pursue strategies that best leverage their own position in spectrum holding, network assets, customer base, and financial resources. Divisions will emerge between those initially focused on fixed-wireless access versus mobility.
In-home Wi-Fi will become a new growth area
In residential broadband, consumers will become increasingly aware that in-home Wi-Fi is often a broadband bottleneck. In response, we expect to see more ISPs launch managed multi-room Wi-Fi solutions. Where successful, these will improve customer experience and provide ISPs with a new, sticky revenue stream.
Network operators will move beyond trials in NFV deployment
Surely 2019 will be the year in which we see a wider range of virtualized network functions in wireline (fixed) networks? vBNG and vCDN are likely candidates as service providers optimize their broadband networks for yet more streamed video content. By pushing caching closer to the users, operators will be able to reduce CapEx and deliver improved QoE.
The Edge Computing market will start to heat up
Follow developments in Edge Computing closely. Next year we believe the competitive battleground will become better defined from a technology, product and market perspective. Players in the market will jostle for attention, each pointing to their own specific strengths.
Established players will launch managed security services
With the constant stream of news on security breaches, we expect to see more activity in Managed Security services from telecom and technology companies. Applicable to both the consumer and business segments, customers are becoming overwhelmed by the scale and range of threats, creating opportunities for a more proactive stance in IoT, Smart Home and business services.
Pay TV providers will invest heavily in customer experience
As the cord-cutting and cord-never trend continues into 2019, video subscriber retention will remain a top priority for pay TV providers. To promote retention and customer loyalty, providers will attempt to differentiate from one another and demonstrate value to the consumer through features such as streamlined UI/UX and optimized content recommendation systems.
Content fragmentation will lead to more piracy and credential sharing
The power struggles to gain competitive advantage in content distribution will see content owners investing more in direct-to-consumer services and attempting to withhold content from Netflix/Hulu. As a result, it will become increasingly hard for consumers to access all desired content without subscribing to multiple services. Many will reject this, leading to an uptick in piracy and credential sharing as consumers feel the full effects of subscription fatigue.
Video gaming and eSports will appear in the ‘scopes of service providers
Keep an eye on video gaming and eSports in 2019. The success of Epic/Fortnite is impossible to ignore and the breakthrough of live streaming on traditional TV is fascinating. Aside from more studios trying to win big on free-to-play titles, we think the timing might be right for some cross-sector M&A, or at least for ISPs to work closer with publishers to build specific services for hard-core gamers.
Operators will find tangible benefits in Machine Learning as the hype starts to wind down
In 2019, we expect Machine Learning (and Artificial Intelligence overall) will continue to exhibit large growth and investment, but the hype around it will recede. Through our work, we know operators are starting to see clearly positive business cases, and we believe that this will accelerate the roll-out of AI/ML initiatives into 2019. As customer experience becomes more important and a differentiating factor in an increasingly crowded market, service providers need to fully leverage all the data they have.
Cartesian is a specialist consulting firm of industry experts focused on the global telecommunications, media, and technology industries. For 25 years, we have helped clients worldwide build and execute strategies that transform the products, services, and organizations that shape the industries in which they operate.