Declining cost curve for 5G equipment could help Europe’s operators, while accelerated investments in the U.S. could hurt credit quality, according to S&P Global

There is a real obsession in this industry with being first.

For nearly half a century* telecoms operators and vendors have been claiming firsts, with the rollout of new devices and technologies, marketing machines going into overdrive with carefully worded, hyperbole-filled announcements designed primarily to obfuscate. (*It’s over 45 years since Martin Cooper made the first mobile phone call while working for Motorola. Scary!)

Everyone wanted to claim some sort of first with 3G, especially given the cost of spectrum in many markets, and 4G was even worse, with the confluence of various mobile standards effectively giving marketeers free rein to claim service launches. Let’s not forget that LTE was a 3G technology, the fourth generation coming in with LTE-Advanced, until telcos, primarily in the U.S., decided they wanted to be able to offer 4G right now.

The 5G hype is arguably greater. We’re already seeing endless service launch announcements in various parts of the world, with trials and soft launches being presented as the real deal, while spectrum licensing and device development are still ongoing.

But a new report out this week suggests that rushing to roll out 5G could be detrimental to the financial health of the operator community and that telcos could in fact benefit from being late to the party for the next generation of mobile technology. That is surely good news in Europe, where fears that the continent will be left behind the rest of the world abound.

"Despite the excitement and promise of 5G, we have a cautious view on its timing," analysts from S&P Global said a research note.

In the U.S., aggressive 5G deployments and related accelerated investments "could hurt credit quality when balance sheets are already stretched," the firm said, noting that investments in spectrum licences, small cell network deployments and elevated costs for 5G equipment will be an issue in the U.S., offset in part by recent tax reform legislation.

"In contrast, we think that 5G build-outs may be less deleterious to credit quality in Europe and [the] Asia-Pacific," S&P said, noting that in the latter market, strong operating cash flows and lower leverage should support aggressive 5G rollouts in the likes of South Korea, China and Japan.

In Europe 5G deployments are likely to be slower, which could leave operators in a better position, provided spectrum auctions do not materially weaken balance sheets or cash flow, the analysts predicted.

"Being a ‘second mover’ may also carry an additional benefit due to a declining cost curve for equipment as production reaches scale," they said.

Europe’s major operators are worried about their investment levels though.

Earlier this week, the CEOs of eight major European telcos met at the FT-ETNO event in Brussels and sent a clear message to policymakers: they need lower costs and a more supportive regulatory environment to make current investment levels sustainable as 5G looms.

The execs played on fears that Europe is lagging behind the rest of the world.

"A new industrial policy, favouring a regulatory shift on network deployment and a level playing field on digital services, is key to keep Europe in the race with the USA and China," said one of the eight, Orange CEO Stephane Richard.

But perhaps if they slowed down a bit, their CFOs and shareholders would thank them.

Friday Review: 19 October 2018