18 March 2021
Few industries have been left unchanged by the COVID-19 pandemic, with many having to pivot their business models entirely. Fortunately, for the Technology, Media and Entertainment, and Telecommunications (TMT) sector, the pandemic accelerated the status quo rather than requiring a full volte-face.
The growth in remote working, home schooling and the migration of everything from food shopping to medical consultations onto virtual platforms highlighted the criticality of a robust telecommunications sector to a functioning society. As enterprises and consumers formed a better understanding and appreciation of the value of telecoms connectivity, operators’ attention shifted to sustaining the new levels of demand – and their new-found reverence – in an environmentally and financially viable way.
Change was already underway – bubbling beneath the surface of the consumer landscape – but the sudden need to meet such a radical change in the type and scale of demand led to operators delivering five-year business models in just five months. Not only did this bring legacy pain points to the fore, it shone a light on the capital pressures within the industry and has placed a new emphasis on environmental considerations.
In this article, Guy Peddy, a Division Director in Macquarie’s Specialised and Asset Finance (SAF) TMT business, explores the sector's priorities over the short to medium term.
The generational scale of the change in societal demand and usage of technology over the past year has forced a rethink of telecommunications network designs. The move to working and educating from home – however temporary or permanent it may be – has shifted capacity requirements away from the urban business districts where they have historically been concentrated. As demand relocates to more disparate, residential geographies, so too does the need for overprovisioning and universal connectivity.
Combined with the impending growth of enterprise private networks – where digitalisation and automation are unleashed by the growth of 5G – it will force telecoms networks to become more distributed. The hyper-scale data centre model will co-exist with the new dynamic of edge data centres and edge computing. Their powers and critical functionality will increasingly be closer to the end consumer, reducing latency and fuelling a surge in applications and use cases. As well as facilitating uptake of new technologies such as artificial intelligence and machine learning, it will expand the internet of things (IoT) and demand for real-time data analysis.
The need to support this new technology growth and the potentially permanently changed demand patterns is putting telecoms operators under immense pressure to upgrade their business models. Little evolved since the European market liberalisation in 1998, many business models are proving no longer fit for purpose, leading to two decades of gradually declining returns. IP-based and digital setups have fuelled this by breaking the relationship between revenue and volume, giving rise to the wholesale-only operator.
This consumer shift will bring legacy asset management into focus too. As multi-generational copper networks make way for fibre, first-time operators look to decommission older, scale networks, and 2G/3G networks will disappear in many European countries by 2025 (or even earlier for some), the cost challenge of decommissioning will arise.
Though the prospect of superior allocation of resources will act as a motivator, the economics of decommissioning are dependent upon a long-term payback of lower energy, maintenance and insurance costs, and positive reductions in the business risk from penal taxation and regulation from failure. Unavoidable, it threatens to divert capital – in the short term – from those growth areas of fibre, 5G and private networks at a time when capital is scarce, balance sheet leverage is elevated, and revenue growth rates are often negative.
The need for capital sustainability is questioning previous thinking in a broader sense. It is now more important to manage rather than own networks, as uneconomic duplicity is a waste of physical and capital resources. This is a material step change in historical thinking within the sector.
Assets can now be shared, especially where it is difficult to differentiate or monetise, as operators identify core versus hygiene assets. At the same time, partnerships can reduce the risk of technological change, and access connectivity can be delivered as a service rather than a capital expenditure.
Meanwhile, environmental sustainability is the new dynamic influencing operators’ decision-making, as it becomes both an increasingly important competitive consideration and an issue exposed by the replacement of legacy infrastructure.
Luckily, the treasure trove of valuable metals and materials that constitute these systems will deliver much-needed residual value and make recycling the preferred approach. This will allow operators to focus instead on the broader scrutiny of their green credentials by enterprises, corporates and consumers when choosing suppliers.
To meet these, carbon offsetting will have a diminishing impact and more will need to be done by telecoms operators to reduce their actual and underlying emissions, around two-thirds of which come under Scope 3 and relate to the supply chain.
A sustainable telecoms sector will have to deliver environmentally, but critically, also improve returns or face the risk of long-term capital flight. Business model innovation will be another prominent challenge in the near future, and a requirement for all players wanting to avoid irrelevance.
Greater responsibility for decommissioning legacy networks, sustainability and shifts in societal demand for and usage of networks will be the driving forces behind the necessary changes here – which, coincidentally, are also the areas that offer enormous potential to differentiate and evolve. Whilst it may take time, we believe with a smart use of capital supporting long term returns, they could be achieved. It is just a case of prioritising future-focused approaches and investing now to build a robust telecoms future.
Written by Guy Peddy, a Division Director in Macquarie’s Specialised and Asset Finance (SAF) TMT business.