The US telecommunications industry continues to be a dynamic one, as we saw all throughout 2022. As with every industry, telecommunications were affected by global challenges like inflation, supply chain disruptions, and labor shortages.
To start this year-in-review, we’ll look at some 2022 trends on a high level. We’ll then dive more in-depth around the ramifications of these trends for telecom companies’ consumer and business customers as well as some considerations for infrastructure companies. Finally, we’ll look ahead to our expectations for 2023.
"FWA broadband is just getting going, but even with 5G FWA rolling out it may not have as large a market as originally thought based on low adoption rates to date and competition from wireline."
2022 Trends
There are a few trends we saw across the entire telecom industry in 2022 that are worth noting, namely:
- Supply chains appear to have held together better than those in many other industries due to aggressive negotiations with suppliers and a willingness to forward buy.
- Labor costs continue to rise due to high competition for field labor as fixed broadband is seeing rapid buildouts due to government funding for suburban and rural broadband services.
- Average revenue per user (ARPU) growth for the year was in the low single digits, beating pessimistic predictions that it would decline.
- The demand for video via wireline and satellite continues its slow but steady decline while the battle for control of the streaming gateway heats up.
- Telcos continue to make environmental, social, and governance (ESG) commitments, especially around greenhouse gas emissions and waste reduction. Most major operators report their Scope 1 (direct) and Scope 2 (indirect) emissions, and also attempt to calculate their Scope 3 (supply chain and other indirect) emissions. For example, AT&T continues to find new partners for its Connected Climate Initiative, which has been working to drive connectivity solutions that help reduce emissions; Salesforce joined the effort this year.
In the wireline world:
- Fiber broadband continues to attract heavy investment capital, and companies in this market continue to see valuations of 16x to 20x EBITDA.
- The enterprise segment for telcos continues to suffer a secular decline in revenue due to a shift to lower cost software-defined networking and increased competition from hyperscalers, software companies and system integrators.
- Cable broadband growth flattened in the second half of the year, though wireless add-on services are booming.
Different sectors within wireless and satellite are seeing varied results:
- The competition for 5G business solutions between telecos and system integrators is hot, but 5G has yet to deliver a viable commercial model.
- FWA broadband is just getting going, but even with 5G FWA rolling out it may not have as large a market as originally thought based on low adoption rates to date and competition from wireline.
- Satellite-based Internet service providers continue to lose subscribers, and these losses may well accelerate as more people in rural areas have their homes passed by wireline broadband providers. In August, the FCC rejected Starlink’s application for nearly $1 billion in Rural Digital Opportunity Fund subsidies, citing doubt that Starlink could deliver the required services and questioning whether many households would purchase a $600 satellite receiver to use the service.
As for players in the infrastructure space:
- Infrastructure businesses are seeing a double-digit compound annual growth rate.
- Open radio access network (O-RAN) technology is reducing network hardware costs and opening a new era of software-defined networks.
- As businesses continue to look to add cloud-based services, communications service providers (CSPs) need to partner with, or directly compete with, hyper-scalers.
- TowerCos are delivering financial returns superior to those of the telecos that first built most towers.
“… led to an acquisition/investment frenzy in fiber broadband providers. We have seen EBITDA multiples of 16-20x and higher for companies that are valued on a discounted cash flow basis with assumed subscriber penetration rates. But conversion to paid subscribers remains key.”
Consumer Market Ramifications
All CSPs have two needs in common: subscribers and infrastructure. The quest to add and retain subscribers drove much of the activity we saw in 2022 and will likely do so again in 2023. Low rates of household formation and population growth mean that adding new subscribers requires taking share from someone else. In wireless, T-Mobile has been gaining over AT&T and Verizon, though aggressive promotions have allowed AT&T to see consistent improvement in net adds overall. In FWA, the race is primarily between T-Mobile and Verizon, though FWA’s contribution is currently minor compared to the rest of these companies’ offerings. In wireline, fiber builders are passing homes as quickly as they can to capture migrations from copper, provide new services to underserved markets, or offer an alternative to cable.
Cable operators continue to add wireless subscribers as part of a converged offering. As broadband subscriber growth has slowed, they are reinvigorating their edge-out strategies and selective overbuilds. Satellite remains a bit of a losing proposition, with the addressable market shrinking as subscribers move to faster, more affordable solutions. The promise of low-earth orbit (LEO) broadband from players like Starlink has yet to materialize at scale. And all this is before the Infrastructure Investment and Jobs Act’s (IIJA) promised Broadband Equity, Access, and Deployment (BEAD) money starts to flow to wireline operators who can offer higher speeds at a lower price than satellite.
This last point has led to an acquisition/investment frenzy in fiber broadband providers. We have seen EBITDA multiples of 16-20x and higher for companies that are valued on a discounted cash flow basis with assumed subscriber penetration rates. While the market generally looks at homes passed as a proxy for future earnings, conversion to paid subscribers remains key. There is rising competition from FWA providers with bundled plans like T-Mobile and Verizon at the edges. Incumbent cable operators are getting more aggressive in defending their markets as well by pushing fiber further out, preparing for DOCSIS 4.0 technology, and edging out to serve new customers. The bottom line is that we may soon be reaching market saturation for broadband.
While all of this is going on, cable operators are bundling wireless service into their broadband offerings at an attractive price. The success of this strategy is proven by the sheer number of new subscribers announced each quarter. These bundled plans tend to be sticky with consumers and very accretive for the operators. Today, they offer these services as mobile virtual network operators, but will increasingly shift service from the wireless wholesaler to their own networks using Wi-Fi and CBRS spectrum, becoming mobile network operators using their own capacity with marginal incremental costs.
Further complicating the picture is the continued loss of revenue-generating units tied to video as TV subscribers continue to cut the cord. While this suggests that streaming services are increasing their subscriber bases, we’re starting to see a leveling off there. This may be due to inflation concerns, but it also may have something to do with the increasing complexity and cost consumers face with many streaming services to choose from. Aggregators are trying to make a play in this space by building a simple IP gateway to content, including Roku, Amazon, and Apple, as well as DirecTV, Flex (a Charter-Comcast joint venture), and some software-based providers. At the same time, there are growing partnerships and integrated offerings, such as smart TVs with integrated operating systems based on Amazon Fire TV Stick and Roku technology. We’ll see more “frenemies” coming together to attack joint problems with scale solutions.
Business Market Ramifications
Utilities have traditionally enjoyed steady revenue from their business accounts, but in telecoms this share of spend is under increasing pressure. Business customers that were on copper increasingly have an alternative in the form of cloud-based solutions. Small and mid-size businesses have a variety of options to shift to cloud-enabled services from hyperscalers like Amazon, Microsoft, and Google.
For CSPs, this is both a threat and an opportunity. The threat is that these customers will find they can live without CSPs. CSPs can partner with the hyperscalers to take advantage of the network through edge to cloud-based services. While it’s early, this holds the promise of new services/capabilities to support the Internet of Things (IoT), autonomous operations, and security.
A sum of $1.5 billion for O-RAN was included in the CHIPS and Science Act of 2022 to fund the Public Wireless Supply Chain Innovation Fund to increase supplier diversity in the mobile networks sector. This funding is intended to accelerate alternatives to Huawei by creating software-based open network architectures that are less dependent on hardware interoperability from a single supplier, opening the door to lower cost, more flexible mobile networks.
Wireline broadband supports some 90% of all Internet traffic. For this reason, infrastructure providers like Equinix, Digital Realty Trust, Zayo, and Level 3 are seeing solid continued growth and opportunities. TowerCos also continues to see solid growth as 5G carrier deployments remain strong and the churn from Sprint is largely worked out.
“Telecom supply chains appear to have held together better than those in many other industries due to aggressive negotiations with suppliers and a willingness to forward buy.”
Looking Ahead to 2023
So, what do we expect to see happen in 2023? To start, the demand for data will continue unabated as the average consumer’s usage will continue its rapid rise. To meet demand, the government-fueled fiber buildout throughout the suburbs and rural areas will continue, with early-subscriber success becoming increasingly important.
Players will continue to battle for broadband and wireless subscribers, while cable operators will continue to aggressively offer wireless bundles as add-ons. These same cable operators will also start to migrate wireless customers to their Wi-Fi and CBRS networks. Wireline companies will increasingly turn to edge-outs for revenue growth.
We anticipate that FWA will realize a limited addressable market and become a niche offering as a lower cost alternative to wireline or a fill-in service as an edge case in select rural markets. 5G mobile broadband buildouts will continue and may well lead to a renewed focus on small-cell deployments. As more geographies gain access to wireline, satellite will become the ISP of last resort. CSPs will see ARPU remaining relatively flat or perhaps even decline slightly for wireline customers, and possibly for wireless as well if T-Mobile continues to hold the line.
Wireless companies will continue to try to protect their margins against inflation and increasing labor costs. They’ll also look for alternate sources of top-line growth in areas like network as a service (NaaS) and use-case specific platforms like the IoT.
In the business customer arena, 5G may start to present some viable commercial use cases while commercial wireline will continue to decline for myriad reasons ranging from competition from tech companies to new technologies to a continued decline in demand as fewer and fewer Americans work from dedicated employer sites. Finally, technology will continue to create new business opportunities; we expect to see O-RAN find a foothold, DOCSIS 4.0 to emerge as a viable alternative to fiber, and new use cases for edge computing to be found.
Elsewhere, we expect to see streaming services continue to experiment with both content and distribution, with aggregators emerging to simplify the consumer experience. The IoT should see increased consumer adoption around smart home technologies and expand in the industrial world as part of the ongoing movement to adopt Industry 4.0 practices.
