A deep dive into the telecommunications industry for 2023 and 2024 from global management consulting and strategy firm, Kearney.
In 2023, the U.S. telecommunications industry was confronted with serious macro-economic and industry-specific obstacles—interest rates continued to increase, environmental concerns were raised, and competition accelerated. Even so, the industry remained resilient. This year’s trials have prompted organizations to develop innovative solutions—such as securitizing assets, rolling out improved fiber tech, developing 5G revenue streams, and investing in artificial intelligence. We’ll kick off this year-in-review by exploring all these themes and more before looking ahead to 2024—detailing how we expect the industry to adapt to tomorrow’s challenges.
In 2023, several noteworthy trends emerged across the industry in general:
Interest Rates. The high interest rate environment continues to impact the telco landscape. In 2023, as of November, the Federal Reserve has raised federal funds rates four times to 5.25-5.50%, sharply increasing the cost of capital for all communications players regardless of size. Rate increases are adding cost pressure which is weighing on the speed of telco organizations’ builds. Operators continue to focus on cost cutting by utilizing a variety of tactics. The high interest rate environment has also impacted M&A deal flow—total CMT M&A deal value was down over 60% in the 12 months up to May 2023, while deal volume was down 20% over the same period.
BEAD Program. Broadband Equity, Access, and Deployment (BEAD) continues to roll out, providing $42.45 billion in funding for planning, infrastructure deployment and adoption programs for high-speed internet access in all U.S. states and territories. BEAD calls for awardees to deploy fiber broadband in all but extremely high-cost areas—where awardees will be able to use Fixed Wireless Access (FWA) and certain other technologies, but not satellite broadband. In June 2023, the federal government announced the allocations of funding to each U.S. state and territory.
Potential Broadband Reclassification. In September, the FCC announced plans to open a Notice of Proposed Rulemaking to reclassify broadband from Title I to Title II. This reclassification would subject broadband to regulation under the 1934 Communications Act, which could open broadband to price regulation. In the past, worries over price regulation have led to sell-offs of cable stocks. The FCC’s announcement led to minimal market movement—a result of the scope of the “Chevron Deference” being narrowed during Sackett v. EPA in May 2023.
Artificial Intelligence. Interest in artificial intelligence (AI) has surged and telco companies are responding accordingly. AI has the potential to relieve cost pressure and enhance the customer experience—providing personalization to drive sales and reduce churn. This technology is currently being deployed in network planning, customer engagement support, and personalized marketing. The emergence of AI will place a greater emphasis on digital infrastructure and on fast, low latency connections.
Lead Cables. While ESG still remains a priority for telco operators, this focus has lessened recently due to rising interest rates and competing priorities. One ESG concern that became top of mind is the lead content of aging cable networks. In July, The Wall Street Journal published an article highlighting the presence of lead-sheathed cables in carrier networks. In the week that followed, AT&T, Verizon, Lumen, and Frontier shed a combined $18 billion in market cap. However, Wall Street’s anxiety was short-lived, as stocks quickly rebounded from the news-incited dip—a result of reassuring statements by both the EPA saying that the amount of lead found did not constitute immediate health threats and companies claiming lead-sheathed cables comprised a negligible fraction of their copper network footprint.
When compared to other sectors that are treading water or regressing, the fixed wireline sector has been a bright spot, experiencing modest success:
Fiber Buildouts. Builders continue to roll out fiber-to-the-home (FTTH) in the U.S. at a relatively aggressive clip. In 2023, at least 7 million passings were planned. While some builds have been scaled back, most fiber builders are actively pursuing both FTTH builds and deepening fiber in their networks for hybrid fiber-coaxial (HFC) players.
Supply Chain. Despite the extreme lack of availability across the market seen in 2020 through 2022, inventory availability for electronic components and equipment started to grow in 2023 as supply chains recovered. This new capacity is aligning to support the wireline buildouts across the U.S. and are indicative of a broader recovery into the future. The same was true for construction services.
DOCSIS 4.0. Beyond traditional fiber, DOCSIS 4.0 technology is enabling faster speed on HFC. This technology will improve capacities downstream and upstream to 10 Gbps and 6 Gbps respectively. Comcast had the first commercial launch of DOCSIS 4.0 (branded “X-Class Internet”) in October 2023 in Colorado Springs, with plans to launch in parts of Philadelphia and Atlanta by end of year.
Private Equity Financing. Mounting debt poses a challenge for companies aiming to raise capital to support growth. In efforts to reduce costs and attract additional financing, wireline telcos are turning to private equity firms that are investing heavily in American digital infrastructure. Gigapower, a Blackstone and AT&T joint venture that closed in May, is a prime example.
Fiber Securitization. In this regard, several fiber players securitized their assets in order to gain access to lower cost funds. Because the market continues to place a premium on fiber—due to low obsolescence risks and cheap operation costs relative to cable/HFC—securitization of fiber assets has become more popular than securitization of other fixed wireline assets. The most notable example has been Frontier closing $2.1 billion worth of fiber securitization notes in 2023.
ARPU. From a topline perspective, the average revenue per user (ARPU) is gradually rising. Cable Broadband ARPU growth is positive for the four leading players year-over-year as of Q3 2023—Altice USA (0.3%), Charter (2.6%), Comcast (3.9%), and Cable One (6.5%).
The video sector continues to slump, yet consolidations offer a path forward:
Cable Programming. As content owners raise programming costs, operators are finding it harder to justify these expenses, especially considering their already narrow margins from their linear video businesses. The recent agreement between Charter and Disney illustrates how cable and content provider negotiations are changing. At the forefront of the deal was the inclusion of Disney+ and ESPN+ streaming in select Spectrum TV video packages. Disney’s negotiation will set the stage for future network operators with streaming (e.g., Paramount with Paramount+ & Showtime, Warner Bros. Discovery with Max), and further hurt leverage among other cable networks that keep only their linear offerings.
Satellite TV. At the same time, satellite TV providers such as Dish and DirecTV continue to see mounting subscriber losses—each losing ~300K to 400K in Q2—as consumers turn to wireline, FWA, and OTT packages.
Despite innovation in the 5G space, the wireless sector remains at a crossroads:
Capacity Demand. As the world becomes increasingly digital and as FWA rollout gets wider, operators must build enough infrastructure to avoid data demand straining capacity. Data demand is at all-time highs and will continue to grow as adoption of technologies such as Augmented Reality/Virtual Reality (AR/VR), higher quality (4K/8K) streaming, AI, and cloud gaming intensifies. AT&T has already seen network traffic grow 30% year-over-year for the past three years.
Wireless Spectrum. Telcos are seeking to expand their capacity through purchases of additional spectrum licenses. Comcast announced plans to lease and eventually sell some or all of their spectrum licenses in the 600 MHz band to T-Mobile. New spectrum issuances hit a road bump, however, when the FCC’s authority to auction parts of the broadband spectrum expired in March 2023. Reinstating these rights is currently being held up in part due to decisions over the future of the 3.1GHz-3.45GHz spectrum band—wireless companies want access, but it's currently used by the U.S. military.
Low Consumer Subscription Growth. Wireless operators are scrambling for new strategies to combat stagnating consumer growth—Q2 2022 to Q2 2023 saw a disappointing 2% increase in total wireless subscriptions. Operators are facing heightened competition from cable companies who are making big gains with a 76% share of net additions in Q2.
Fixed Wireless Access. Wireless telcos are exploring additional ways to monetize their 5G networks. The most successful method thus far has been FWA, which continues to expand. Fixed Wireless/5G home internet services from T-Mobile and Verizon added around 890K subscribers in Q2 2023, compared to 815K net adds in Q2 2022. Despite the growth, rates of FWA subscriber additions should slow as the initial opportunity has been captured. AT&T has launched their new FWA offering (branded “Internet Air”) in response to T-Mobile and Verizon. Operators are scaling these programs by focusing on select markets with enough wireless coverage and capacity to serve both the home internet and wireless markets without having to build additional infrastructure. The question for all wireless operators is how much FWA can they sell in each market before it starts to impinge on capacity.
Private 5G. Private 5G networks offer another monetization angle for 5G. To enable activities such as Industry 4.0, private 5G offers a way for companies to deploy networks that support IoT and other applications. These networks are also being deployed in schools, hospitals (Cleveland Clinic), sporting events (F1 Grand Prix in Miami), festivals (Lightning in a Bottle Music Festival), construction sites, and mines—anywhere businesses are trying to wow their customers or speed up operations. While operators are excited about the opportunity, growth in the market has been slower than the industry would have hoped—telcos face competition from hyperscalers such as AWS, Google Cloud and Microsoft Azure, which are leveraging their extensive cloud and edge platforms as a consolidated offering with network connectivity. In February 2023, Hewlett Packard Enterprises acquired Athonet to bolster their ability to deploy private 5G networks as part of their broader Aruba networking portfolio—a further sign of non-telcos looking to break into the market.
Satellite offers the promise of connectivity to those in remote and uncovered areas:
Low Earth Orbit. Satellite communications are an emerging way to provide broadband connectivity, particularly in rural or hard to reach areas where traditional infrastructure buildouts would not be economical. Low Earth Orbit (LEO) Satellite operators such as Starlink (SpaceX) and Kuiper (Amazon) continue to promise access to millions of unserved and underserved users in the U.S., and millions more around the globe in places where traditional infrastructure builds are not physically or economically feasible. Whether LEO reaches the full market hype that many expect remains to be seen. Satellite is unlikely to replace wireless/wireline offerings where it is already established, and growing wireless internet and wireline expansion will reach more and more rural markets, which may limit the addressable market for LEO operators.
Telco-Satellite Cooperation. In May 2023, AT&T announced it would lease spectrum to AST SpaceMobile. In the agreement, AST will not transmit in areas covered by AT&T’s terrestrial cellular network but can train their spot beams on uncovered areas. The arrangement also includes providing temporary coverage after natural disasters. Meanwhile, in February 2023, Globalstar announced that Apple would lend it $252M to help pay for new satellites, ensuring that Globalstar would continue to support Apple’s iPhone emergency service.
Improving Technology. In September 2023, AST SpaceMobile used a Galaxy S22 to make the “first ever” 5G connection between an unmodified smartphone and a satellite in space, from a wireless dead zone in Maui, HI.
2024 Predictions for the Telecom Industry
We see these trends extending into 2024, as technology and component availability continues to improve while the new consumer base shrinks. Telcos will continue to see growth in some areas even as others gradually phase out:
Increased Broadband Focus on SMB. With the saturation of the consumer market across the telecommunications industry along with sustained high interest rates and low rates of household formation, net additions growth in broadband is likely to remain anemic. Net additions growth will be increasingly difficult in the larger markets, with most of the opportunity centered in less urban markets. As a result of operators experiencing heightened competition, there will be an increased focus on the small and midsize business (SMB) market for growth. Telcos will re-evaluate how they serve this market and further bundle products accordingly.
Focus on Margin Growth. We anticipate management will increasingly focus on improving EBITDA margins to maintain cash flow in the wake of rising long-term debt costs.
AI Takes the Spotlight. AI-driven connected planning will optimize the return on capital for network builds. AI experimentation in telco Sales and Network will continue, as tangible use cases for network planning, customer success/service, and marketing personalization are developed. Meanwhile, AI will begin to drive an increase in network consumption as the data required to feed models continues to grow.
Creative Wireline Expansion. Consolidation and scale will remain a focus for wireline operators. Interest in M&A among fiber players will remain high, particularly as operators seek to attain a competitive footprint within their target geographies. High interest rates will be a headwind to traditional debt-centric acquisitions, so we expect more creative deal structures to emerge, including wholesale models. The move to open access fiber networks is just beginning in the U.S. and will present a capital-efficient way for operators to expand their reach.
Cable Bundles Continue to Win. Fiber remains the gold standard, but large cable companies are working to negate the speed delta with the rollout of DOCSIS 4.0. While cable operators struggle with the perception of legacy technology, the move to a converged wireless/wireline bundle will continue to pay off. Given the bundling value proposition, customer adoption will remain high with a substantial payoff for the cable companies if they can improve customer experiences to retain their base. Cable companies are also looking to continue their fiber edge-outs to gain new subscribers and counter fiber overbuilders.
Cable Operators Expand Small Cell Deployment. Watch out for cable companies continuing to deploy strand-mounted small cells. While this will help with EBITDA margins, as they are able to offload demand from the variable cost agreements with mobile network operators, they will have to develop new operational capabilities and deploy different equipment. This will require more fixed costs and a transition from operating expenses (OpEx) to capital expenditures (CapEx) to increase the amount of wireless consumption on their own networks.
Move Over, Copper. Incumbent local exchange carriers that still have copper customers are seeing churn rates higher than expected. This trend will continue to accelerate as FWA expands and ultimately fiber is available due to BEAD.
Business 5G Comes of Age. 5G B2B use cases will continue to emerge. 5G technology is finally reaching the point where “true 5G” is becoming market ready. For example, T-Mobile recently announced a network slicing beta for developers based on application type.
Growth in Private 5G. Additionally, we expect to see an increased uptake of hybrid and private 5G. While some major telcos have backed off on their ambitions for the market, hyperscalers such as Amazon Web Services and Microsoft Azure are partnering with telcos such as Federated Wireless to offer private 5G networks to enterprises on the CBRS spectrum.
The full picture of the telco industry in 2023-24 shows an increasingly complex and layered environment dependent on acquisitions, partnerships, new technologies and innovations, and of course the consumer and industry bandwidth to adopt and promulgate them. From 5G to fiber optics to satellites in space, we see an industry poised for further growth and expansion.