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Investor Skepticism Forces Wireless Carriers to Tread Cautiously on 5G Spending

Phillip Dampier February 18, 2019 Consumer News, Wireless Broadband No Comments

Investors are not buying into the substantial hype surrounding the forthcoming 5G revolution and many remain unconvinced about the benefits of spending billions of investor dollars to deploy the next generation in wireless.

A survey by telecom analyst McKinsey & Co., picked up a clear drag on proposed spending, especially outside of North America, as carriers are finding investors reluctant about the business case for 5G technology.

The survey found 60% of wireless operators cited selling investors on the merits of 5G to be their greatest challenge. Only 25% were confident they could successfully prove a substantial return on investment for shareholders who typically want short-term results. Investors are demanding detailed evidence that 5G networks, the most costly requiring large fiber optic networks and neighborhood small cell antennas, will pay off with increased revenue and customer demand. Unlike earlier cellular standards which required incremental upgrades usually on existing cell towers, the fastest iteration of 5G will require providers to construct costly new fiber networks with a very large number of short-range antennas expected to be placed on top of utility or light poles.

Customer demand for 5G is anticipated to be low until new devices are introduced capable of connecting to it, and investors already recognize consumers are increasingly delaying device upgrades since the industry dropped two-year service contracts with device subsidies. Ongoing upgrades to existing 4G LTE networks may ultimately dampen demand even for less costly 5G networks that will be deployed on existing cell towers. McKinsey’s survey found less than 35% of respondents are planning quick launches of 5G on gigabit-speed capable millimeter wave spectrum, citing the high cost of deploying small cell networks.

“Until th[e business case emerges], most operators will tread cautiously, leveraging 5G for near-term objectives and waiting for a clearer view on the use cases’ economics to accelerate,” the McKinsey report concluded. “Given the expense required to prove those significant use cases, it could be an uncomfortably long wait. And for operators in countries that don’t see 5G as a matter of strategic and economic importance, there is a greater risk of falling behind.”

In early 2019, most network operators will focus on network planning and funding, with the first significant wave of launches expected in the U.S. coming later this year. Just over half of U.S. operators plan to have “large-scale 5G deployments” completed by late this year, and U.S. carriers are the most optimistic 5G can make good business sense, at least for some applications. Other U.S. carriers expect their networks to launch by the end of 2022. But in neither case are those launches expected to be widespread across the country. Competing with cable and phone company internet with fixed wireless service is also a non-priority for most operators.

“At least at the outset, the majority see enhanced mobile broadband and the Internet of Things (IoT), rather than fixed wireless access or mission-critical applications, as the most prevalent applications,” McKinsey’s survey found. Among early potential applications are smart utility meter connectivity, traffic sensing, and connected public infrastructure like lighting and traffic control signals. Giving consumers a way out of choosing between Verizon and Comcast for home internet service is not going to be an early priority for companies like AT&T. In fact, starting a price war is the last thing investors want to see.

“Although commercially in its infancy, 5G technology is ready, and in most markets its presence will be felt from 2020 on,” McKinsey’s report states. “Yet the fact that commercial models are not ready cannot be minimized; the business case is marginal, and the investments to enable new business models are not currently planned.”

McKinsey believes what will ultimately drive a gradual rollout of 5G technology is network congestion which can no longer be managed through existing traditional cell tower networks, known as “macro sites.”

“In rural and suburban areas, as well as along roadways, operators can handle increased traffic simply by densifying existing networks with macro sites,” McKinsey shared. “In many highly populated urban areas, by contrast, they’ll need to rely on small-cell solutions for two reasons: a higher concentration of traffic, as measured by traffic load per square kilometer, and the use of higher spectrum bands (greater than 3 gigahertz).”

But making the jump from the traditional large cell tower to a network of small cells scattered around neighborhoods will require a great deal of money. Operators will need to build fiber optic connectivity to each small cell, which can be managed either with a newly constructed fiber project or leasing existing fiber optic networks, presumably from cable operators which already have a significant fiber presence. In either scenario, rural areas will largely be left out, because all-important network traffic density is generally inadequate to support the business case for 5G, and cable operators are unlikely to have fiber networks available to lease in those areas.

Kagan: Cable Company Wireless Is Designed to Trap You in a Bundle, Not Compete in Wireless Business

Comcast and Charter Communications have no real interest in competing head-to-head in wireless with AT&T, Verizon, T-Mobile, or Sprint. Instead, the two cable companies hope to trap you in a bundled package of services too inconvenient to cancel.

Jeff Kagan, a longstanding telecommunications analyst specializing in the cable industry, believes Comcast, Charter, and other cable operators entering the wireless business have no intention of being a serious competitor to the country’s four largest mobile companies.

“The goal of XFINITY Mobile [from Comcast] is to offer their customers another service and to create a sticky bundle,” Kagan said. “It’s not to lead the wireless wars. It’s not to increase their market share for traditional reasons. It is simply to create a sticky bundle to stabilize and grow their customer base.”

Kagan

XFINITY Mobile and Spectrum Mobile (from Charter), both require customers to be signed up for their respective internet services. If a customer cancels internet service, they will lose their mobile service. That could prove to be a major hassle for wireless customers, because they will have to properly port out their existing phone number(s) to another provider before dropping broadband.

Kagan believes cable operators will use mobile service to further strengthen their bundle by tying discounts to the number of services each customer takes through the cable company.

“Customers who use one service find it easy to switch away to a competitor,” Kagan said. “However, when they use multiple services and get a discount for the bundle, they become sticky and generally stay put. And the more services a customer uses, the larger the discount, the stickier they get and the less likely they are to wander.”

That is also likely to be true with Altice, which operates Optimum (Cablevision) and SuddenLink and has partnered with Sprint to offer cell service.

Sprint and T-Mobile, which are planning to merge, have repeatedly argued cable operators will be aggressive new players in the mobile business, giving the potentially combined carrier fierce new competitors. But Kagan doubts that will prove true.

“The problem is, the sticky bundle is not a low-cost solution,” Kagan offered. “With that said, the higher cost to the cable television companies is less than that of losing their customer base. So, the cost makes sense as simply a cost of doing business.”

The challenge cable operators face is that none plan to own and operate their own traditional cellular network. Comcast and Charter have partnered with Verizon Wireless to resell access to its 4G LTE network and Altice will rely on Sprint. Leasing access on an ongoing basis is likely to be more expensive that relying on your own network, but beyond offering Wi-Fi calling and experimental access to future 5G-type services in the emerging CBRS band, cable operators will remain almost completely dependent on their wireless provider partners, limiting their effective ability to compete.

Kagan believes the goals of the two industries are different. Wireless operators are trying to monetize their networks through usage, while cable operators are trying to find new services that will keep customers loyal and are willing to ignore monetizing their wireless side businesses to achieve that goal.

Charter Communications Slashing Investments in Its Cable Systems by $1.9 Billion in 2019

Spending less, charging more in 2019.

Despite repeated claims from some in Washington that eliminating net neutrality would stimulate U.S. telecommunications companies to invest more in their networks, Charter Communications has announced a dramatic $1.9 billion cut in capital expenditures (CapEx) spending on its Spectrum cable systems for 2019.

Charter posted 2018 revenue of $43.6 billion (up 4.9 percent over 2017), with especially healthy returns for its internet service, which grew 7.1%. Charter earned $11.2 billion in revenue, up 5.9% in the fourth quarter of 2018 alone, partly from rate increases, reduced costs, and additional broadband customers.

Republican FCC commissioners have repeatedly argued that deregulating the internet by sweeping away net neutrality would stimulate companies to invest more in their networks. But it now appears the reverse is true. In 2017, Charter spent $8.7 billion on network investments; in 2018 the company spent $9.1 billion. But this year, with net neutrality no longer the law of the land, the cable company is planning to dramatically cut investments in 2019 to just $7 billion. The combined company, which now includes Time Warner Cable (TWC) and Bright House Networks (BH), has never spent this little on capital expenditures. The 2016 merger between Charter and TWC and BH forced a 189.4% spike in spending after the deal was completed, as Charter began a cable system overhaul and upgrade.

Charter is expecting it can distribute more of its revenue to shareholders, share buybacks, and debt payments as a result of the completion of its all-digital conversion project, which eliminated analog television signals from cable systems to make more room for revenue-enhancing internet service. The company also gets to lease more set-top boxes to customers seeking to view digital television signals on older analog TV sets.

Charter also reports it has successfully completed its DOCSIS 3.1 internet upgrade to more than 99% of its cable systems, allowing the introduction of premium-priced gigabit internet speed.

Charter executives signaled investors earlier this month Charter expects to post greater revenue and profits as a result of the spending reductions, but these new-found gains will have no effect on the company’s ongoing plans to continue mildly aggressive rate increases in 2019.

Charter has not disclosed how much it plans to spend on its new mobile business in 2019. The company is marketing its mobile phone service more aggressively this year as it prepares to accept customers bringing existing phones to its cellular service, powered by Charter’s in-home and in-business Wi-Fi and Verizon Wireless’ 4G LTE network.

Windstream Relying on Government Funding to Double 100 Mbps Availability in 2019

Windstream is relying on the Federal Communications Commission’s Connect America Fund to double the areas where it will offer 100 Mbps broadband service, expected to reach 30% of the company’s 18-state local service area by the end of the first quarter of 2019.

“Windstream understands that premium internet speeds are critical to families and businesses in rural America, and we are systematically enhancing our network to meet that urgent demand,” said Jeff Small, president of consumer and small and medium-sized business services. “Network upgrades are expensive, especially in rural areas where there are relatively few customers, so Windstream is using a combination of its own capital and crucial support from the FCC’s Connect America Fund to make faster speeds more widely available. Without support from the Connect America Fund, many of these projects simply would not be economically feasible.”

Thomas told attendees at the Citi 2019 TMT West Conference Windstream’s legacy copper wire telephone network is not up to the job of handling the kinds of internet speeds more modern technologies can manage.

In urban and larger service areas, Windstream is most likely to deploy fiber to the home service in new housing developments and select gentrified neighborhoods where a business case exists to invest in fiber upgrades. The company also typically replaces its copper wireline infrastructure with fiber where road construction projects or damage forces the company to replace or relocate its lines. Suburban and more densely populated rural areas are likely to receive an upgraded version of Windstream’s DSL service that can manage up to 50 or 100 Mbps. In Windstream’s significant rural service area, the phone company is increasingly turning to fixed wireless technology, especially in flat midwestern states like Nebraska and Iowa where it plans to offer a combination of 3.5 GHz “CBRS” and 5G millimeter wave fixed wireless broadband capable of delivering up to 1,000 Mbps.

Windstream’s service area

“[We are deploying wireless internet] probably at a larger scale than a lot of the larger wireless companies,” Thomas said, especially in flatter areas where wireless signals go a long way.

Because most current broadband expansion fund programs require companies to commit to at least 25/3 Mbps service, simply expanding basic ADSL technology has proven inadequate to meet the government’s speed requirements. But wiring fiber to the home service to get faster speeds in rural areas does not meet the Return On Investment requirements Windstream’s shareholders demand. Windstream claims fixed wireless can solve both problems.

“You can get 100 Mbps out there very cost-effectively,” Thomas claimed. “You are really blowing away copper infrastructure and making it irrelevant because you’re embracing this 100 Mbps technology.”

As of early 2019, Windstream claims that 60% of its customers can get at least 25 Mbps service, 40% can receive at least 50 Mbps service. By the end of March, 30% will be able to receive 100 Mbps service.

 

A satisfied Windstream customer talks about his upgrade to 50/8 Mbps, which replaces his old 6 Mbps DSL service. (6:03)

Verizon, Samsung Will Release 5G Smartphones in 2019

Verizon and Samsung on Monday confirmed long-held industry expectations they would seek to steal a march on Apple by launching U.S. 5G smartphones in the first half of 2019.

The two companies said in a statement they would unveil a prototype, using Qualcomm modem chips, at the chipmaker’s annual Snapdragon Technology Summit in Maui, Hawaii this week.

While Verizon is leading the charge to trial 5G in some cities next year, industry analysts say the higher-speed networks are unlikely to be widely available until the middle of the next decade.

Apple is engaged in a legal battle with Qualcomm that has led it to stop using its modem chips, and the Cupertino, California company is widely expected instead to use Intel modems, which will not be ready for production until late 2019.

Citing sources familiar with the matter, Bloomberg reported on Monday that Apple would wait until at least 2020 to release its first 5G iPhones.

The delay could make it easier for Samsung and Verizon to win customers who are eager to connect to 5G networks, which will provide a leap forward in mobile data speeds, up to 50 or 100 times faster than current 4G networks.

Qualcomm has also partnered with other smartphone makers who have committed to 5G phones for next year.

U.S. wireless carrier Sprint is also working with LG Electronics USA to launch a 5G smartphone in the U.S. in the first half of 2019.

Verizon launched its first commercial 5G service in October when its 5G Home offering went live in Houston, Indianapolis, Los Angeles and Sacramento.

Verizon Chief Financial Officer Matthew Ellis said last month that the company plans to target a broader audience for its 5G home broadband product following the adoption of global standards for the technology.

(Reuters) Reporting by Sayanti Chakraborty in Bengaluru; Editing by Shounak Dasgupta

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