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10 August 2020

Covid-19 delays to 5G investment and roll-out are a mixed blessing

Mobile networks have generally weathered the Covid-19 storm well with only slight decreases in average download speeds and little increase in downtime. But the impact on 5G plans has been significant, with spectrum auctions delayed, deployments rolled back and investments postponed.

This has prompted a kneejerk reaction among some commentators and analysts, who have been painting an altogether gloomy picture, issuing grave warnings about having to re-evaluate business plans and urgently address the squeeze on investment.

This malady seems to have afflicted professional services group PwC as it assessed findings of its survey that the Covid-19 pandemic would delay roll-out of 5G networks in Europe by 12-18 months, with investment over the next two years falling by €6-€9bn ($7.1-$10.6bn).

We do not dispute the figures particularly, but do take issue with the conclusions as applied wholesale to European MNOs in general, rather than considering the considerable variations between and within countries. Our findings from surveys of operators is that, privately at least, (and very publicly in the case of Orange’s CEO), many are quite relieved that the pressure to deploy 5G has relaxed somewhat, and they may have a breathing space to tighten up the business case for moving beyond 4G so quickly. (For more on our surveys visit RAN Research)

While 5G will indeed transform the communications landscape over time and enable those new use cases, many of them, for example in the automotive sector, will emerge more gradually than many of the breathless industry reports suggest. As we have consistently argued, autonomous driving will take longer to become widespread than many analysts had predicted and certainly than manufacturers in the field had hoped.

Beyond that, need for the extra capacity 5G will bring is by no means universal and, in Europe in particular, will be confined to relatively few urban hotspots. Most operators still have spare capacity on their 4G networks, which is partly why the impact of increased mobile data consumption on download speeds resulting from Covid-19 has been relatively slight. There has been greater impact on some fixed broadband networks, given the increase in offload to WiFi caused by increased home working and videoconferencing via Zoom in particular, although that has subsided in recent weeks as lockdowns have eased in many countries.

This spare capacity partly explains why many of the leading operators in Europe, such as Vodafone, Telefónica and Deutsche Telekom, see small cells as a less urgent priority than elsewhere, as is discussed in the latest report from our sister service, RAN Research, entitled ‘Small cells drive microwave backhaul boom’. As that title suggests, small cells deployment will balloon generally around the world over the next five years, while macrocell populations only increase slowly, but Europe will lag other regions.

Meanwhile, other priorities have emerged that will divert some resources from 5G deployment, notably the kickback against Huawei kit in the infrastructure, which will affect many European countries given indications they will at least partially follow the lead of the UK in ceasing future purchases (see separate story).

In Portugal, the three dominant MNOs – NOS, Vodafone and Altice – have just stated they will not after all deploy Huawei equipment kit in their 5G cores. They were ahead of their government here, although this trilateral move on the part of the operators that account for virtually 100% of the country’s mobile connections was confirmed by the country’s minister for infrastructures, Pedro Nuno Santos.

France is another EU member that gone beyond Commission guidelines which recommend limiting but not banning Huawei from 5G. The French government has indicated it will not renew licenses for Huawei gear once they expire, which will effectively phase the firm out of mobile networks, albeit later than in the UK probably. The upshot is that many European operators face an additional headwind from the Huawei factor.

Partly for this reason, delays to some 5G spectrum auctions resulting from the pandemic crisis have been welcomed. We note also that a few regulators have acted to minimize delays in deployment by dishing our spectrum without conducting a sale, as in New Zealand. We do not see this become a broad trend, not least because governments themselves that are in financial crisis as a result of having to prop up their economies are loathe to give up revenues from spectrum auctions derived from a mobile sector faring better than most others.

Nonetheless, with many MNOs having felt pressure to deploy 5G to satisfy regulators or shareholders, rather than because the business case was patchy, an auction delay of six months or so is more a relief than a disappointment. Indeed, some operators had been actually lobbying for such delays. Bouygues Telecom, the third largest of France’s four MNOs, had called for the 5G auction there to be put back from April 2020 until late that year or early 2021, to give more time for operators to meet government targets for improved 4G rural coverage before embarking on 5G.

Such concerns have not been confined just to Europe. In India, MNOs successfully lobbied not just for the 5G 3.5 GHz band auction to be postponed, but also the sale of some additional 4G spectrum. This was prompted by a combination of the Covid-19 lockdowns and conflicts over involvement of Huawei, but again it has brought time for operators.

Coming back to that PwC report, one point correctly made was that business cases for 5G revolved at least as much around new cases associated with the IoT as existing ones calling for greater capacity and higher bit-rates. This baton was picked up in another survey by Frost & Sullivan, examining the impact of the ongoing pandemic on growth of the IoT in general and the number of devices deployed in particular.

This particular report focused on IoT test equipment, which is a useful surrogate for the field as a whole. The fairly obvious finding was that the pandemic is dampening growth across most sectors of IoT with the exception of healthcare machine-to-machine devices. However, a rebound across the board was anticipated by 2021, which makes sense under the assumption that economies will enjoy a sharp V-shaped recovery rather than a more protracted U-shaped one.

Such predictions are though little more than guesswork, underpinned by the logic that governments cannot afford to sustain draconian lockdowns for more than a few months longer because they will run of cash, and in any case their economies would then suffer irreparable damage. On this basis, partial or even national spikes in number of cases during the forthcoming northern hemisphere winter, reinforced perhaps by the seasonal outbreaks of influenzas, will have to be ridden out to some extent smothered just by social distancing measures within places of work, education and social gathering.

Frost & Sullivan correctly underlined the importance of continuing investment in IoT during the pandemic, even if priorities have to be adjusted. Operators themselves are still in competition and will want to emerge from the pandemic as well placed as possible to compete in these emerging sectors of the IoT. So while inevitably capital spending will be trimmed this year, the tightest pressure will be on margins and profitability as some make a calculated gamble to continue investing in key areas at a level unsustainable in the event of more prolonged global economic disruption.