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Telenor latest operator to dash vendor hopes of a 5G capex spike

Telenor is the latest operator to dampen vendors’ hopes that 5G might drive a significant revival in their network equipment revenues. The Norwegian company said it has no plans to increase its overall capex spending this year, despite starting to prepare the ground for commercial 5G in 2020.

The operator said, in its quarterly earnings statement, that it would invest between NOK16bn and NOK17bn ($1.9bn to $2bn) in capex in 2019, excluding spectrum licences, which would close to 2018’s figure of NOK16.8bn. It said its goal was to reduce its capex-to-sales ratio to about 15% in 2020, from 15.4% in 2017.

Its priorities for those investments in 2019 will be network modernization in its home market – fiber expansion and upgrade of mobile networks to be ‘5G-ready’ – the latter will be a common approach for European MNOs, as it was in the 3G to 4G transition, and entails updating and expanding the current technology, but with flexible base stations that can be upgraded to next generation radios relatively smoothly and cheaply, when required.

Indeed, on Ericsson’s earnings call last week, CEO Börje Ekholm said: “When we look at what’s defining what’s 4G and what’s 5G, it’s increasingly blurred line. And actually, it’s not a relevant metric anymore. The reason we win contracts is that they modernize the network and prepare for 5G, but they also need the 4G capacity they get with the modernized network. So it’s hard now to say what they’re actually doing in that sense. They’re doing both, right? And so for us, that’s why we look more as in a way 5G-ready shipments as a more relevant metric and then pretty much all our Ericsson Radio System (ERS) volume is—since 2015—5G-ready.”

In its 2018 fiscal year, Telenor reported a 0.6% dip in sales to NOK110.4bn ($13bn), and a 3.2% rise in EBITDA to NOK45.3bn ($5.3bn).

Telenor operates networks in various Asian and European markets, but has been heavily focused on cost-cutting in the past year, as it tries to boost profitability amid low growth in service revenues. It reduced its workforce by 6,000 to 31,000 during 2017, though 4,000 of those losses went with the sale of its Indian subsidiary. However, it has also been one of the most outspoken telcos about the need to use digital technology and automation to reduce labor costs. A year ago, CEO Sigve Brekke said automation and digitization would enable the operator to reduce jobs by 20% between 2018 and the end of 2020.

He said at the time: “The load on the networks is not falling and data growth is exponential, and we are expected to service that and maintain a margin, and maybe even grow the margin. The only way to do that in the short term is to go heavily after opportunities such as digitizing the core and going for cloud-based solutions instead of lots of different data centers.”

The operator aims to virtualize 75% of its IT by mid-2019 and to have 90% of network functions running in the cloud by 2020. A common network and IT platform should result in cost reduction of 20% to 30% by 2020, and an opex reduction of between 1% and 3% a year.

This makes it a very advanced player in terms of digitalisation – many of its peers have not progressed far beyond the packet core when adopting virtualization. Last year, Telenor published a white paper, written with Metaswitch, claiming that containers are the only viable way to build large-scale 5G networks.

The paper described a proof-of-concept and a live trial based on delivering VoLTE at an event in a remote area of Norway. It highlighted challenges to the adoption of container technology in telco networks – primarily, immaturity of available systems, security concerns and orchestration complexity, none of which has been completely addressed a year later. However, these are outweighed by the advantages compared to the more established approach of virtual machines (VMs) in software-defined networks – speed of deployment, support for increased density of network elements and devices, and more efficient scaling.

These benefits should accelerate industry efforts to address the downsides, according to the white paper authors, including chief research scientist at Telenor, Pal Gronsund.

“Containers, they have a more lightweight footprint, you don’t have the same amount of resources, so if you can bring in containers, there can be a higher density of VNFs (virtual network functions),” Gronsund said . “I also think the portability aspect of this – you can more easily move containers around – is important … VMs will be extremely important to 5G as well. But moving into containers can also do a lot of the things that are not as easy with VMs.”

The Telenor proof-of-concept integrated technology from multiple vendors, including Altiostar’s baseband unit, Affirmed Networks’ virtual packet core and Openet’s virtual PCRF. It also used Metaswitch’s virtual IMS deployed on a Red Hat OpenShift Container Platform, which provided container orchestration and automation tools. The PoC ended in a live demonstration of VoLTE at a Norwegian festival held in the wilderness, where mobile coverage was sparse. Telenor used “a pre-packaged script to drive the Red Hat OpenShift Container Platform engine,” and bring up all the VNFs required for an IMS core in less than four minutes, rather than the several months usually needed to install and commission an IMS core.

One of the goals of all this software-driven innovation will be to reduce 5G capex as well as operating costs. NTT Docomo recently boasted of its early stage gains from using commodity servers as it moves towards fully virtualized networks. Although this transition is far from complete, Docomo says it has already achieved 10% reduction in relevant capex.

Hiroyuki Oto, general manager of the MNO’s core network development department, said the commodity hardware had resulted in capex savings despite some additional costs associated with management and network orchestration.

Constantine Polychronopoulos, CTO at virtualization company VMware, said: “We are moving toward software-defined radios and eventually upgrading a radio will just be a software exercise and a lot less costly. Virtualizing the network will address capex as well.”

This is part of a common theme among major operators – that they do not expect to increase capex spending significantly for 5G, and the investments they do make will be spread over many year and will be based on proven demand, rather than repeating the past pattern of a sharp spike in spending over a few years, to achieve a ‘build and they will come’ network.

Last year, US Cellular’s CTO, Michael Irizarry, said 5G “would have to cost no more than 4G and probably less.” That isn’t too far from what Vodafone’s CTO, Johan Wibergh, has said in various forums – that 5G has to justify itself on the basis of cost efficiency alone, before new revenue streams are considered. At last year’s Mobile World Congress, he reiterated his theme, saying: “Revenue is not growing and has been very flat or rising just 1%, and so there is no room for increasing costs.”

At the 5G World Summit in London in 2018ar, Swisscom and Three UK also played down hopes of a 5G-related boost in capex, largely because they do not believe 5G will create a significant boost in spending by their own mobile consumers. Three UK’s CTO, Bryn Jones, insisted – in a clear message to suppliers – that he saw no reason for a major capex increase, saying: “Networks are like painting the Forth Bridge. You roll out 2G and as soon as that is rolled out you start rolling out 3G. The capex is really substitutional and you manage within the envelopes.”

His counterpart at Swisscom, Heinz Herren, also said 5G could be managed within today’s “capex envelope”, adding: “With 5G there might be some incremental capex but if we are clever and add radios that can deal with 4G and 5G we will not see a big uplift in capex.”

He added that the business case still had to be made for at-scale roll-out, saying: “The Swiss market is flat and so it is really difficult to add 5G and sell it and personally I think we are having too many discussions around the business case. I think if your main business case is connectivity there is no question about doing 5G, but I don’t think you will see additional ARPU.”

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