In our last two year-end reviews, we remarked on the quiet evolution of the TMT sector. However, this year has been far from quiet. In 2018, we saw 5G go live, major investment and M&A, fierce competition in digital video, and TMT caught in the middle of geopolitics. We are sure 2019 will be another exciting year to watch unfold.

2018 Year-End Review and Industry Predictions for 2019

By Michael Dargue

Dear Colleague,

History scholars will no doubt look back on 2018 as a turbulent year in international politics. For those of us that obsessively follow the telecoms, media and technology (TMT) industries, it has been a long time since geopolitics had such an impact on our sector. Tensions between the US and China have featured large in 2018, with trade tariffs, export sanctions and security concerns providing a steady flow of news throughout the year.

2018: The Year That Was

5G goes Live!

Finally, after all the hype and excitement, commercial 5G mobile services have gone live. South Korea was first out of the gate, with local operators SKT, KT and LG Uplus all launching commercial services on 1 December. However, Koreans will need to wait until next March before 5G handsets become available; the service is limited to mobile routers for now.

Elsewhere, there has been no shortage of press announcements detailing trials and launch plans. While many operators have been claiming “mine’s bigger than yours”, others have – perhaps wisely – cautioned against over-optimism in the short term. The truth is, 5G networks will come in a variety of shapes and sizes depending on MNOs’ spectrum choices, cell site design, backhaul options, and network configuration. On top of this, each MNO has its own strategic priorities, whether that’s offering the best mobile broadband experience, reducing last-mile costs for fixed broadband, or gaining a foothold in Industry 4.0. Just like a Swiss Army knife, 5G offers many different tools. The winners will be the operators that find best use for them.

Investors on a full fiber diet

In fixed networks, we reached 1B broadband connections worldwide and investment in fiber continues at pace. As we wrote last year, key drivers for fiber include mobile backhaul, growing enterprise demand, along with a land grab for consumer broadband in some countries. Even the UK – long seen as a fiber laggard – is now in a fiber construction boom, with CityFibre, Hyperoptic, Openreach, TalkTalk and Virgin Media announcing investment plans totaling £billions. Elsewhere in Europe, Spain and France reported impressive growth, each with a run-rate north of 1M connections/year. While over in the US, AT&T has added 3M new fiber connections this year – with a target of getting to 14M by mid-2019. China, however, is in a league of its own… adding about 1M connections each week!

All this fiber growth is being fueled by interest from financial investors, particularly from infrastructure funds who now have confidence in fiber as a stable, long-term play. In addition to new entrants, there’s also interest in existing assets: Altice’s sale of a major stake in its French FTTH network for €1.8B and Elliott’s agitation for Telecom Italia to spin off its network show there is appetite where a deal can be done.

Another year of mega-deals

It was a bumper year for TMT bankers, with a raft of deals announced and/or completed this year. Familiar investment themes included vertical integration, geographic expansion, scaling-up, and fixed-mobile convergence. Leading the pack was AT&T’s $85B acquisition of Time Warner, followed by Comcast’s $27.9B winning bid for Sky. Meanwhile in April, Sprint and T-Mobile announced their romance was back on – they’re now awaiting the FCC and DoJ to bless their nuptials before they tie the knot. Over in Europe, LGI sold its cable businesses in Germany, the Czech Republic, Hungary and Romania to Vodafone for €18.4B; and in the Netherlands, T-Mobile and Tele2 merged in a rare 3-to-4 MNO deal with no conditions. 2018 also saw further consolidation in the Nordics with Tele2 completing its acquisition of ComHem in Sweden, Telia acquiring GET and TDC Norway, and TDC itself being acquired by a group led by Danish pension funds for $6.7B following investor pressure.

In IPO news, two of the world’s largest music streaming services had their market debuts this year. Spotify and Tencent music both listed on the NYSE and both achieved $20B+ valuations. Interestingly, Spotify chose a direct listing over the traditional IPO path, leveraging its strong brand to bypass the banks and sell direct to investors. One wonders whether other tech unicorns may follow Spotify’s example in the years ahead.

Transformers – Telcos in Disguise

If we could pick one word to describe the telecoms industry in 2018 it would be “transformation”. However, while pretty much every telco CEO has a plan, there is no single view of what transformation means for a traditional network operator. On the cost side, BT, DT and Vodafone all have plans to trim €1B or more off their operating expenses; many firms announced job cuts in the thousands; and, automation and AI are seen as key enablers. Huawei went as far as saying it could reduce Network Operations by 90%. To get to these savings, telcos desperately need to hire engineers with software and SDN/NFV skills which are, paradoxically, in short supply.

Looking beyond cost, we see many telcos now pursuing “digital transformation” which combines the automation/AI mentioned above, more use of digital sales and support channels, and greater internal agility and innovation. The most ambitious are looking hard at how to reposition their firm, e.g. as a platform provider (think “Edge Computing”), or as developer of over-the-top applications, no longer tied to the operator’s own network.

Battle Royale

Three narratives stood out for us in digital media this year. First, in online video, the arms race for high-quality content continued to escalate. Competition for consumers has inflated budgets for original content, and there’s probably never been such a good time to be in production. Netflix said it would spend $8B this year, Amazon is estimated to be in for $5B, and Apple is just getting started at around $1B. This is before we even get to the Hollywood studios, Disney’s acquisition of Fox, and the planned launch of Disney+ next year. Clearly there’s a big question on sustainability and it’s going to take some deep pockets to stay in the game.

Second, in broadcast TV, the remarkable tale of industrial-scale piracy in the Middle East. Qatari broadcaster BeIN Sports is seeking $1B in damages from Saudi Arabia for its alleged involvement in a pirate satellite channel that was illegally re-broadcasting premium content including the FIFA World Cup and the Formula One World Championship. Called BeoutQ, the pirate channel had its own set-top boxes, overlaid its own digital on-screen graphic over the BeIN logo, and no doubt benefited from the alleged Saudi ban on imports of BeIN’s own set-tops. The action is widely seen as a spillover of the 2017 deterioration in diplomatic relations between Saudi Arabia and Qatar.

And third, in video games, we had the runaway success of Fortnite. Released in 2017, Epic’s multi-player, online shooter had notched up 200 million registered users by November, a 60% jump in 6 months. With revenues exceeding $1B/month, Fortnite is a great case study in free-to-play gaming. As anyone with teenage children will attest, this game is incredibly addictive and – much like “the floss” dance – a lot harder than it looks.

#PersonalData

Our expectation that privacy and data security issues would only get worse in 2018 did not disappoint. Top prize this year goes to the Facebook/Cambridge Analytica scandal in which the personal information of millions of users was harvested and traded for political advertising. Quite remarkably, all the data had been obtained from Facebook’s platform without any need for hacking. Other notable mentions go out to Marriott Hotels (details of c.500 million users stolen), Under Armour (150 million), Quora (100 million) and myHeritage (92 million) which all suffered security breaches of one form or another.

2018 also saw the EU GDPR legislation come into effect, setting new, harmonized requirements for the handling of EU citizens’ personal data. Maximum penalties for non-compliance are the higher of €20M or 4% of global revenues, which is hopefully sufficient to focus minds. We’d like to believe that this will lead to fewer incidents like those above, but sadly think that there’s not going to be much improvement in the near-term.

Collateral Damage

Returning to our opening theme, we’ve picked a couple of examples to illustrate the impact of politics and government. First up, in April, US action against Chinese vendor ZTE precipitated an extraordinary sequence of events. When ZTE was found to have broken the terms of its settlement for Iranian export violations, it was blocked from trading with US firms, many of whom were key suppliers. Unable to purchase vital components, ZTE soon shut down its operations causing serious knock-ons for both its suppliers and customers worldwide. The ensuing chaos was only halted when the US later rescinded the ban and instead imposed a $1B fine and changes to ZTE’s board.

Our second example is from the tech sector and concerns the failed attempts at consolidation between the giants of the semiconductor industry. We’ll spare you the twists and turns of this long-running saga. The tl;dr goes something like: Broadcom’s $140B offer for Qualcomm gets blocked by the US; Qualcomm then later tries to buy NXP for $44B and gets blocked by China.

If nothing else, the political focus on TMT this year shows the strategic importance of the sector, and also how reliant the whole industry is on global supply chains.

2018 Prediction Review

In December 2017, we made ten predictions for 2018 – here’s how we did:

Prediction for 2018

Did It Happen?

NFV will show traction in the wireline space

 

ALMOST

While there is definitely a lot going on behind the scenes, we feel we still haven’t seen enough results to award ourselves a full tick on this one. Notable announcements came from Telefonica with its live customer trial of its OnLife Pods for fiber access in Madrid; AT&T’s trial of virtual OLT hardware abstraction (VOLTHA) for XGS-PON access; and CenturyLink which trialed a vBNG software from NFV start-up NetElastic.

AI and machine learning will increasingly play a bigger role in TMT

  YES

In 2018, operators made progress in applying analytics to manage their networks and support their operations using a combination of in-house and vendor solutions. Machine learning algorithms continuously adjust cooling plant settings in Google data centers, AT&T is using AI in their predictive maintenance efforts, and AI customer service chatbots, speech and voice services are now common amongst telecom leaders.

FTTH networks will see major new buildouts

 

YES

In the US, AT&T announced 3M more locations would be added to its fiber network by mid-2019, with Verizon deploying to an additional 50 cities outside its traditional ILEC footprint. In the UK, there were major fibre expansion announcements by CityFibre, Hyperoptic, and TalkTalk, as well as Virgin Media’s Project Lightning and Openreach’s First Fibre. Reliance Jio’s JioGigaFiber also made the news with a goal of connecting up to 50 million homes across India.

Pre-5G networks will see their first trial customers

 

YES

Even better than predicted… As we reported in our review of 2018, commercial 5G services went live in South Korea on 1 December. We may yet see more networks go live before year end, with a number of operators having plans to launch before the end of 2018.

Regulation will take a center position in the public discussion

 

YES

Public discussion about internet and data regulation took center stage in 2018. The FCC’s proposal to repeal Net Neutrality rules attracted 21.9M public comments (although there was much dispute about how many were from real people vs. bots, Russian or otherwise). In May, the EU GDPR rules came into force, threatening firms with huge fines for non-compliance. The fallout from these events is not limited to 2018 and will likely continue for many years to come.

Security and encryption will improve leveraging AI

 

  YES

We found plenty of examples on this one: Microsoft is using multiple ML algorithms as part of its Windows Defender Advanced Threat Protection, and Iovation, pipl, and Zonos have launched AI-powered fraud prevention software applications to the market. AI can be used not only to encrypt data, but also to decrypt, with Google and the University of Toronto successfully using AI to crack multiple cyphers.

Original OTT Live content will be a Hollywood trend

 

 

YES

Facebook placed a focus on live sports content in 2018, having reached an agreement with the rights holder, Eleven Sports, to broadcast free weekly games from La Liga and Seria A. Facebook also expanded into the eSports scene by hosting several eSports leagues and tournaments on its platform. YouTube found success in amateur boxing with the much-hyped KSI vs Logan Paul match – streamed as pay-per-view content with over 800,000 viewers at its peak. However for Netflix, CEO Reed Hastings, reiterated there were no plans to offer live TV, despite moves from Amazon Prime Video and Hulu in this space.

Smart Cities and transportation will show signs of transformation

  NOT YET

Cities around the world are getting smarter but this is a long-term game. Examples of progress include Hangzhou’s City Brain which controls traffic lights to minimize travel times, and in London, air quality sensors are being deployed on street lamps in the capital to allow real time monitoring across the city. In terms of transport, autonomous vehicles (AV) made further progress with milestones such as Alphabet-subsidiary Waymo’s AVs surpassing 10 million miles driven. Tragically, we also had the first fatality from an AV this year in Tempe, AZ in which an Uber AV was at fault.

Data centers will see even bigger transactions

 

    

YES

2018 has been another year of huge investment in the data center market featuring many successful multi-billion-dollar acquisitions. Digital Realty secured a foothold in the LATAM market through its purchase of Ascenty at the cost of $1.8B; Equinix spent $1.6B across acquisitions of Metronode and Infomart Dallas; and Iron Mountain acquired the US operations of IO Data Centers for $1.34B.

AR will capture the consumer crowd’s enthusiasm

 

YES

Popular consumer AR offerings this year included Snapchat Lenses, which captivated 70M users each day. We also saw retailers like Amazon and IKEA using AR to help customers visualize how furniture will look in their homes before ordering. Apple and Amazon are both now pushing AR, so we expect to see a lot more growth in the next few years.

 

Predictions for 2019

Looking forward to the year ahead, here are our predictions for 2019:

7300-YEL-no1

Fiber assets will attract more investment

Investment in FTTP networks will continue to gather pace with renewed confidence from the financial sector and a desire to capture first-mover advantage. Mobile backhaul will play a crucial role in new build, with demand for multi-Gbps backhaul at macro sites and, at least in the US, dense networks for small cells. Meanwhile, FTTP consolidation will start to play out in the most mature markets.

7300-YEL-no2

We'll start to see differentiation in 5G strategies

The launch of 5G services during 2019 will start to show clear differences between mobile operators in how they view this new technology and how they want to use it. MNOs will pursue strategies that best leverage their own position in spectrum holding, network assets, customer base, and financial resourcesDivisions will emerge between those initially focused on fixed-wireless access versus mobility.

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In-home Wi-Fi will become a new growth area

In residential broadband, consumers will become increasingly aware that in-home Wi-Fi is often a broadband bottleneck. In response, we expect to see more ISPs launch managed multi-room Wi-Fi solutions. Where successful, these will improve customer experience and provide ISPs with a new, sticky revenue stream.

7300-YEL-no4

Network operators will move beyond trials in NFV deployment

Surely 2019 will be the year in which we see a wider range of virtualized network functions in wireline (fixed) networks? vBNG and vCDN are likely candidates as service providers optimize their broadband networks for yet more streamed video content. By pushing caching closer to the users, operators will be able to reduce CapEx and deliver improved QoE.

7300-YEL-no5

The Edge Computing market will start to heat up

Follow developments in Edge Computing closely. Next year we believe the competitive battleground will become better defined from a technology, product and market perspective. Players in the market will jostle for attention, each pointing to their own specific strengths.

7300-YEL-no6

Established players will launch managed security services

With the constant stream of news on security breaches, we expect to see more activity in Managed Security services from telecom and technology companies. Applicable to both the consumer and business segments, customers are becoming overwhelmed by the scale and range of threats, creating opportunities for a more proactive stance in IoT, Smart Home and business services.

7300-YEL-no7

Pay TV providers will invest heavily in customer experience

As the cord-cutting and cord-never trend continues into 2019, video subscriber retention will remain a top priority for pay TV providers. To promote retention and customer loyalty, providers will attempt to differentiate from one another and demonstrate value to the consumer through features such as streamlined UI/UX and optimized content recommendation systems.

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Content fragmentation will lead to more piracy and credential sharing

The power struggles to gain competitive advantage in content distribution will see content owners investing more in direct-to-consumer services and attempting to withhold content from Netflix/Hulu. As a result, it will become increasingly hard for consumers to access all desired content without subscribing to multiple services. Many will reject this, leading to an uptick in piracy and credential sharing as consumers feel the full effects of subscription fatigue.

7300-YEL-no9

Video gaming and eSports will appear in the 'scopes of service providers

Keep an eye on video gaming and eSports in 2019. The success of Epic/Fortnite is impossible to ignore and the breakthrough of live streaming on traditional TV is fascinating. Aside from more studios trying to win big on free-to-play titles, we think the timing might be right for some cross-sector M&A, or at least for ISPs to work closer with publishers to build specific services for hard-core gamers.

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Operators will find tangible benefits in Machine Learning as the hype starts to wind down

In 2019, we expect Machine Learning (and Artificial Intelligence overall) will continue to exhibit large growth and investment, but the hype around it will recede. Through our work, we know operators are starting to see clearly positive business cases, and we believe that this will accelerate the roll-out of AI/ML initiatives into 2019. As customer experience becomes more important and a differentiating factor in an increasingly crowded market, service providers need to fully leverage all the data they have.

 

Do you agree with our predictions? What do you think 2019 will bring to the communications sector? Share your comments on our Year-End Letter with us <here>.