Fritzsche’s Forum: Top 10 Themes For 2023…..(Hint: It Will NOT Be Dull)
January 11, 2023 | As the calendar turns to 2023, it is prediction time! So, without further ado, here are our Top 10:
1. Spotlight on IoT – Like Edge was in 2022, 2023 will be the year when IoT becomes more than a ‘whiteboard concept.’ Europe has set the precedent. Expect that many US carriers noted with great interest as to what is going on on the other side of the pond (and the value creation being seen).
2. Carriers Need to Make the First Move to End the Cloud “Frenemy” Status – Relationships between the cloud players and the carriers continue to find themselves in the middle of a weird / somewhat awkward dance. In a recent post, Cole Crawford, CEO of Vapor IO, characterized this relationship very well noting: “both need to accept that one owns the first mile, the other the last mile.” The logical way to do this is to embrace shared infrastructure. But the key question - will you convince the two legacy carriers (who have always bearhugged their own, exclusive networks) to do this?
3. Wireless Wars – Buckle Up! – As the once wireless leader, Verizon, comes under fire, the C-Suite there has indicated it may need to get more “aggressive” in some ways. As the leader goes, so too may others. As economics 101 teaches us Price (P) x Quantity (Q) = Revenue (R). The concern is the “Q” part of the quotient continues to be challenged given the US wireless market is so deeply penetrated. Thus, if the “P” lever is pulled (and ARPU is compressed), that leads the Revenue (and margins) to also see contraction. Not a trend many investors will embrace or that will screen well for those in the quant world.
4. Privately Owned Data Centers May One Up Those in Public Light - One thing 2022 taught us is data centers need much capital. In fact, CapEx as a percent of revenue is highest among this silo than any other broadband infrastructure area. Simply put, those data center companies which will be most successful will be those that live (and breathe) the famous Peter Drucker quote: “Innovate or Die.” This is essentially table stakes in order to be able to fulfill the needs of their (very demanding) customer base. This capital is much easier to spend under the shield of private capital than in the public eye. We believe those companies now in the hands of private capital players (i.e. QTS, STACK, CyrusOne) may be best positioned to lean into this spend as they are not beholden to Wall Street’s myopic focus on AFFO.
5. Expect a Spectrum Tug-of-War in Lower 3 GHz Band – Midband spectrum is the foundation for 5G. Yet, the US continues to lag other countries in terms of availability of exclusive (non-shared) midband spectrum. This will bring all eyes to the “lower 3” (3.1-3.45 GHz) spectrum. This spectrum – now occupied by the DoD – would be a critical complement to the recently auctioned C-Band and 3.45GHz spectrum. But….it is complicated! Prepare for a meaningful game of tug-of-war! CTIA has been lobbying (hard) to ensure some amount of this lower 3 GHz is made available through a competitive auction for licensed 5G operations; however, cable cos and some tech companies, including Amazon, are pushing (as hard) against having to submit to auction and rather asking that the spectrum simply be shared, similar to what the FCC did for CBRS. DC insiders indicate resolution is as clear as mud. But the end result will impact the industry’s push to identify specific bands in legislation extending the FCC’s auction authority beyond March 2023. My prediction: activity on the Hill around spectrum pipeline legislation in Q1 2023 should bring near term clarity.
6. Expect Towers To Continue to Push Toward New (Non-Macro) Silos – American Tower’s purchase of Coresite (November, 2021) surprised many. While towers have been dipping their toes into the data center waters, this transaction brought it to a new level. We expect to see the US public towers cos think outside the box as to how they can drive their growth. There is no one trick pony to 5G infrastructure deployment. As a result, towers will need to expand their portfolios to be part of the carriers’ 5G conversations. Expect this to come in many forms: edge, small cells, data centers represent three key areas to watch.
7. Others will Follow AT&T’s / JV Fiber Playbook – Santa came early to AT&T. On December 23rd, AT&T and Blackrock announced a new fiber JV. While financial terms were not disclosed, we expect this was the first domino to fall in the wave of fiber carrier / financial player JVs that have been so popular in Europe. Such a partnership provides a form of off-balance sheet financing for the carrier. For the financial player (that is flush with capital to put to work toward digital infrastructure), it gives them the opportunity to pair up with a vetted management team and ride the fiber wave. We expect others are watching with keen interest here. Before the calendar turns to 2024, we expect to see two to three similar announcements made (maybe even with some of the ‘grooms’ who were left at the AT&T altar?)
8. Expect Private Networks News Flow to be Fast & Furious (Infrastructure Play Here Should Not Be Ignored) – Private network momentum is (finally) being seen! The Global mobile Suppliers Association (GSA) has identified 955 different organizations in 72 countries deploying private cellular networks (up from 66 from the Q2’22). We would expect the momentum to only grow in 2023 as more unlicensed spectrum is deployed (and possibly freed up from the FCC), expect private network deployment to continue to build. The infrastructure side of this trend? Inbuilding wireless plays. There is much interest in this space – but no player that has significant scale (therein may lie the opportunity……)
9. Roll Up of FTTH Players will be seen – 2022 and 2021 saw the rise of multiple fiber to the home (FTTH) players. Many of these platforms took advantage of the significant government subsidies being put toward broadband incentives (and these grants are still coming from many different pots!). Many of these carriers have partnered with financial players to fuel this buildout and home expansion. While some have seen strong sub growth (‘fiber always wins’), many lack scale. History has shown being sub-scale in this business is a difficult strategy (cable consolidation offers evidence of this point). One of my key theses as an analyst was there eventually would be a “super RLEC.” At the time I thought this would be in the form of Frontier, Consolidated, Windstream, etc. Given the changes that have occurred in the last two years, I believe the thesis is correct, but I had the wrong “actors”. Look for 2023 to see some of these smaller infrastructure-backed FTTH carriers join forces to form a broader ‘production.’
10. Enterprise Fiber Players Will Not Be Ignored or Left Out Anymore – We were somewhat shocked how “unloved” the enterprise fiber space was in 2022. This sector was essentially ignored in every conference discussion we attended. It is easy to craft a glass half empty case for this group in 2023 (looming recession, slashed corporate budgets, layoffs, etc.). However we would take the under there. We believe 2023 could be a very important year of development for this sector. Several reasons drive this view. First, we expect M&A in this sector to take place to create almost “mini-ZAYOs.” Second, look for this group to shake their ‘dumb pipe’ syndrome and find ways to move up the stack (similar to ZAYO / QoS Networks acquisition). Finally, while the macro headlines are indeed ugly, in a recession we do not see broadband usage declining. In fact, one could argue the two factors have an inverse relationship (making these companies all the more critical in a CTO’s world).
So let’s see what you got, 2023! This space is indeed a special one for all the twists and turns it can take (almost on a daily basis). Buckle up….It is sure to be quite a ride…..