CapEx vs OpEx: Technology Investment Bounces Back

The gradual shift away from a CapEx (capital expense) to OpEx (operating expense) model of investment in many tech-heavy sectors had been widely discussed before the pandemic struck. The suitability of the model in a period of remarkable technological change when companies are likely to find it harder to justify significant upfront costs – not least to their boards or shareholders – wasn’t hard to understand.

With cloud adoption – and, consequently, the ongoing shift in focus away from hardware-centric operation – accelerating during the past three years, it’s not surprising that this general pattern is continuing unabated in the post-pandemic era. Inevitably, the level of debt being carried by the potential customer – and their ability to secure finance for new technology purchases – is a critical factor here.

“I think it’s the case that more businesses [in broadcast & media] have tended to take an OpEx approach in recent years,” confirmed Craig Bury, CTO of Three Media, a technology consultancy that specialises in designing and implementing efficiencies for broadcasters and telcos. “Obviously, a lot it has to do with the availability of cash resources and [lending options]. It does all tend to be determined by the way the finance side of the business drives things.”

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There has also been another unwelcome – and somewhat existential – challenge to financing new investments in recent times. The Arena TV scandal has, unsurprisingly, led to banks being more cautious about lending money to broadcast, with many introducing significant new safeguards to ensure that nothing like it can ever happen again.

CapEx vs OpEx: A changing marketplace

For those who need it, here is a brief recap. Formerly one of the UK’s biggest outdoor broadcasting companies, Arena Television collapsed at the end of 2021 with debts of more than £280 million. It turned out that loans from more than 50 lenders had been secured against thousands of items of equipment that did not exist. The alleged fraud by the company was uncovered during an asset verification inspection, when one of its creditors was unable to locate some stated items of equipment.

One year on from an initial announcement, the Serious Fraud Office is continuing to conduct a criminal investigation into the “business practices of individuals associated with Arena Television Limited and its linked entities”. Much of the media attention to date has focused on the company’s erstwhile directors, Richard Yeowart and Robert Hopkinson, both of whom were reported to have fled the UK in the wake of the scandal breaking. With legal action pending, it’s a story that still has a long way to run yet.

There is no doubt that the scandal has had an impact industry-wide. Guy Symmons is Director of GSM Finance, a company which has been helping to broker finance for broadcast and media organisations since it was founded in 1997. The Arena TV episode, he confirms, “has changed the marketplace a bit in that [lenders] are more cautious and will want to verify their assets. [In particular] any deal worth more than about £50K will entail the broker being instructed to actually go and see the asset in question.”

Where further lending to long-term customers might once have been readily agreed to by banks, verification at every stage is now the watchword. So as well as a clear administrative trail, the banking and leasing industry “wants to ‘touch the metal’, so to speak, and have [photographic verification] regardless of how long the relationship with the customer might be,” said Symmons.

Nonetheless, broadcast continues to be an important aspect of GSM’s business, which also has an especially strong profile in retail. “We tend to follow the market, and when we see a niche that we like we make ourselves known and offer our services,” explained Symmons.

In terms of Covid’s impact, he said that there were “really two sides to that. There were some companies who were busy doing more filming because people wanted more content. Then there were others who – for various reasons – could not work as much but needed to carry on buying equipment [for possible future projects]. Like everything, there were definitely winners and losers there.”

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It is also inevitable that the pandemic will have resulted in some companies taking on more debt than would otherwise have been the case; not just so they can acquire new equipment, but to service existing debts. “There will be plenty of organisations carrying a good deal of debt at present, and it could take up to five years for some of them to get out of it,” suggested Symmons.

More generally, he indicates that optimism in the market is slowly returning, albeit tempered with an understandable quantity of trepidation: “There are people who didn’t invest because of the lockdowns who are investing coming out of that period, but I would say they are tending to be more cautious” – because of their own financial circumstances and/or “in case something else happens” to seriously disrupt the industry.

CapEx vs OpEx: Technology investment drivers

Putting recent challenges and issues to one side, it is Bury’s view that “one of the major drivers of approaching technologies with regard to new investment in technology is whether the business has a reason to make it a CapEx investment. For example, do they get the depreciation over time” – depreciation being an accounting method employed to allocate the cost of a tangible or physical asset over its operational life. “If they don’t need the tax benefits, they may be more inclined to take it as a straight OpEx line.”

But in the longer-term, it’s likely that OpEx is proving more popular because of its simpler ongoing accountability. “More and more companies are using OpEx as it makes it easier from a management perspective,” he said. For example, “if you know you are going to have a quiet half-year, then it’s much clearer if the [expenses] show up in a direct line with regard to what you are doing [and when].”

He agrees that migration to the cloud is another contributory factor to the increased reliance on OpEx investment, but even that is not necessarily clear-cut. “There can be lots of different ways to pay for the services – whether it be PAYG for multiple years or paying upfront [for a certain period]”; therefore, choices made in that area need to be taken in accordance with each business’ specific requirements.

More generally, David Radoczy, COO of Three Media, thinks that new technology investments will continue to be driven by customers attaining “peace of mind” about their overall direction of travel – no small feat given the enormous change in every area of the business these past few years. “If you are committing to a certain way of working – for example, if you are going to have everything driven in the cloud – then you need to be confident about every aspect of what you are doing,” he said.

With IP, 4K and HDR now firmly embedded into the industry, there may be reason to expect a more subdued period once the post-pandemic rush has subsided. But as Symmons noted, the industry is propulsive to such a degree that it’s never too long “before another big new technology comes along and gives companies another reason to invest”.

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