TBR: “5G” Business Case Remains Elusive; Economics Questionable

by Chris Antlitz, TBR

The mobile industry continues to move toward realizing the vision of a hyper-connected, intelligent world and is at the cusp of a major inflection point. 5G, artificial intelligence (AI), cognitive analytics, virtualization, pervasive automation and other new technologies will be deployed at scale over the next decade, and this will have significant implications not only for end users but also for all stakeholders in the global economy.

The mobile industry has significant hope that the 5G era will address key challenges and will lead to revenue generation, stronger positioning against over-the-top (OTT) providers, as well as help communication service providers (CSPs) better handle data traffic growth. This hope appears to be premature, however, as the economics of 5G still do not make sense, evident in the lack of a viable business case for the technology. Said differently, it remains uncertain whether the revenue generation possibilities from 5G will be attractive enough to justify the infrastructure cost to deploy 5G.

With 5G likely several years away from starting to help CSPs address their revenue and OTT challenges, they are expected to remain vigilant in their quest to drive down costs. Herein lies the challenge for the vendor community.

Vendors, especially incumbent vendors, will face ongoing price pressure and significant disruption from new technologies and architectures in areas such as NFV/SDN (virtualization and the white-box threat), SaaS, automation, AI and analytics.

Despite all the talk and hope of what the 5G era will bring, industry trends are moving against the vendor community, with incumbent vendors, particularly hardware-centric vendors, poised to struggle the most. Leading CSPs are focused on significantly reducing the cost of network operations and capex, underscored by a desire to disaggregate the black box and commoditize the hardware layer.

Vendors also face overall lower spend as CSPs shift investments away from LTE now that those networks are pervasively deployed and focus instead on the service layer, where they aim to digitalize themselves and offer innovative services. Other trends that are moving  against incumbent vendors include the open sourcing of software, evident by the slew of new open infrastructure initiatives such as the ORAN Alliance.

Incumbent vendors are susceptible to major disruption by relatively new companies that are not tied to legacy portfolios and are actively looking to align with the desires of CSPs. One example includes vRAN (virtual Radio Access Network) vendors, which were well represented at MWC2018. Incumbents will have to stay vigilant and keep a good pulse on the market to navigate appropriately.

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“The hyper-connected, ‘intelligent’ world will challenge long-held societal beliefs and will create significant moral and ethical debates, such as how hyperconnectivity will impact people’s privacy and who owns whose data. This world will also upend and challenge tried-and-true business models that have been around for decades.”

The mobile industry is increasingly pinning its hopes on 5G to address key challenges, generate new revenues, manage exploding mobile data traffic volumes and better compete against OTT providers.

“This hope appears to be premature, however, as the economics of 5G still do not make sense, evident in the lack of a viable business case for the technology. Said differently, it remains uncertain whether the revenue generation possibilities from 5G will be attractive enough to justify the infrastructure cost to deploy 5G.”

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Though use cases for 5G were myriad at MWC2018, particularly as they relate to Internet of Things (IoT), it remains to be seen how CSPs, and consequently vendors, will grow revenue from 5G. According to TBR’s 1Q18 5G Telecom Market Landscape, with the exception of fixed wireless broadband access, most of the operators that have made formal commitments to deploy 5G thus far have justified those investments by the efficiency gains that are realizable versus LTE. Said differently, the main driver of 5G investment will be the cost efficiencies the technology provides operators to remain competitive in their core business, which is offering traditional connectivity services.

In order for the business case to materialize for 5G use cases and drive revenue for CSPs, significant developmental progress must be made in deep fiber, wireless densification, edge computing and regulatory reform, among other areas. It will take years for these areas to be built up to the level required to begin delivering on the vision of some breakthrough use cases, such as hyper-connected cars and other mission-critical IoT use cases that would require 5G technology to become commercially viable.

Low latency is essential to enable commercialization of mission-critical use cases A significant reduction in latency is required to realize mission-critical uses for the network. Specifically, TBR notes that the mobile industry will have to make two variables align to see these use cases become commercialized.

First, latency must be lower than 5 milliseconds, and second, that latency must be sustained at 100% reliability. If either of these requirements is not fully met, mission-critical uses of the network will not be implemented due to a variety of considerations, including insurance and risk. For example, remote surgery will require sustained, ultralow latency for the duration of the procedure. Any lapse in connectivity, even for a millisecond, could prove disastrous from a patient outcome perspective. Insurance companies would not insure such a use case unless they are confident in the technology’s ability to perform.

TBR notes that though mission-critical uses of the network are compelling, the infrastructure cost to achieve these two foundational parameters is almost cost prohibitive. Due to the limitations of physics, spectrum and capital, many mission-critical 5G use cases will not be economically viable, at least through the next five years, according to TBR’s projections for infrastructure and ecosystem development. The most likely outcome is it will take until the mid- to late 2020s before networks are at the level of development needed to begin supporting the strict requirements of mission-critical use cases.

Where are the profit margins for vendors if everyone is open?
Vendors were nearly falling over themselves to proclaim how “open” they are and how much they are partnering with other companies. Though being open helps drive innovation, it could backfire from a business standpoint.  With proprietary technology under attack from virtualization, white box, and other methods of disaggregating and open sourcing traditionally closed systems, vendors’ ability to differentiate, maintain top-line revenue and earn a profit will be significantly impacted.

TBR believes there is an existential threat on black box hardware pervading the ICT industry and that it will become more and more difficult to retain pricing power and earn a profit on proprietary hardware, which will push vendors increasingly into the software and services spheres to maintain their value-add in overall solutions. These market trends are reinforced by strong words spoken by chief technology officers (CTOs) from some of the largest operators in the world who believe the black box is dead and made that point very clear in their presentations at MWC2018.

In the digital era, value will reside in the software layer of the ICT stack, with hardware increasingly commoditized and services shifting to become more software-related in nature. Vendors, particularly incumbent vendors, that can pivot and align with these fundamental changes in the ICT market will be able to stay successful in the market.

Sophisticated telcos aim for the platform:
The world’s leading telecom operators see the value of the platform in the digital era and are steering their organizations to exploit the value of those platforms. Though connectivity will remain critical to realizing the digital era, the reality is that connectivity is increasingly viewed as a commodity, reflected in falling average revenue per user (ARPU). Conversely, the value and economic profit in the digital era will be obtainable by companies in the ecosystem that either own the platform or derive significant economic value and/or differentiation from being part of a platform.

TBR notes that more and more operators in the global ecosystem are actively looking for ways to reduce their exposure to the connectivity layer, either through business diversification or by engaging in network sharing or infrastructure spin-offs or divestitures, to redeploy capital toward other domains, such as content platforms, advertising platforms and virtual network services platforms. The topic of infrastructure handling in the digital era was discussed by several well-known presenters in various keynotes and panel discussions during MWC2018.

The car is the smartphone of the 5G era:
Many demos on the floor were related to connected transportation, particularly as it pertains to the car. Samsung put it best, stating that the car is the new smartphone. There is a lot riding on connected transportation to take off. Should there be a “killer app” for the car, much like the App Store was for iPhone and smartphones in general, it could become a key driver for 5G investment at scale because connected transportation would require significant investment in 5G infrastructure to support the latency and bandwidth requirements. Some vendors posited that the “killer app” for the car will be voice assistance. Samsung, via its Bixby platform, and other vendors aim to be the central platform residing in the brain of the car of the future. There are also industry organizations established to facilitate the development of the connected car, most notably the 5G Automotive Association  (5GAA).

Regulators need to get progressive faster:
Regulatory reform remains slow, and this is stifling industry development. On one hand, regulators are trying to maintain the status quo and continue to deal with CSPs like they are utilities, while on the other hand, this stance is hindering CSPs’ ability to introduce innovation in the market and effectively compete against new competitors, such as OTT providers. Political debates aside, at the very least, regulators need to be progressive and create a more level playing field between CSPs and new entrants that compete against them, particularly OTT companies, which have come to dominate the digital economy.

Conclusion:
Business models for CSPs and other enterprises will fundamentally change during the digital era. Those companies that can navigate the landscape and align themselves with market shifts will be best able to remain profitable as their historical business models are upended by innovation. There is hope in the mobile industry that revenue growth will return, even though the actual use case(s) that will provide that growth remains elusive. In the meantime, while operators continue their search, they will remain in a sustained cost optimization phase to stay cost competitive in their traditional businesses. 5G holds some promise  for a return to revenue growth, but the technology will require multiple “killer apps” to drive significant market development and deliver on the vision of a hyperconnected, intelligent world.

3 thoughts on “TBR: “5G” Business Case Remains Elusive; Economics Questionable

  1. Totally agree with the author of this blog post. Worse is that the early commercial 5G deployments are counterproductive IMHO because they have no relationship to the future IMT 2020 standards for Mass Market 5G. Note again that ITU-R WP 5D won’t even evaluate IMT 2020 Radio Interface Technologies (like 3GPP New Radio or other submission) till July 2019.

    Any one agree or disagree with my comment above?

  2. March 2018 IEEE Spectrum:
    Just like graphene or Elon Musk’s startups, SG has become a technology savior. Proponents tout the poorly defined wireless technology as the path to virtual reality, telemedicine, and self-driving cars. But 5G is not a technology—it’s a buzzword unleashed by marketing departments. As early as 2012, Broadcom was using it to sell Wi-Fi, In reality, SG is a term that telecommunications investors and executives sling around as the solution to high infrastructure costs, the need for more bandwidth, and a desire to boost margins.

    The unifying component behind 5G is faster wireless broadband service. A more stringent—and practical—definition is the use of high-frequency millimeter waves (in addition to the microwaves that 4G LTE relies on today) to deliver over-the-air broadband to phones or homes.

    If you’re talking about phones, 5G is still years away. And new services aren’t really on the menu. Just listen to the heads of several telecommunications companies, who have begun to tamp down investors’ expectations around what 5G can deliver.

    At an industry event last November, Gavin Patterson, CEO of BT Group, which operates British Telecommunications, said commercial service remains a long way off. The transition from 3G networks to 4G networks happened quickly, he said, because there was immediate demand for faster data, driven largely by smart-phones. From his perspective, those 4G networks are still humming along just fine.

    At the same event, Johan Wibergh, CTO of Vodafone, said the real benefit of 5G is efficiency—the ability to deliver more bits at a lower cost. He claims that 5G will be 10 times more cost efficient than 4G LTE. That’s a good reason to upgrade, but not until carriers feel more pressure to improve profits.

    Meanwhile in the United States, Verizon and AT&T are rolling out 5G networks, but not for phones. Instead, they’re focused on the home broadband market, delivering what’s known as fixed wireless service over millimeter waves. Millimeter-wave spectrum is freely available for 5G for a reason-it has terrible signal propagation. Any obstacle in a signal’s path, including rain, trees, and people, can disrupt it.

    These links are cheaper to deploy than fiber, which explains why Verizon will launch its first fixed wireless service in Sacramento, Calif., later this year. Meanwhile, AT&T has been testing its own 5G broadband service in Austin, Texas; Kalamazoo, Mich.; and South Bend, Ind.

    Small and midsize cities could be the perfect match for 5G broadband, according to Harold Feld, a senior vice president at the consumer advocacy group Public Knowledge, Feld sees SG as a potential source of competition for consumers in areas where major telecommunications firms have refused to lay fiber.

    But 5G can’t solve the problem of rural connectivity. The technologies deployed for it will ultimately work best in suburbs and densely packed downtowns. And rural operators worry about being pushed out of their own markets.

    First, 5G will do a credible job of providing faster broadband to homes and offices in cities and towns. Then, once its signal propagation challenges are sorted out, it will deliver mobile data. It may even introduce new competition to certain markets. But it isn’t magic, and rural customers deserve a better solution.
    http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=8302380
    http://ieeexplore.ieee.org/document/8302380/?part=1

  3. Copy/paste from Barron’s article by Alex Eule:

    …is Qualcomm really our best hope for 5G? It’s possible that 5G may not even be the game-changer we’ve been led to believe. Wick notes that many 5G applications could struggle with interference, while their power needs might slow deployment in mobile devices. “Qualcomm has done a great job of convincing people who don’t have much technology or science background that 5G is going to be this revolutionary technology that’s the gateway to autonomous driving, artificial intelligence, and military capabilities,” Wick says. “I think that’s very questionable.”

    https://www.msn.com/en-us/news/technology/the-art-of-the-blocked-deal-the-trump-administration-leaves-wall-street-guessing-on-m-a/ar-BBKk1N8

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