AT&T and Verizon – their race to 5G will not be a moneyspinner for years

AT&T and Verizon have spent the past couple of years trying to outdo one another in early 5G plans, stoking the fire of hype as they went. They have been so eager to be the first tier one operators with large-scale 5G services that they have not waited for smartphones or affordable, fully standards-based equipment to be ready. They are starting with fixed wireless (Verizon for better commercial reasons than AT&T) and with networks for which they will have paid a premium, given the lack of scale in the market (Verizon’s is even pre-standard).

This is good for their PR in an increasingly competitive market, and helps support a nationalistic government’s narrative of global hi-tech leadership and battles with China. Of course, as a recent report from Deloitte highlighted, this particular aspect of the trade wars is like the race between the hare and the tortoise. China may be starting later, but it will get to scale – and massive scale at that – before the USA. Deloitte, in its report ‘5G: The chance to lead for a decade‘, said China had already spent $24bn more on 5G-ready infrastructure than the USA, while the GSMA predicts that China will account for 39% of the world’s 5G connections by 2025.

‘First to 5G’ races are meaningless once the first flush of excitement is over, of course, and everyone settles down to try to make money. But while the Chinese government has contributed huge resources, indirectly and directly, to make 5G happen at scale, the US operators have to make their business case work on purely commercial grounds. Even the FCC is not as friendly towards the biggest telcos as it used to be, and is keen to encourage new entrants with changes like shared spectrum.

The commercial case may be tough, or at least slow, to make. Last week, AT&T’s CFO, John Stephens, said the telco does not expect to book significant revenues from 5G services in the near term.

“On revenue opportunities, will we say in five years, how did we ever live without this? I would say yes,” he told the Morgan Stanley European TMT conference.  “Am I here today to represent to you that we have X dollars of 5G revenue in next year’s plan? No, I’m not. I’m not here to make any predictions on revenue opportunities in ‘19.”

His counterpart at Verizon, Matthew Ellis, told the same conference that the operator does not expect 5G to have a significant effect on its financial results until at least 2020.

The focus, in the first phase of roll-out, on traditional business models is part of the challenge. The new revenues from 5G were supposed to be driven by its ability to support low latency, high availability and high security services, suited to the needs of many enterprise and industrial services. But many of those capabilities will not be optimized until later releases of the 3GPP standards – Release 15 was heavily focused on enhancing mobile broadband speeds and efficiencies – and anyway, most telcos admit to finding the commercial case hard to solidify.

Stephens said AT&T is working on applications for enterprise sectors, but “the revenue opportunities are going to take some time.”

But in focusing on traditional users and applications, operators are tied to the same old limitations. As Stephens said, in any one quarter, just 5% of AT&T customers buy a new handset, which points to a five-year process for moving all of them to 5G (and that’s excluding the low end base). In fact, handset replacement cycles are lengthening, and operators do not, in most cases, have heavy subsidies (with accompanying lock-ins) to help them seed the market, as they did in 3G and 4G.

Consumers may get excited about the promise of high speeds to support virtual reality and immersive gaming, but they will only sign up for these services if they do not add much to their monthly bill.

The five-year clock will not even start ticking until late 2019, when a few smartphones are expected to hit the market – but these are likely to attract a relatively small number of users, not the whole 5% of quarterly upgraders. First-wave smartphones will be premium devices, and of course, users will have to live in an area of good 5G coverage.

Verizon achieved 75% population coverage with 4G in about two years, but given the higher frequency bands in which 5G is starting to roll out in the USA – and the fact that, outside dense urban areas, current 4G networks are often underused – it seems unlikely that the two leading US MNOs will go for broad coverage as quickly as that. The only US major eyeing traditional coverage-first deployment is T-Mobile USA, which aims to use its new 600 MHz spectrum to push 5G out rapidly, rather than confining it to urban centers or fixed wireless territories.

AT&T plans to launch mobile 5G services in a dozen cities this year, with more to follow next year, though the mobile aspect will be limited until those handsets appear and its main launch device will be a Netgear personal hotspot.

Verizon last week showed the way forward to full mobility when it said it had completed “the world’s first” 5G data transmission on a smartphone on a commercial 5G NR network, in Providence, Rhode Island. The test used a Motorola moto z3 smartphone paired with a device running on Qualcomm’s Snapdragon X50 5G modem and QTM052 mmWave antenna modules, running over Verizon’s 28 GHz spectrum to Samsung network equipment.