The start of 4G was a major wake-up call to many operators, that a new network does not necessarily bring a premium in revenue terms, not even for a first mover. Now that early 5G deployers are starting to announce financial results, it is clear that the same will be true of the new networks, at least in familiar consumer and mobile broadband (MBB) markets. In the UK, BT/EE revealed six-month figures which showed almost no impact from its early launch of 5G, back in May. The telco was clear that the financial impact will not come from more of the same in MBB services, but from new models, particularly those which will rely on its plans for increasing convergence of its fixed, mobile and WiFi access networks around a sophisticated 5G core.
That core, and its large wireline broadband footprint, will give the incumbent an opportunity for differentiation. Other broadband providers, such as Sky and cableco Virgin, are considering converged cores, but do not have their own mobile networks – the same, in reverse, is true for Three (which is using 5G both for fixed and mobile broadband) and O2. Vodafone has some wireline assets but far less than BT.
It will certainly be important for BT to leverage its fiber and converged core advantages in the 5G era, if its results are to show improvements in returns on its 5G investment. Those are not visible yet, though this will not be unusual. Improvements to financial metrics from 5G will be a slow burn, not the sudden uptick that was expected in earlier generations – so at least there will be less disappointment than there was when 4G largely failed to deliver a premium.
When 3G made its debut in Europe and Asia, it still brought operators a revenue boost, despite its limited extra functionality (a much-needed boost for European MNOs which had spent such huge sums on spectrum). In 4G, some first movers did get a temporary boost to revenues. EE itself was able to launch LTE months earlier than its rivals because it was, uniquely in the UK, able to refarm 2G spectrum in 1.8 GHz rather than waiting for auctions.
But any premium compared to 3G was quickly competed away and price wars ensued in many markets – by the time Chinese 4G services were launched, they were priced below 3G on many tariffs, to encourage migration to the more efficient network. In other words, new networks are often about improved cost bases rather than improved revenues.
In EE’s case, despite its 4G headstart, it saw its revenues fall in the first full quarter after its launch in October 2012, even before the other operators had entered the market. The real impact of 4G was felt far later, especially when it started to deploy LTE-Advanced for further efficiency and differentiated quality of service.
It will be a similar pattern in 5G, but converged and enterprise services will be more important to delivering that medium term revenue improvement. In the first half of its fiscal 2019, to the end of September, BT reported a 2% year-on-year decline in adjusted revenues to £11.4bn ($14.8bn), and a 3% drop in adjusted EBITDA , to £3.9bn ($5.1bn).
Its consumer unit, which houses EE, saw its second quarter revenues fall by £10m ($13m) year-on-year, to £2.644bn ($3.42bn), and its first half EBITDA fell by 5%, to £1.2bn ($1.6bn). BT no longer publishes breakdown of customer numbers, so there was no indication of 5G uptake, beyond the statement that “5G results are in line with expectations”. But despite 5G, postpaid ARPU was down by 5% in the second quarter, to £20.8 ($26.9). BT expects its overall revenues to fall by 2% for the full year.
Once again, EE’s headstart with a new network (it launched ahead of its three rivals) has not turned into a visible boost during the period when it was the exclusive 5G supplier. And most 5G-related discussion on the results call was about capex, which was up 22% in the consumer business during the first two quarters, at £455m ($589m). That hurt free cashflow, which fell by 38% to £604m ($782m) in the same period. Last year, BT spent £3.96bn ($5.13bn) on capex and this year plans a bit less, between £3.7bn ($4.8bn) and £3.9bn ($5.05bn).
Of course, it is very early days for 5G, and BT has ambitious plans to bring the service to 25 towns and cities this year, as well as bringing fiber to at least four million premises by March 2021. The combination of 5G and fiber will deliver cost efficiencies across broadband services as a whole, the telco argues, and will enable some services that are not possible or optimal on one network alone.
This is why the converged core project is so critical. A cloud-native, multi-access core will help BT to leverage all its assets, including its extensive network of WiFi hotspots and homespots, more effectively and to implement new architectures such as network slicing, which it has been trialling for a number of use cases including drone services.
According to CEO Philip Jansen, converged and quad play services are central to the telco’s growth strategy for business and consumers. It now offers a package of broadband, mobile and TV under the new Halo brand, though critics say the demand for quad play is low in the UK compared to other European markets, and that BT’s TV offering is weak compared to Sky’s.
BT is moving quite quickly from having two separate networks (having re-entered the mobile market when it acquired EE three years ago), to a fully converged platform in which fixed and mobile connectivity complement one another – for instance, 4G devices are offered as back-up if a fixed line fails. In time, a converged 5G core could allow the operator to manage and allocate all its network assets dynamically, treating them as a single pool of capacity, and to enable network slicing, something which BT has trialled extensively.
Its Hybrid Network will be launched in 2023, bringing its three access types together. CTIO Howard Watson told last week’s Total Telecom conference in London: “Simplicity is the key. As we approach 2020, we know that our customers are increasingly intolerant of complexity. They want their network to work, to deliver the services they want, wherever they want them. That’s why we are focusing on taking a leading position in converged connectivity.”
He added: “We want to take our network beyond the limits that each individual technology poses, making it greater than the sum of its parts … Whether you are connecting through fixed, mobile or WIFI, bound by intelligence and software driven common infrastructure, we truly believe we can transform the customer’s experience and deliver that seamless connectivity that they demand. We are in a unique position to do that because we are the only operator in the UK to build this type of network.”
To make the most of the converged network, in terms of service flexibility and efficiency, the converged core will be an important step forward. BT is starting to plan the cloud-native 5G core it intends to deploy in 2022 and has already announced some vendors – Canonical for the open source virtual infrastructure manager (VIM) software; and Juniper for the virtualized network infrastructure for the private cloud that will support the core. That 5G core will eventually be part of a bigger converged core platform that will support its multinational business, not just its UK unit. BT has 30m mobile and 10m broadband customers in the UK plus operations or partnerships in 180 countries.
“BT’s 5G core will be built on Canonical’s Charmed OpenStack and utilize Canonical’s open source tools to automate the deployment and operations of its infrastructure,” said Neil McRae, BT Group’s chief architect. BT will also use Ubuntu Advantage, Canonical’s service package for Ubuntu, for management and support of the 5G core.
“This will ultimately be one of the foundations that underpins our network for the next 5-10 years,” McRae summed up. “We’re building a platform that internally we call Network Cloud, which is an elastic, scalable compute platform that we will use for both internal network demands but also use as our core edge offering in the future.”
For now, the focus is on NFV, but this is just the starting point for evolution towards a full cloud-native network based on containers and microservices, said McRae in an interview earlier this year.
BT has been one of the more realistic telcos in discussing its cloud journey, and says NFV still has a couple of years at least to go, before it becomes mature and fully capable of supporting telco workloads to the same quality standard as dedicated appliances, while also enabling operators to move to a more flexible, dynamic services model with automated operations. While being an early supporter of OpenStack, BT has also talked about the high expense of deploying open cloud systems as a pioneer, since it currently still requires expensive inhouse or consultancy resource to tune the infrastructure and virtual machines to deliver the required level of performance for a telco network.
McRae added that NFV was “helpful but not the end desire … Canonical is going to help us get to cloud-native across the network, leveraging OpenStack, leveraging Kubernetes, leveraging Linux, in a way that few others can do.” Such projects will, in turn, help the OpenStack community embrace containers fully and move on from the virtual machine (VM) approach which is starting to look outdated for 5G.
Another essential element of most operators’ 5G strategies is to reduce cost, rather than pin too many hopes on increased revenues – both by leveraging the efficiencies and automation of the 5G network, and by attending to internal structures and shifts in skills.
Scott Petty, Vodafone UK’s CTO, has said he expects 5G to be 4-5 times more cost-efficient than 4G, though this is already a comedown from the estimate made by Vodafone’s group CTO, Johan Wibergh, in early 2018, when he said 5G would be 10 times more cost-efficient.
BT is halfway through a plan to cut 13,000 managerial and back office jobs, which is already delivering savings of £1.1bn ($1.4bn) a year, against a £1.5bn ($1.9bn) target. However, it is increasing its costs and workforce in other areas, so its net personnel reduction is 1,300 compared to 2017, while City analysts expect its net cost reductions to be only £200m ($259m) over the next two years.
But further automation may improve that picture. Jansen said: “We need to find a way of putting in new systems and processes that take out unnecessary manual intervention and automate and digitize as much as we can.”
Vodafone ended hopes that UK would avoid 5G price war:
BT currently prices 5G at a slight premium to 4G but that can only be sustained if rivals do not enter a price war – a forlorn hope, it seems.
Vodafone launched its own 5G services in July, a month after the market leader, and went straight for market share at the expense of ARPU premium. It does not charge any premium for 5G and announced unlimited tariffs and an improved convergence offering.
This was a notable change from its usual premium-price mentality and saw it trying to revive its flagging fortunes in its home market by behaving more like the UK’s challenger operator, Hutchison’s Three (which has launched 5G with fixed wireless services first, and has an advanced roadmap for a cloud-native and 5G core).
Vodafone’s first three consumer and business plans are all based on unlimited data, with pricing scaled on network speed rather than the volume of data used (though clearly one influences the other). Speed-based pricing is new to the UK, though it looks likely to be a fairly common feature of the 5G scene in mature markets, and has already been promised by Vodafone Spain.
The slowest tier tops out at 2Mbps and is targeted at users who mainly stick to messaging and social media; the other tiers are 10Mbps and the maximum speed the network can deliver, the latter targeted at gamers and heavy video users. The respective monthly prices are £23, £26 and £30 ($28, $32 and $37).
UK consumer director Max Taylor said the new tariffs provided a “vital point of difference versus our competitors … One of the benefits of 5G is that it helps us to provide more reliable service in congested areas, so why charge a premium for a service they should already expect?”
Vodafone expects to see its ROI coming from increased market share, and from cross-selling other services, such as home broadband.