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23 August 2018

New network ownership strategies would help USA close 5G gap with China

The USA and China are locked in battle on many fronts, and 5G is one of them. The trade and security wars will harm mobile vendors from both countries, but will not stop the new networks getting built. In that race, it seems China has the edge on its rival, having spent more $24bn more on 5G-ready infrastructure than the USA to date.

But this is not just about deep pockets – it is about the approach to network ownership. In China, a relatively young market with plenty of growth is encouraging creative thinking about network sharing and co-investment in 5G by interested non-telecoms parties (as with the stakes taken in China Unicom by web and industrial corporations). Meanwhile, Verizon and AT&T may be moving early to 5G, but they are clinging to the same assumptions about network ownership and control, which could leave some industries underserved, and open the telcos up to challenges from new mobile players such as cablecos or Dish.

The $24bn figure is the calculation of Deloitte, in its new report ‘5G: The chance to lead for a decade‘, which comes a year after a GSMA report concluded that China would account for 39% of the world’s 5G connections by 2025. In other words, the USA may be able to claim the first fully commercial 5G when Verizon and AT&T go live with their initially fixed services (though they may be pipped by a smaller country). But China has been laying the groundwork to scale up rapidly and bring 5G to its massive and data-hungry population.

According to Deloitte, China already has 350,000 cell sites equipped to support 5G equipment, compared to 30,000 in the USA. Catching up may be “near impossible”, it warned.

Of course, races to be the first or the biggest are meaningless if 5G does not deliver strong business cases for the operators and the promised improvements for consumers, businesses and society. Deloitte is not really comparing like with like.

Chinese operators are under significant government pressure to make their country a ‘5G nation’, but also receive significant support to do that, and while the quest for profits is tough for the three Chinese MNOs, the planned economy does offer some benefits in terms of rapid scaling-up of infrastructure. For instance, regulations about access to city cell sites are not debated and challenged as they have been in the USA, where that issue has greatly held back the densification on which many 5G services will depend.

Also, China is a newer mobile economy than the USA. Despite the massive investments in 4G, there is plenty of growth left to chase, in consumer and enterprise markets. The operators are taking a ‘build and they will come’ approach, which was common in the west in the 3G era, but has largely been abandoned in favor of a more piecemeal modernization strategy, in which a few markets or one use case – such as fixed wireless at Verizon – need to be proven before the MNO moves on to large-scale expansion.

By contrast, China Mobile, Unicom and Telecom are planning rapid roll-out of 5G – and are currently scaling up their IoT networks too – confident that, in their young market, users and new services will follow.

“The United States, Japan and South Korea have all made significant strides toward 5G readiness, but none to the same extent as China. Infrastructure spend and tower density distinguish China’s leap forward and highlight the degree to which China outpaces the United States during these early stages of 5G deployment,” Deloitte wrote, remarking that the USA currently averages 4.7 5G-ready cell sites per 10,000 people, compared to 14.1 in China. In total, China has 1.9m mobile sites, almost 10 times the USA’s 200,000 (China has four times the population and a similar land mass). For every 10 square miles, there are 0.4 sites in the US, but 5.3 in China.

One factor which has enabled the 5G pace to accelerate is the creation of the China Tower joint venture, into which the three MNOs have placed many of their sites. This unit has invested $17.7bn in sites since 2015. While a leaked document suggested that the US government was interested in a similar wholesale national 5G infrastructure scheme, this is very unlikely to happen in the US competitive and regulatory landscape. Indeed, Deloitte believes “such interventions … could risk disrupting a communications and technology ecosystem that has proven symbiotic and resilient over the past decade.”

However, it is not just the centralized economy of China which has enabled the operators to cut through red tape and local opposition to secure the sites they need. The same report shows that other countries are ahead of the USA in the number of cell sites they have, and therefore the density of infrastructure already in place to support 5G. Japan has even more 5G-ready sites per 10,000 people than China, at 17.4 or 15.2 per 10 square miles. Germany boasts 8.7 sites per 10,000 people and 5.1 per 10 square miles.

The US operators are likely to be far less worried by these comparisons than their government. It will be more important to do 5G right – ensuring it delivers new revenue streams and enables broader economic growth – than to do it on a huge scale in the first few years, especially when there is still plenty of growth in 4G (outside of a few very urban areas, there is unused 4G spectrum and network capacity, while new services are being launched using NB-IoT, Cat-M and mobile V2X technologies). A strong 5G base may give one country’s economy an advantage over another’s – through enhanced productivity or efficiency perhaps – but those enterprise use cases are in the second phase of commercial deployment for most operators in all markets. And there are far more factors to decide the balance of economic power between the USA and China, than just their 5G state of readiness.

However, the US MNOs have committed to deploying 5G early, and at considerable scale compared to most countries outside east Asia. In doing this, they have their eyes fixed on their own rivals, more than on the Chinese operators. The landscape is changing quickly. If T-Mobile and Sprint succeed in merging, they will have to reconcile two very different approaches to spectrum and network technology, but will provide a bigger counterweight to Verizon and AT&T. Those two big telcos have been investing in new strategies – including media, content, IoT and quad play – to offset the pressures on the mobile and broadband markets. They are also putting the platforms in place to allow 5G-enabled services to be launched quickly, and to reduce the cost of ownership of their networks through virtualization.

But they don’t just have to watch out for an enlarged TMO, but also for the increasing mobile activities of the large cable operators, which have the advantages of strong content deals and consumer TV relationships, as well as a wireline network with which to backhaul dense WiFi and 5G networks.

Verizon and AT&T also have fixed lines to improve their cost base and generate revenues, if they lease them to other players for backhaul and fronthaul. Indeed, a new report from Wall Street analysts Cowen declares that Verizon is now a “fiber giant”, with 900,000 global route miles. Verizon has recently been bolstering its fixed assets ahead of 5G, acquiring fiber and fixed wireless spectrum with XO as well as dark fiber from Zayo. It is now a top five fiber provider in 16 markets outside its own fixed-line service footprint and, according to the report, “continues its relentless and aggressive fiber densification, especially with metro fiber deployment.”

Incoming CEO Hans Vestberg said on the most recent earnings call that the fiber networks “will continue to be in high demand and can take significant share in mature markets,” and that Verizon’s fiber build-out “will allow us to take full advantage of the many use cases that will come to bear in 5G”.

The operator’s wireless chief, Ronan Dunne, told an investor event this month that 3G and 4G had been about freeing users from wireline connections, but 5G was far more about convergence and ‘always best connected’. The differentiation for service providers would no longer come from wires-free connectivity but from personalized experiences and services.

“Increasingly I will be able to deliver a network for a one-to-one relationship,” he said. “So, we’ll actually be able to deliver an experience on the network that is defined around the specific user needs of the customer at that time.” He focused on four markets where he thinks these new experiences will make a difference to consumers and businesses – retail, healthcare, gaming and stock trading. In retail, he envisages 5G supporting real time, deeply granular data analytics to give physical retailers the same customer insights as their online equivalents. In healthcare, advanced networks could support more effective long term patient monitoring.

And in gaming, of course, 5G’s low latency comes into play and can potentially differentiate a certain operator’s network (if they have invested in that capability earlier or more optimally than their rivals). Ultra-low latency is “probably where you get this extra level in your game that only Verizon’s 5G customers are able to access with the extra capability there”, said Dunne. “Clearly in the gaming world its the latency … Getting your retaliation in first in a gaming app is all that matters.”

That ultra-low latency will also be important to financial traders. Dunne says Verizon aims to “deliver a trading experience on your mobile, in conjunction with Yahoo, that is best-in-class and perhaps even your ability to trade nanoseconds faster than somebody who is on a wired service”.

There were also the inevitable nods to autonomous vehicles and smart cities, as well as stadium experiences and smart manufacturing.

AT&T’s CFO John Stephens was also seeking to reassure investors that the investment in 5G would deliver new revenue streams. “As we continue to do 5G Evolution, and then lead in 5G, we believe we will see additional opportunities for growth and revenue streams that will only improve our situation,” he told an investor relations event. “Specifically, things like augmented reality, virtual reality, the internet of things, the ability to continue to service our business customers and provide them new services, whether it’s playing in the healthcare industries and helping deliver healthcare services or a whole host of other entertainment services.”

He was clear that the main opportunities would come from dense urban deployments of mobile 5G (even though AT&T will seed the market with fixed wireless services in suburban areas first). “We’re going to be putting a lot of small cells in downtown urban areas,” with support for mobility from 2019, he told the Oppenheimer annual technology conference.

In all these cases, Verizon and AT&T are thinking like traditional operators, about staying ahead of rivals primarily through deploying a better network, which can underpin new experiences more effectively than those of competitors.

That approach requires significant investment because it plays against any idea of sharing active network equipment. So AT&T has increased its capex spending sharply over the past year to prepare for 5G, whereas many operators in other parts of the world – especially those which plan to deploy at a more gradual pace – aim to implement 5G with the same budget as for 4G, or even lower. AT&T is spending up to $25bn this year on its network, up from around $21.6bn last year, with 5G and FirstNet the main priorities.

But if the key competitive edge is in the RAN and core, not in the applications layer, the partnership ecosystem or the customer relationship, then US operators are under pressure to spend big – and we are unlikely to see them blazing a trail for neutral host or shared networks any time soon.

That may not be true of their new challengers, however, and if the cablecos, Dish and even the turbulent Ligado take a different approach, the MNOs will have to adapt their strategies, if only because they will not enjoy the same market share, ARPUs and profit levels that currently set them apart from most other operators round the world (though the return of unlimited deals and TMO’s ‘Uncarrier’ strategies are already inflicting damage).

Cable operators will take a more collaborative approach to the cost of building out 5G, and are likely to build far more of their own infrastructure than they have done to date. The alliance between Comcast and Charter in the mobile market demonstrates this approach – achieving immediate economies of scale and market weight by working together in a mutual challenge to the big operators.

Most of the cablecos’ network investment has been in WiFi so far, but now they are activating MVNO agreements to add mobile services, and they are testing cellular technology in shared spectrum such as the CBRS band in the USA (see separate item), as well as taking active roles in 5G trials. They are assuming that 5G services will be enabled by very dense, targeted zones of small cells, most of them indoors or in city centers and business campuses. Cablecos are well-placed to provide the backhaul and fronthaul for such localized networks, and can move towards a ‘thick MVNO’ arrangement where they build localized networks themselves to support direct enterprise services, or to support specialized service providers on a neutral host basis. Their reliance on their MVNO hosts would be confined to wide area coverage and mobility.

Approaches like this will be enabled by greater availability of shared spectrum to supplement any airwaves the cablecos may purchase at auction; and by a more open ecosystem for 5G base stations, especially small cells, which could evolve to be more akin to the WiFi equipment market thanks to initiatives like Facebook’s Telecom Infra Project (TIP). Such changes will shift the competitive landscape and could help ensure that all US industries are well supported by 5G, not just a few large verticals in which MNOs can make a strong business case without significantly altering their strategy on network control and ownership.