The closer we get to commercial 5G roll-outs, the more unclear the business case looks, for the majority of mobile operators. To some extent that is natural – it is easy to make bold projections when a new generation of technology is years away, but now the first standards are finalized, and a few operators have firm dates to start commercial activities. But for the rest, they are more likely to agree with BT CEO Gavin Patterson, who said in November that “the business case for 5G still needs to be built … I’ve been speaking to CEOs around the world, and we’ve all been struggling to make the business case work”.
There are three aspects to that potential 5G case – cost savings, enhancement of current mobile broadband models, and enablement of new revenue streams, particularly from ultra-reliable and massive IoT (Internet of Things) services.
The requirement for the first two is clear. Consumers are demanding better quality mobile broadband to support exciting new use cases such as virtual reality, but that needs to be delivered far more cost-effectively, since the operators are struggling to make a profit even with current data rates and allowances.
Johan Wibergh, CTO of Vodafone, for instance, says he is looking for about 10 times greater cost efficiency for 5G than for 4G, enabling operators to meet users’ rising data demands while reducing budgets and clinging on to profit margins, even amid price wars.
“The increased efficiency that you get from Massive MIMO and radio that can handle up to 100 MHz means 5G is about 10 times more cost efficient than 4G,” he said recently. “We should be talking more about this because at first it will be about mobile broadband, and cost is a challenge with growing data volumes.”
He believes the case for 5G must be made first on the basis of slashing the cost of delivering data services. Certainly, MNOs should not hope for higher ARPUs just because they have a faster 5G network – very few operators succeeded in charging a premium for 4G over 3G, and those first movers which did charge higher fees, like EE in the UK, found it slowed down adoption rates.
But to transform the mobile broadband cost base will take a lot more than the 5G New Radio (NR) upgrade. It is more spectrally efficient and will be able to harness lower cost spectrum sources including shared and dynamic bands; and technologies like Massive MIMO, though not 5G-specific, will often be deployed hand-in-hand with the new radio to improve its efficiency. But many of the projected reductions in total cost of ownership will be coming from new architectures, such as virtualized networks and commoditized hardware. Those are not only about 5G, and they require massive upheaval in supply chains, internal skills and culture, and the way networks are planned and paid for.
No easy savings here then.
Turning to revenue potential, enhancing mobile broadband data rates and allowances – while not being able to charge extra – is hardly an exciting justification for 5G investment and upheaval. For most operators, this is mainly about grappling for market share by using 5G efficiencies to offer larger data buckets or lower rates; or, even more negatively, about reducing churn by addressing the complaints users have about mobile services. These were highlighted by Ericsson in a new report entitled ‘Towards a 5G consumer future: six calls to action from consumers for operators to rethink mobile broadband.’ This basically outlines the problems most customers have with their mobile service, and suggests that 5G will make MNOs better equipped to rectify them because of its greater capacity, flexibility and efficiency. But those 5G networks still have to be built before the benefits are felt, and even with modern open architectures, they will still represent billions of dollars of capex spend spread over the coming decade.
According to Ericsson, the six leading consumer requests which emerged from its survey are:
- Provide a simpler buying experience (60% of smartphone users complain about over-complex data plans).
- Offer a true sense of what ‘unlimited’ means.
- Treat gigabytes as currency – the average smartphone user has 31GB of unused mobile data left over per year, and 40% would like to use this as currency to save or trade.
- Offer more than just large data allowances – faster broadband speeds, personalized plans and fair contracts are considered more important.
- Avoid meaningless marketing slogans and focus on real network experience.
The final point was to give consumers more with 5G, and Ericsson gives hope to its MNO customers with the findings that 5G appeals to 76% of smartphone users, that 50% expect to use 5G services within two years of launch in their country, and that 44% would be “willing to pay for 5G”.
However, there was no indication of whether they would pay more than for 4G, or how much – and some expect 5G to mean they pay a single fee to cover all their services and devices.
“Our latest study does not look at a consumer view on 5G in isolation, but rather uncovers unmet consumer needs that must be fulfilled by operators on the way to 5G,” said Jasmeet Sethi, senior advisor at Ericsson Consumer & Industry Lab, which conducted the research. “From offering an effortless buying experience to focusing on real network performance, consumers are demanding changes they would like to see already made today.”
It may be more practical for MNOs to meet most of these demands if they have an efficient 5G network, but belatedly addressing customer complaints seems a poor business case for huge investment in a new network, set against the likelihood that device makers like Apple, or application providers like Facebook, will take much of the consumers’ gratitude and excitement for the new capabilities of 5G.
So additional revenue streams will be essential to make the case, even though nearly all MNOs expect to stay in their comfort zone for the first few years of 5G, addressing mobile broadband requirements (including connected car in-vehicle infotainment) first.
A few operators are relying on fixed wireless access (FWA) to bolster the first-phase business case, since this can be deployed from day one, whereas many ultra-reliable or massive IoT use cases will only be optimally supported by the second set of 5G standards, Release 16, due in 2019 (Release 15 is split into two halves – 5G NR Non-standalone, which was ratified earlier this month, and 5G NR Standalone, which should be finalized mid-year and includes the 5G Next Generation Core Network as well as the radio).
While ultra-low latency, critical communications and massive numbers of IoT devices have all been touted as new scenarios which 5G supports, the technologies to do this are unproven as yet, and so are the profit cases. Most operators are trialling these systems and poring over business model calculations, but failing, yet, to find sufficient commercial incentive to deploy.
That leaves FWA in the spotlight, sometimes for MNOs, more frequently for would-be new entrants into the wireless game, from infrastructure neutral hosts like the UK’s Arqiva (which has acquired 28 GHz spectrum in London) to cablecos.
The FWA frontrunners are Verizon and AT&T in the US. Both have several extensive trial markets and will start to offer commercial services in about a year’s time. They are in a different situation from that of most operators round the world since their wireline activities are territorially constrained, so they see the opportunity to offer fixed/mobile and quad play services outside their wireline base by using 5G in millimeter wave bands. Verizon, in particular, has a fairly small wireline footprint, and intense competition in its north-eastern territories from cable operators.
Verizon executives have said they can make a standalone business case for FWA by harnessing 5G efficiency and high frequency spectrum, though the operator intends to add mobile services within a couple of years – and clearly, the ability to support both fixed and mobile offerings on the same infrastructure is an important element of this 5G case. Verizon said in November that it believes the US residential fixed broadband market is worth $65bn a year across 129m households. Of those, 14m are served by its Fios fiber product, leaving 115m available, and Verizon is targeting 25-30% of those with wireline expansion or FWA. It trialled residential FWA in 11 markets last year and will go live this year in its first commercial market, Sacramento, California.
There are very divided opinions on the merit of its business case. AT&T, though it has similar timelines, is far more definite that FWA is just a stepping stone to mobile services – a way to deploy infrastructure, test real world 5G and get some early customers and revenues, before vital smartphone devices are available to drive mobile adoption.
And while some analysts are supportive of Verizon’s view that 5G FWA is a business in its own right, others question the practicalities. Craig Moffett of Moffett-Nathanson said recently: “If multiple players enter each market, all targeting the same 25-30% total addressable market, well, what then? Wouldn’t it be now shared among two, three, or even four providers?” he wrote in a client note in response to Verizon’s November presentation of its plan. “There’s a completely different future where each operator targets different markets. That would create a truly bizarre market dynamic that is almost unimaginable today, where each operator ‘owned’ different cities, not just for fixed wireless broadband but also for 4G LTE.”
However, analysts at New Street Research wrote in a recent report that Verizon could gain a “meaningful advantage” over other 5G operators, because it would have taken the lead in densifying its network. This will mean spending an estimated $35bn in capex over seven years to deploy 5G FWA to 32m homes, wrote the analysts, but this will create a dense network to complement 4G services as well as supporting future mobile 5G offerings, and that could “materially delay the need for more midband spectrum” for 4G.
“We estimate that Verizon would need ~360,000 nodes to address ~32m households with FWA and 430,000 nodes when incorporating the FiOS markets [45m homes in total],” they said. They calculate that Verizon’s capex will reach $22bn over the seven-year expansion period, solely based around FWA to 32m homes. “They seemed to imply that if the initial cities met expectations they would be prepared to materially increase capex to pursue the opportunity; if not, the deployment may be spread out over many years, keeping within the current envelope,” New Street added.
But as well as competition from wireline, cable and other wireless operators, Verizon will have to address judgements by the FCC that mobile broadband is not a full substitute for fixed home internet services; and its refusal to lower the speed standard for broadband. These conclusions are found in the latest Broadband Reports from the FCC, chaired by Ajit Pai – even though he had previously suggested that mobile broadband might be sufficient to reach national broadband objectives.
“I’m glad that the FCC has backed away from its crazy idea to lower the broadband speed standard,” FCC Commissioner Jessica Rosenworcel said. “But it defies logic to conclude that broadband is being reasonably and timely deployed across this country when over 24m Americans still lack access.”
Fellow Commissioner Mignon Clyburn added: “While my initial review of Chairman Pai’s draft report raises serious concerns, I acknowledge that it addresses one of my concerns by now correctly concluding that mobile and fixed connectivity are not substitutes.”
Under President Obama, the FCC ruled that all Americans should have access to home broadband services delivering at least 25Mbps downstream and 3Mbps upstream. The Obama FCC also said that everyone should have access to both fixed and mobile Internet services, not just one or the other.
In August, the new FCC asked for public comments on whether mobile could be a substitute for fixed Internet, and proposed setting a mobile broadband speed minimum for the first time, of 10Mbps downstream and 1Mbps upstream. That aroused fears that the requirement for everyone to have both fixed and mobile Internet would be diluted, and that 10Mbps mobile connectivity could be considered to be ‘broadband’.
That created a backlash, and the FCC has now declared that mobile cannot replace fixed Internet, without referring specifically to fixed wireless. The new broadband fact sheet says: “Because fixed services and mobile services are not full substitutes, it is important to evaluate progress in deploying fixed broadband service as well as progress in deploying mobile broadband service. Any analysis that only looked at the progress in deploying fixed broadband service or only looked at the progress in deploying mobile broadband service would be incomplete.”
An FCC spokesperson said there will not now be a specific speed standard for evaluating mobile networks and the 25Mbps/3Mbps standard will still apply only to home Internet.
Before Pai became chairman, he criticized the FCC for excluding satellite from evaluations of broadband progress. Including satellite would make it easier to say that the US was covered with broadband but the FCC has not commented on any possible changes to its rules with regards to satellite services.