5G will be quite disruptive.
We studied the impact of LTE on economies and industries. It is likely to take roughly 2 to 4 years for completely new business models and very innovative companies start to surface just like Uber, Tencent, and Facebook did in the LTE era. 5G’s intersection and interaction with AI, robotics, edge computing, blockchain, industrial and autonomous will create some amazing applications and services. If forecasts hold true, 5G will be ahead of 4G by two years which adds another interesting dimension to the disruption equation. So, how should operators think about participating in the 5G ecosystem that is bound to create trillions in new value?
When LTE was launching almost a decade ago, the global subscriber penetration was roughly 40% with less than 20% of subs using mobile data. The business case of LTE was clear—mobile broadband, the promise that 3G never delivered on, was around the corner. If you build it, they will come seemed to be the safe bet. And indeed, operators benefited from ramping up to deal with the surge in data demand. As we sit on the cusp of the 5G cycle, we are approaching 70% penetration with approximately half of the subs using data services. If we dig deeper into the numbers by region, most of the major mature markets are approaching 90% penetration with over 70% of them using mobile data—most of them on LTE.
Over the last decade, capex and revenue grew in similar proportions. For the global wireless industry, the operator capex grew 75% and revenue grew 71% during the last ten years compared to the decade prior to it. In the U.S. market, which has been the envy of the world due to relatively high ARPUs, the growth in revenue was even higher.
5G arrives at an interesting point in industry’s evolution. For the first time, the network upgrade cycle is taking place amidst declining or flat service revenue growth for the operators. In the U.S., the service revenues declined for three straight years before returning to modest growth in 2018. The story is the same for other mature markets. Even operators in developing markets are facing challenges. It is time to rethink the operating model. There is a path to revenue growth and EBITDA expansion, but it is complicated as it requires new business models, infusion of software-driven network management, investment in vertical expertise, and rethinking the business from the ground-up.
Will the industry rise up to meet the challenge?
For starters, the traditional ways of building, upgrading, and managing the network won’t work. We looked at the economics of 5G and concluded that the traditional path of network upgrades won’t lead to a profitable outcome for the operators. Operators will have to change both sides of the equation—Cost and Revenue. On the cost side, without harnessing the power of software in dealing with network traffic, the margin/GB will continue to shrink. Even with 5G’s 10x efficiency, the growth in data traffic will put pressure on cost benefits. Operators will have to learn to do more with their existing assets—spectrum, sites, hardware with the help of software to not only optimize the data traffic but also create new opportunities with insights and collaboration. Virtualization of the network helps with launching new services on the fly. Software densification can drastically increase capacity at lower cost. Using AI to shape and understand traffic can drastically alter the cost equation to support GBs of data/user.
Each country is driven by different motives as to how fast they want to deploy 5G and why. For some, it is the competitive advantage in creating a vibrant ecosystem that sparks the economy while others are driven by an industrial policy that mandates mobile broadband for the masses. Developing countries have learned that by providing network access, there is a universal uplifting of the masses as more services and information becomes accessible.
In 2011, we started thinking about where the next cycle of the industry revenues will come from. It was clear that the access cycle will be the catalyst for 4G but might start to taper out during 5G. Additionally, a new framework to think about the revenues was needed which led to the birth of the 4th Wave thesis that has accurately predicted the rise of digital services ecosystem. In fact, last year, the U.S. became the first country to create a trillion-dollar mobile ecosystem on the strength of its 4th Wave digital ecosystem.
Operators who have embraced the 4th wave strategy have benefited from it. In 2017, the access revenue growth for the top 18 operators was virtually zero but the digital services revenues grew by double digits. We expect some of the progressive operators to continue to sharpen the digital skills and revenues. Access is a critical building block, but the value has shifted to the higher layers of the stack.
Having sat through many operator board meetings around the world, I see a disconnect that might hamper the industry’s growth. The 5G strategy of "we will build and they will come" has serious flaws for several markets. The financial and the technology sides of the house are not completely in sync. The senior management teams and the board at the operator companies should be asking some fundamental questions about the cost structure of the 5G rollout, how to maximize the utilization of the existing assets, a software-led approach to network upgrade and expansion, and creation of new ecosystems and revenue streams that run on top of the access layer, and the business models that will help 5G thrive for the next decade. 5G will be one of the most important building blocks of the Connected Intelligence or Industry 4.0 Era and its imperative that we get the rollout right.
5G's moment also marks another critical shift in the industry from consumer (which is inherently emotional) to enterprise (which is more rational). One is rooted in the new and the glitzy while the other in accountability, process, and the ROI. Will the industry adjust to the shift by inventing new business models and new collaborative approaches to unlock revenue streams? It is possible that the first phase of 5G is going to be about enhanced mobile broadband that gives consistently higher speeds. The revenue generated during this phase is likely to fund the expansion of the 5G network nationwide and investments into vertical industry solutions. So, it is critical to get the strategy, business models and economics right.
In a six-part series on 5G network and digital innovation, I will discuss some of my observations and suggestions on how the ecosystem can come together to address the unprecedented set of opportunities that will come before us in the next decade.
Chetan Sharma is CEO of Chetan Sharma Consulting, an 18-year young management consulting firm and is an advisor to CXOs and boards of companies in the wireless industry. Over his 25 years in the industry, he has worked with operators on all five continents and has the rare distinction of advising each of the top nine global mobile operators. Chetan has written 14 books on various wireless topics and his research work has helped shape many strategic decisions and dialogue in the industry. More information at www.chetansharma.com. You can follow his musings at @chetansharma.