Ericsson remains bullish, Nokia is somewhat neutral and Huawei has tipped into scepticism. So how should we feel about 5G and what does the business case look like?
Telecoms ropey history on business cases
One of the worst characteristics of the telecoms industry is our tendency to invest in technology without knowing what we’re going to do with it. We even have a hackneyed phrase to describe this (“build it and they will come”). A phrase that entirely misses the point. They may come but will they pay?
Repeatedly the telecoms industry invests in extremely expensive technology without a proven business case. The mobile industry, in particular, has a poor history in this respect. 3G was slow to take off because no-one knew what to do with it – there were no applications initially. Scarcely had we started making money out of it when 4G came along. And despite all the hype it hasn’t earned the premiums the industry forecast – driving up scepticism amongst investors.
The uncomfortable truth is that we invest in expensive technology without seeing a commensurate uplift in our revenues. We invest just to stand still commercially. And that’s the best case scenario. The main hope of recouping the investment is through B2B use cases, because there is growing recognition that consumers now expect tariffs to remain low while also expecting service improvement.
Widespread scepticism around 5G business case
5G is not unique in the weakness of its business case, but increasingly CEOs are finding it hard to backing for another commercially unproven technology. The industry simply cannot afford to go on another wild goose chase of a technology in search of a customer. BT’s Gavin Patterson, for example, talking at last year’s Huawei Global Mobile Broadband Forum (November 2017) said: “I talk to other CEOs around the world… and we’ve all been struggling a little bit to make the business case work.” Patterson went on to say: “Finding the use cases is the biggest challenge we have at the moment.”
MTS’s CMO Vasyl Latsanych has been even more scathing. “That self-driving cars will need 5G is not proven scientifically. 5G is still just about attracting attention at MWC in Barcelona.” KT’s Lee Yong-gyoo Lee, head of the 5G business unit, says that the business case for 5G “is not clear at all”. And Bruno Jacobfeuerborn, CTO of Deutsche Telecom, admitted that his finance department was voicing scepticism.
China Mobile is trialling 5G in 17 cities, supporting 11 types of services and applications. But according to Liu Guangyi, a CTO at the China Mobile Research Institute, one of the key goals of these trials is to “make sure our 5G networks can earn money so we can earn back our investment”.
Having once been an advocate, AT&T is now a sceptic and far more granular in its assessment. Its Senior EVP and CFO John Stephens told the Cowen and Company Technology, Media, and Telecom conference: “It’s not the network…It’s the cost efficiency.” Candidly, he said it’s not the last mile that worries the company but the backhaul. All those mooted high bandwidth services with gigabit speeds will need fibre backhaul to the core. But getting fibre to small cells and 5G access points is expensive. “In a general residential broadband solution, the economics for us don’t seem to work,” he said.
The question is: if the economics don’t work for consumer. Do they work for business services?
The search for a business case
Many commenters lazily fall back on the get-out-of-jail-free card that is IoT to justify 5G spend.
Until now, IoT has been pretty handy to shore up ropey business cases because some huge numbers have been pumped out by analyst houses and everyone likes a sharp incline on their forecasts.
However, cold reality has been thrown on the IoT business case by none other than the GSMA, who calculates that a mere 5% of IoT revenue will go to connectivity providers. It’s not an inconsiderable amount of cash – 5% of $1.1 trillion is still an awful lot of money. But it’s not enough to justify the kind of CAPEX 5G will require.
Not only that, but the key here is not the number of connected objects, but the revenue from those connected objects, and IoT revenue is not looking a pretty picture at all. The “things” themselves mostly aren’t that data heavy, nor are they low latency or realtime. Most IoT traffic is, in fact, pretty modest in its network requirements. Most “things” will also not be valuable enough to justify any great network spend.
There are some sparks of hope though. 5G does offer the possibility of increasing coverage of faster broadband services to rural areas that are not well covered today. There’s no doubt that bandwidth-starved rural businesses will pay for the privilege. But it does require operators to target rural areas first, rather than the usual model of London-first and everyone else when we get round to it.
Network slicing will enable us to offer new classes of experience and quality of service, though here the industry needs to be careful it’s not just cannibalising its existing business. The business case will only stand up if there’s additional spending with 5G, not if it simply substitutes mobile spend for fixed line spend (particularly as most operators are multi-service and so this is simply internal cannibalisation).
There are some businesses and industries willing to pay more for low latency and meaningful service guarantees (for example, financial services), but the challenge here is can our industry judge the value of our services to these customers accurately and price accordingly? History would suggest not.
5G can provide flexibility to businesses by enabling an ‘instant pipe’ to take peaky traffic and maintain QoS, to connect up new offices and homeworkers, and to support diversity to cost-effectively minimise risk from disasters and cyber attacks.
New services such as Augmented and Virtual Reality will drive the requirement for bandwidth and low latency, but the gap between mooted 5G rollout dates and these technologies going mainstream is palpable. And again, no-one seems to be able to answer the question of whether companies will pay enough for these services to justify the investment. In fact, we already know that manufacturers will shape their business to take advantage of lower resource costs (look at how they work with electricity generators today) rather than the other way around. They are far more likely to be interested in utilising off-peak low-cost capacity than hiking their spend on bandwidth-heavy services.
Nokia’s Digital Design Service
For 5G to be successful, the industry needs to do something it’s never been very good at, which is to reinvent its commercial model and communicate tangible benefits to its business customers. Part of this is accurately understanding costs – something Nokia has recognised. In June 2018 it announced a new offering to help – Nokia Digital Design. This provides a services platform and machine-learning algorithms that enable the cost impacts of 5G use cases to be accurately modelled.
It’s a start. It’s certainly helpful. But it still doesn’t help service providers to either design the use case, price it, or sell it effectively. This is where the real challenge lies.