The U.S. wireless telecom industry is starting to gear up for the transition to 5G. Among other things, the next-generation mobile technology promises to offer download speeds that are 10 times faster than the current standard, with fewer delays in data transmission. Despite their public enthusiasm for the technology, however, some wireless carriers are privately worried about taking the 5G plunge. As a result, we could see delays in the rollout of 5G—despite its clear technological advantages—by up to a decade.
Such hesitancy among mobile carriers is understandable. Only a few years ago, these companies upgraded their mobile networks from 3G to 4G. That required major, often ten billion dollar plus investments in new product development, wireless spectrum, and network infrastructure, yet it didn’t deliver markedly better financial performance. The business case for 4G was based on attracting new customers (which has happened) and capturing higher revenue from each customer (which hasn’t). Indeed, the average revenue per user (ARPU) for nearly every U.S. mobile network operator has actually declined during the transition to 4G. It’s no wonder there is concern about the case for 5G!
Why no uptick in user revenue? One reason is that many people, especially younger customers, are less likely to make voice calls. Text messaging has evolved, too. Instead of sending messages through wireless carriers, people increasingly use mobile apps like Whatsapp, Apple iMessage, or the message function in social media platforms like Facebook Messenger. Carriers still make money on the data through those apps, but it’s not enough to make up for the revenue they’ve lost on their own voice and messaging services. Ironically, most of the newer apps only became available with the advent of 4G. In that way, carriers have been victimized by their own success.
More broadly, consumers tend to believe that wireless technology—like most technology—should get steadily better and cheaper over time, and they’re disinclined to pay more for those improvements. 4G has clearly been a big step forward compared to earlier wireless standards, but it hasn’t persuaded many to open their wallets. In fact, some people treat the service like a utility in that they only notice when it fails, such as when they can’t download the movie they want. Despite interest in new, bandwidth-hungry applications like virtual reality (VR) and augmented reality (AR), it’s not clear that the appetite to pay more for 5G has gotten any greater.
Regarding new customers, that avenue for growth is increasingly tapped out as well. Wireless is now becoming a mature industry, in which competition is stiff and the market is more or less saturated—with penetration rates of more than 100 percent in most developed markets.
Enterprise customers are a similar story. During the upgrade to 4G, wireless carriers believed that they would attract a lot of new enterprise users based on “industry verticals” (technology products aimed at a particular industry, like hospitality), and that those customers would have higher usage rates. Neither expectation panned out. Today, the focus is the Internet of Things, in which manufacturing equipment, medical devices, aircraft, delivery trucks, and just about every other piece of capital equipment will all be connected wirelessly. That process has already begun, and the number of wireless connections will continue to grow. However, a connected machine generates far less in revenue, as little as $0.50 to $1 per month for some applications in developed markets like the U.S., compared to the $50 or $60 per month from standard voice-and-data subscribers.
With all that as backdrop, wireless executives understandably are fretting about the investment required to upgrade to 5G, which could easily run into tens of billions of dollars in new network equipment, spectrum, and products for a nationwide operator. And, given the experience with 4G, it’s not clear that those investments will pay off.
Pressures are mounting on all sides. The government clearly wants 5G. At the 2016 CTIA Super-Mobility Conference, the former FCC Chairman Tom Wheeler stressed the importance of 5G in ensuring the U.S. remains economically competitive. Consumers say they want it too, as do enterprise customers.
So wireless carriers publicly say they want it. But privately, they might be wondering how they can justify it. In this way, 5G represents a solution—a very expensive one, at that—in search of a problem.
Three Dimensions to Consider
In assessing how best to handle the shift to 5G, carriers need to make decisions along three dimensions. The first is technical depth, meaning how many of the technology elements they want to adapt. The upgrade to 5G is not a binary process like flipping a switch. Instead, companies have a range of options regarding which elements they introduce. These can include incorporating technologies such as massive MIMO antenna arrays, expanding use of carrier aggregation, deploying heterogeneous networks, and utilizing vast swaths of millimeter-wave spectrum, among others.
Additionally, while the technical definition of most wireless standards gets established by international standards bodies and government agencies, the marketing definition tends to be far more fluid. Carriers have not been above capitalizing on this difference in the past. For example, a few years ago, one carrier with what was arguably a 3G network simply started marketing it as 4G, with no changes to the underlying equipment or service. (Competitors dismissed it as “Faux G.”) Such a move could yet again become an option for some players during the shift to 5G, at least as a temporary way to jump ahead of the competition with limited investment.
The second dimension to consider is geography. Carriers in the United States and other developed markets need to decide where they will make upgrades to their network. Political and regulatory pressure often factor into these decisions; governments and society at large typically want everyone in a national market to enjoy the same service levels. But the reality is that 5G might only be financially viable in urban areas with dense populations (where, not coincidentally, customers are generally willing to spend more on technology). In fact, as some recent announcements have indicated, 5G may not start out as a mobile technology at all. Instead, it may initially serve as a fixed-wireless replacement for cable, in which urban residents get a home antenna that links to a site nearby. That approach would give customers an upgrade in speed and bandwidth, but would not enable mobility away from home. The bottom line: geography was an issue with the 4G rollout, and it will be an even bigger consideration with 5G.
The third dimension is timing – that is, when carriers start the rollout process and how quickly they get to the finish line. This is the hardest dimension for companies to assess.
There’s a tendency to think every carrier would want to implement 5G as soon as possible, everywhere they can. After all, that would provide a first-mover advantage and a point of differentiation. However, some carriers may simply not be able to afford it right now, or they may not be able to get the capital investment approved by their board.
Moreover, based on their experience with 4G, some carriers may decide the business case isn’t there—at least not yet. Because they finished the last upgrade relatively recently, their networks are still functioning fine. In this way, they’re a bit like a driver with a late model car. He could always trade it in for a new one, but he doesn’t need to, so it’s hard to justify the expense. With wireless networks—as with cars—there are points on the life cycle where it makes more economic sense to upgrade, and points where it’s better to wait.
The timing issue is compounded by the fact that carriers differed both in when they started implementing 4G and in how long the implementation took. Some started early and finished quickly. Others started later and moved more slowly. And still others were among the last to start but finished quickly. As a result, the age of networks and equipment among carriers are substantially different.
Because companies have different ways to play in the market as well as different implementation timelines, they can deploy 5G in many different ways. Carriers that have an established brand based on network superiority, may want to begin implementing 5G early, in order to protect their brand and their base of customers. Once they start, however, they don’t have to rush. They can begin marketing a 5G network by doing just enough to retain their credibility—for example, rolling it out to a small number of cities—while not overinvesting.
By contrast, fast-followers need to determine how much of a head-start they’re willing to give the industry leader. If their customers are satisfied with 4G service, these carriers may be able to hold off on most 5G capital investments for a few years and try to compete on price instead.
Another option is to pursue new markets altogether. With fixed-wireless broadband being an increasingly-likely starting point for 5G deployment, some operators may choose to pursue this market as a starting point, being early to market, building or extending their brand, and establishing a loyal customer base before others get into the market. Doing so will require new capabilities for some operators, however, including the creation of broadband and entertainment offerings, as well as the delivery of in-home installations and repairs.
Finally, some companies may decide to wait until they have no choice but to upgrade, either because the competitive pressures become so great or because their network no longer functions well enough to retain customers. (This is analogous to driving the old car until it dies on the highway.) This may not seem like an attractive choice, but investing billions of dollars on a network upgrade simply because your competitors are doing so isn’t a great option either.
Wireless companies have joined the ranks of other mature, capital-intensive industries facing the paradox of slowing growth and accelerating technology change. In the past, these companies could create value primarily through top-line growth. Their biggest challenge was meeting escalating demand. Today, they can no longer win through customer acquisition, because most developed markets are already saturated, and there aren’t any customers left to win over (short of taking them from a competitor). In this environment, the decision process to determine when to invest—and when to hold off—becomes much harder.