Wednesday, September 6, 2017

Business Model Remains the Key 5G Uncertainty

More than half of mobile industry executives surveyed by GSMA say the business model, specifically the “lack of a clear business case,” is the single biggest 5G risk. Still, 74 percent of respondents believe “enhanced mobile broadband” (faster speeds, lower latency for human users of smartphones and other devices) will be the initial “priority use case” for 5G.

That reflects past history in the broadband era, where the initial use cases always have been “faster speeds” for mobile internet access. In other words, 5G should appeal to users of 4G because it offers an order of magnitude (or more) increase in speed, plus an order of magnitude lower latency.

The big issue, in that regard, is incremental revenue, since incremental capital will have to be deployed to enable 5G. Mobile operators likely will face challenges that fixed network operators have not faced, in terms of monetizing higher speeds.

Initially, some suppliers of 4G service were able to charge a premium for such access, above the cost of 3G service. That relatively quickly ended, though, and most suppliers of 4G service likely would argue that “faster speed” does not earn much of a price premium.

To a greater extent that most suppliers would like, 4G speeds are “table stakes,” with account volume being the driver of revenue upside. In 2012,  4G did command a price premium. By about 2016, competition had in many markets eliminated the ability to extract a price premium.

So the issue is whether 5G will command a price premium (possible), and how long that state of affairs might last. Right now, nobody seems willing to make a public guess about that matter, and the outcome will rest heavily on competitive dynamics in each market.

To the extent that mobile operators will not be able to create “speed tiers” as do fixed network operators, the only chance they will have to create a differentiated price is to create 5G tariffs that are higher than 4G, and hold the price delta for as long as possible.

Most consumers will understand the “higher price for 10 times to 100 times faster speeds” argument. That is what they deal with routinely with fixed internet access services.

Of course, other offer elements--usage buckets, bundled video offers, access to “no extra charge Wi-Fi networks,” device offers and other bundled features also will matter.

The point is that, early on, the expectation of immediate incremental 5G revenue increases for mobile data service likely does make sense.

How much additional early-stage incremental revenue can be generated from other use cases is the other key issue.

In some markets, fixed wireless might represent the biggest “new” use case and revenue stream, beyond “faster smartphone speeds.” Internet of things might be more significant long term, but that is the issue: it will take a decade or more for IoT to reach significant percentages of total revenue.

Incremental revenue is key becauses operators must expect incrementally-higher network investment, compared to 4G. For starters, 5G will rely significantly on small cells. That means more investment in radio sites, which in turn means lots more backhaul investment.

To be sure, normal depreciation schedules should cover the bulk of investment, in principle, leaving only the incremental new cost to be covered by new incremental revenues.

Longer term, industry executives expect there will be a big need for application partnerships to drive new revenue streams, as well as infrastructure sharing to reduce investment cost.
source: www.gsmaintelligence.com

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