A paradox of life, especially for sentient beings that frankly prefer certainty to uncertainty, is that many “realities of life” are paradoxical: both “now and not yet,” nuanced and contradictory, subtle instead of clear cut.
So it is with 5G. It is fair enough to say 5G is “overhyped,” as Johan Wibergh, Vodafone Group CTO, characterizes matters. Each new generation has been hyped. But not every next generation mobile network has been deemed equally successful. “Why” that is the case matters.
“I think as an industry we got 2G and 4G very right, it was technology that worked and gave great services for our customers, made business cases work for the operators and work for the vendors,” he said. “ If we think about 3G, that wasn’t a success in many parts of the world.”
It matters “why” this statement is “correct.” One problem with 3G was not so much the other elements of the business case as it was the “overpaying for spectrum.” It is correct to note that 3G was the first platform expected to support creation of many new services beyond voice and texting.
Eventually, that did happen, particularly with regard to mobile email, mobile browsing and tethering of PCs, if not for any great new class of application. The point is that new use cases did arise.
What damaged the business model was vastly-inflated service provider payments for new spectrum. Had that not been the case, it is unclear whether 3G would have been deemed “not so successful.”
Service providers will not make the mistake of overpaying for spectrum, ever again. First, they know what happened with 3G, when operators overpaid for spectrum. Second, service providers know they can rely on Wi-Fi and unlicensed spectrum to boost end user experience.
Third, there are huge amounts of new spectrum, dwarfing all current supply, coming available. Finally, new ways of using existing spectrum (spectrum sharing) and a massive shift to small cells and better radios also will help supply huge amounts of effective new capacity.
Wibergh is correct that 5G will supply bandwidth at lower costs per bit.
Pointing out that 5G networks will be an order of magnitude less costly than 4G, Wibergh suggests that near-term business upside related to mobile broadband is more important than the other longer-term opportunities.
Here he might be partially right. Many have argued that the upside from 4G was precisely the lower cost to deliver bandwidth, especially at first. It is harder to argue this was the advantage later on, when 4G underpinned a shift to consumption of entertainment video as a key trend.
Also, where 3G was inferior to Wi-Fi as a connection platform, in terms of speed, 4G actually offers better end user experience than does Wi-Fi, in many to most settings.
Wibergh says he I doesn’t “understand why we as an industry are not talking more about this, because in the beginning of 5G there is going to be much more mobile broadband usage, and cost is a challenge for us.”
There are some reasons for the emphasis on new apps such as internet of things, connected cars and so forth, rather than cost per bit. By now, most industry executives already believe that mobile broadband--no matter how efficiently it is delivered--will fail to produce significant new revenues.
There are limits to end user willingness to pay; competition keeps driving cost per bit lower; consumers will use “no incremental cost” Wi-Fi to control their spending; and in many markets, “unlimited usage” means there is no revenue upside for increased usage, except at the margin, when consumers are less-costly usage-based plans are enticed to spend a bit more for such unlimited plans.
Fundamentally, that is why the attention is focused on new applications--and internet of things in particular--and not on cost reduction for mobile broadband. Though lower cost is quite helpful, the human-driven mobile broadband market is reaching a natural limit.
And if one believes that half of current mobile revenue will be lost over the first decade of 5G operation (as has been the case in recent decades for telecom, generally), cost savings are not the answer to sustainable business models.
The other issue therefore is product substitution and maturity. Over the course of the 3G and 4G life cycles, voice, which has been the revenue driver, has begun to falter, replaced by mobile data revenues, which represents nearly all the growth in developed markets.
In developing markets, subscription growth--based on voice--still matters.
But mobile data has characteristics unlike those of voice. Generally speaking, when voice usage increased, so did revenue. The relationship was fairly linear. In the internet era, as usage of data increases, revenue does not follow in a linear way. Higher usage can result in nearly-zero incremental revenue for the service provider, or in revenue gains that do not track higher usage.
Instead, new revenue drivers, representing half of current revenues, must be created. That is why we do not hear executives hyping cost savings as the rationale for 5G. Such savings simply would not be sufficient to justify the investment.
To the extent that 3G is not universally viewed as a success, it is arguably more because of too-costly spectrum purchases, not the operating performance of 3G, or its ability to underpin new use cases and revenue drivers.
In the 5G era, new revenues will be the key. As the old saying goes, “you cannot cut your way to success.”
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