5G Business Model Concerns are Overblown, in One Sense

Many mobile service provider executives have professed concern about the business model for 5G, which might be considered misplaced, given industry history. That makes sense for the net new use cases and revenue models that might be possible: those business models must be built. 

source: Ericsson 

On the other hand, name one mobile platform--ever--that has failed to boost total or net revenues. To be sure, subscription growth alone accounts for most of the gains. And that growth driver is slowing. 

Still, we have yet to see a single mobile platform that proved unable to drive higher total revenues. That does not mean such growth is inevitable, but new use cases and revenue drivers always have emerged, even when unexpected. 

Growth drivers do shift, however. The first generation was driven by business voice. 2G was driven by consumer uptake, then text messaging. By 3G, growth gradually shifted to internet access. In the 4G era revenue growth is driven almost exclusively by mobile internet access. 

5G has both hygenic (maintenance) and transformative growth drivers, as did all the prior digital generations. The hygenic drivers include lower cost per bit, higher access speeds and lower latency, as customers consume ever-greater amounts of data. 

The transformative drivers have been text messaging in the 2G era, web access in the 3G era, mobile internet in the 4G era (including social media, video entertainment and location-based apps) and will almost certainly be different in the 5G era. 

Five years ago, some had concerns that 5G--especially when based on use of small cells--would cost so much that service providers could not afford to deploy it. That turned out to be wrong. 

While executives would prefer not to invest in a new network, they know the industry does so every decade, and these days for practical reasons such as the need to supply much more capacity at largely the same prices now charged. 

It is one thing to complain about investing more in capex. It is something else again to pretend the industry will not continue to introduce new platforms about every decade. As capacity requirements grow, it has proven necessary to support new spectrum, modulation techniques,  architectures and applications which the legacy networks and devices were not designed to support.

5G, AI, IoT Cannot be Separated

As 5G continues to deploy globally, the focus now shifts to how 5G, artificial intelligence and the internet of things will be monetized. What are the 5G value propositions and business models for consumers, enterprises and service providers?

And there is a reason Jefferson Wang, Accenture Global 5G Strategy Lead, believes those three technologies cannot be separated. 

Retail connectivity service providers of the future will have to exchange their “connection services” model for a different new model where they have become “platforms,” argues Jefferson Wang, Accenture Global 5G Strategy Lead. 

Connectivity providers also become significant value chain suppliers of internet of things experiences incorporating a healthy dose of artificial intelligence to maximize the potential of 5G. Wang will explain how 5G, IoT and artificial reality are related to service provider success at PTC’21. 

To start, if immersive, “everywhere” experiences are supported, it seems clear that 5G and other untethered platforms will have to play a key role, but in an open ecosystem, where incentives for partners are clear. 

“The future home in the 5G Era will harmonize network connectivity, devices, platform solutions and data to seamlessly predict customer needs and extend the boundaries of where we live, making us feel at home anywhere,” Wang says. 

What is “home,” and what does our definition mean for suppliers of communications services?

Retail communications service providers (who sell to end users) will need to evolve their vertically-integrated service provider model, says Wang. “To stay relevant in the digital daily routines of their customers, they will set themselves up as a multi-sided platform orchestrating and coordinating the “future home.”

But note the new definition of “home.” 

The traditional notion of home as a static shelter will soon be entirely replaced by the new consumer mindset of “at home is everywhere.” For retail connectivity providers, that has implications for survival and business models. 

Historically accustomed to delivering connectivity, most are still far from prepared to be the primary managers and traffic wardens of data flows for humans in the “future home.” Just controlling data infrastructure, as they have done for decades in their traditional role, will not suffice, Wang believes. 

Instead, access providers will have to assemble an ecosystem of partners. 

And the “future home” shows why IoT is crucial. “Anything that means home to us--from our favorite room temperature and air quality to our preferred light shades, entertainment and education suites, fitness and health devices, door security features and refrigerator contents--will very soon be emulated in outstanding quality “wherever we go,” Wang says. 

That means IoT sensors and actuators will have to be ubiquitous, and increasingly supported by artificial intelligence capabilities. 

And mobility--especially using 5G and successive generations of mobile networks--will be key, as the “envelope” must follow people outdoors, in their vehicles or when traveling and staying at remote locations. 

“Our home will turn into an envelope wrapped around us throughout the day,” he says. 

Customer Data Allowances Now Must Account for Advertising Load

To the extent that your mobile data usage allowance is a cost issue, it is largely because usage allowances are matched to usage, in most cases. Even "unlimited" usage plans are not actually truly unlimited; throttling of speed happens at some point.

And to to a huge extent, the data people consumer on their mobile devices is advertising. So to some extent, users pay to receive advertising as they need data allowances about double what their actual intended content requires.

It has been clear for perhaps half a decade that video and video advertising now represent a considerable amount of the data people consume on mobile or fixed internet connections, with estimates running from 10 percent to 50 percent of total data consumption to perhaps 18 percent to 79 percent. 

In 2014, as much as 38 percent of all video content viewed online consisted of video advertising, according to Statista. 

source: Statista 

Some issues and subjects do not get researched or investigated because the sunlight does not reflect too well on private interests. And that can hold true for virtually any entity--public or private, big or small--any bureau of government, churches, social organizations, political parties or candidates, companies or charities. 

To illustrate, there is very little research on the amount of total data consumption on smartphones or other devices that consists entirely of advertising. The reasons are not difficult to fathom: it arguably reflects poorly on the web experience. 

After all, rare is the citizen or consumer who professes to enjoy advertising exposure. People tolerate it because they receive benefits (lower cost or free content, generally). But there also are costs when video advertising data represents a large percentage of data consumption, as most consumers pay for data consumption, and generally in some way related to total consumption. 

That is not to denigrate the value of advertising in supporting user access to valuable applications, services and content. Advertising support always has been an important revenue model supporting content delivery, for example.

Still, it is hard to find data on what percentage of any customer’s total data consumption consists of advertising. But the few studies you might be able to find suggest that more than half of data consumption related to viewing of news sites consists of advertising. In one test, 55 percent of total data consumption was advertising, and much of that was driven by use of video. 

That is especially the case now that consumers watch so much video (video represents as much as 80 percent of total mobile data consumption). 

source: Cisco 

Also, all that video consumption drives online and mobile video advertising volume. Up to 90 percent of advertisers use video for their advertising, some estimate. By some estimates, the average person is now estimated to encounter between 6,000 to 10,000 ads every single day, and a huge percentage of those ads will use full-motion video.

All that explains the usage of ad blocking apps since about 2010, efforts by ad-supported apps to disable or prevent ad blocking, and the rise of web browsers with control over ad insertion. 

source: econsultancy 

An analysis of the 200 most popular news sites (as ranked by Alexa) in 2015 showed that Mozilla Firefox Tracking Protection lead to 39 percent reduction in data usage and 44 percent median reduction in page load time, according to a study sponsored by Mozilla.

The New York Times once found that ad blockers reduced data consumption and sped up load time by more than half on 50 news sites, including their own. 

Journalists concluded that "visiting the home page of Boston.com (the site with most ad data in the study) every day for a month would cost the equivalent of about $9.50 in data usage just for the ads".[3

source: Oberlo 

But the volume of data consumption does affect connectivity provider business models in direct fashion, as it requires the supply of ever-greater capacity, mostly for the same rates historically charged--or lower. At the same time, the benefit of advertising--including users and consumers--does shift almost entirely to application providers. 

But you will not find much research on that issue. It simply does not benefit many powerful interests in the content business, including connectivity providers who also own key content assets and ad-driven revenue models.

Omni-Directional or Sector Radios Change Architectures

Mobile cellular networks have always been built on the principle of frequency reuse, the ability to increase capacity of a radio network by subdividing use of available frequencies within a coverage area. A simple way to explain this is how a cellular network and a tV broadcast network use spectrum.

A TV transmitter has one block of spectrum that is used across a coverage area. A mobile cell network, on the other hand, uses smaller channels and coverage areas (the cells) to effectively reuse any specific amount of spectrum it has the right to use. 

In this example, where seven different frequencies are available in an area, the cells are arranged in a way that allows reuse of all seven frequencies across the entire service area, much more intensively, and increasing effective capacity of the network. 

source: Raymaps 

With the advent of sectorized radios, though, there is a bit of nuance. Where the older pattern was to use a single frequency within a single cell, the pattern today is to use sectorized radios that cover about 120 degrees of a cell. 

There are advantages, including the ability to increase range (how far the signals travel), and advantage partly gained because signal interference is reduced. That effectively increases the signal-to-noise ratio, in turn allowing devices to receive an adequate signal at greater distances.  That is especially advantageous in rural areas, for example,. 

One other interesting change from omni-directional network design is that, in earlier, omni-directional cells, the radios are located at the center of the cell. In a sectorized radio network, the radios are located at the edges of the cell. 

source: Science 

In a sense, spectrum sharing also is based on the principle of frequency reuse, the difference being that where cell networks have one licensee reusing a block of frequencies, spectrum sharing has multiple licensees using the same frequencies. 

Spatial division is used for cellular networks (only one frequency at a time in a given area), time division for shared spectrum networks (only one priority user of a frequency in a given area at a given time). 

Nearly 25 Years Later, Telecom Act Still Consequential, but Not As Much as Internet

Even the biggest innovations in communications are not as consequential for the whole of the economy or society as we might believe, as vital as they are for participants in the industry. That noted, few technology or policy innovations are massively consequential for whole societies and economies. 

Still, some innovations are hugely consequential for participants in the connectivity business, leading to whole segments of the industry disappearing, new entrants rising to dominance and business models radically changing.

The authors of the Telecommunications Act of 1996 believed the “goal of this new law is to let anyone enter any communications business -- to let any communications business compete in any market against any other.” The Act was expected to affect all firms in the telecom business, and arguably succeeded in that respect.  

The Act primarily was intended to affect telephone service--local and long distance, cable programming and other video services. In the sense of promoting competition, the Act succeeded.  

But the Act did not anticipate the internet. And it would be difficult indeed to make the case that anything in communications approaches the impact of the internet, even as connectivity is fundamental. 

To be fair, the Act only intended to create more competition in communications services. It did not aim specifically to create space for broader innovations. 

It goes too far to argue that the Act was akin to rearranging the deck chairs on the Titanic. but a reasonable person might argue something along those lines, considering the most impactful innovations since 1996, which are almost all related more to the emergence of internet applications and services than “communications” competition. 

A logical fallacy is an error in reasoning. And while it might not be entirely fair to make the analogy, connectivity competition has been far less transformative or disruptive than convergence. 

It happens all the time. The Ad Hominem Fallacy is that someone is wrong about something because of who they are. The problem there is that a fact is a fact, no matter “who” says it. 

Probably most common in the area of public policy is the “causal fallacy,” where there is correlation but not causation. As economists disagree about the outcomes produced by any specific policies, so public policy about communications often is underpinned by a set of assumptions that might, or might not, be correct. 

That was partly proven correct. Many expected that the most important new competitors for the local telecom companies were AT&T and MCI Communications, the two giants of the long distance business. 

What framers did not foresee was that demand for fixed network voice would begin to decline within four years of the law’s passage. 

And it is likely nobody foresaw that both AT&T and MCI actually would be purchased by the local telcos they were supposed to compete with, SBC Communications buying AT&T and Verizon getting MCI. 

Though some smaller independent companies did emerge, the biggest national competitors to the telcos were the cable TV companies, which most likely expected would be competitors, but probably few believed would be the major beneficiaries of deregulation. 

Few likely expected cable companies would emerge as the dominant suppliers of broadband services. 

Any single policy or action with a proposed outcome assumes a simple cause-effect relationship we cannot isolate from all the other uncontrolled circumstances that might plausibly contribute to the stated outcome. 

We might have a cause-effect relationship that argues “quality broadband leads to economic development,” but we have no way to verify that relationship. It is equally plausible to argue different cause-effect relationships. 

Perhaps related is the “hasty generalization,”  a general statement without sufficient evidence to support it. The commonness comes from the complexity of any issue or problem to be solved. If you have spent any time working on the problem of “homelessness” or “economic development” you realize fairly quickly how complicated any proposed permanent solution must be. 

As helpful as the Act has been, it has been marginally responsible for the internet revolution that now has subsumed the entire connectivity industry within the new ecosystem. Connectivity is necessary, but most of the value is generated by others supplying devices, apps, content or platforms. 

source: A.T. Kearney 

That said, the Telecom Act was profoundly important for those who are in any part of the connectivity value chain.

Connected IoT Devices Now Outnumber Phones and other Human-Used Devices

There now are more IoT devices(connected cars, smart home devices, connected industrial equipment) than phones, laptops, and computers connected to communications networks, says IoT Analytics. There are 21.7 billion active connected devices worldwide, and IoT appliances now represent 11.7 billion (54 percent) of those connections.

By 2025, it is expected that there will be more than 30 billion IoT connections, IoT Analytics says.  

source: IoT Analytics 

The vast majority of those devices will be connected to a local area network of some type, including short-range connectivity such as Bluetooth to premises systems such as Wi-Fi. Perhaps a quarter of all connections will use a public network of some type. 

source: IoT Analytics 

Early 5G "Leads" Will Not Hold

Historically, the early days of any next-generation mobile platform rollout have featured significant disparities in coverage, as one or more operators moved earlier, and with distinct spectrum assets. 

5G is proving more disparate than in the past, as leading U.S. mobile operators have distinct spectrum asset profiles. Verizon has deployed millimeter wave assets more heavily in downtown core areas, compared to AT&T and T-Mobile, and that shows up in speed tests. 

source: Opensignal 

AT&T has arguably been the most challenged in use of low-band coverage spectrum, while T-Mobile will enjoy a period of supremacy in use of mid-band spectrum. 

Eventually, however, those differences will narrow, as has been the case for earlier mobile generations. Though marketing battles will be intense in the near term, present differences will become far less pronounced in the long term (defined here as five to 10 years), before 6G starts to be deployed. 

Though some customers may jump around a bit to gain a perceived advantage in network performance “right now,” over the longer term all the three leading networks should feature similar coverage and performance.

5G: Unintended Impact to Outweigh Expected Gains?

“If it were just about cell phones, we wouldn’t need 5G,” says Verizon CEO Hans Vestberg. In other words, 5G is about new use cases and applications other than supporting smartphones.

Maybe that will ultimately not be the point. If you remember the major revision of U.S. telecommunications law called the Telecommunications Act of 1996, you will remember the practical consequences of deregulating the local telecom access business. 

Revising U.S. law, the Act enabled competition for local telecom services, lawful operation and ownership of Class 5 voice switches, the right to sell customers voice and other services and wholesale access to incumbent networks. 

All that happened just prior to voice communications reaching a historic peak about 2000, with a rapid decline. Most incumbent telcos lost 35 percent of their customers for that service in 10 years, as much as 65 to 70 percent over two decades. 

Service providers also lost half their revenue from long distance calling over that same period. 

source: CDC, Statista 

At the same time, other big changes in end user demand were happening: substitution of mobile phone service for fixed service; use of mobiles instead of cameras or music players, GPS devices or video screens. 

source: Wikimedia

There also was increasing use of the internet as a substitute for a wide range of other activities and products. In 1996, for example, it is estimated there were 36 million global users of the internet, representing less than one percent of the world population. A decade later, that had grown to 17 percent. 

About that time, some 14 percent of the U.S. population was using the internet, on dial-up connections. A decade later, that had grown to about 66 percent. 

source: Pew Research 

The point is that disruptive changes in regulatory framework can produce outcomes we did not expect, especially when disruptive enabling technologies happen at the same time, allowing massive product substitution and behavioral changes. 

The same thing might happen with 5G. It arrives in tandem with other key technologies and platforms, including commercial artificial intelligence, edge computing and internet of things. It may, in the end, be hard to separate the various threads from each other. 

In part, that is because computing architectures shift over time, oscillating between centralized and decentralized approaches. That puts computing resources at different places within the architecture, fluctuating between centralized and decentralized designs. 

In the mainframe era, computing resources were centralized at far ends of the network. That shifted in the client-server era to more local processing on devices themselves or on local servers. In the internet era computing switched back to far end hyperscale data centers. 

source: GSMA 

But most observers believe we are now in a stage of shifting more workloads back locally, to take advantage of artificial intelligence, heavy local analysis of sensor data to support the internet of things and compute-intensive applications using virtual or augmented reality. 

“These days lots of companies want to turn bandwidth problems into compute problems because it’s often hard to add more bandwidth and easier to add more compute,” said Andrew Page, NVIDIA media group director of advanced products. 

Mobile Operators Expect MEC Demand; Enterprises Not so Keen?

Connectivity service providers are optimistic about incremental new revenue from internet of things, edge computing and some functions of a 5G network, such as network slicing or virtualization. It is not so clear that enterprise or consumer buyers of 5G services see value in the same way. 

Virtualized networks and infrastructure edge computing (multiservice edge computing) are viewed by mobile service provider executives as key to maximizing the value of 5G, a survey by Omdia finds.

Polling mobile service provider, enterprise and infrastructure provider executives, the study found 77 percent of respondents agreeing that NFV was a top investment area to drive 5G value.

Some 73 percent identified MEC as similarly valuable. But there is a big caveat. 

Mobile operator executives were the respondents who cited the importance of MEC. Enterprise respondents ranked internet of things, artificial intelligence and big data far higher than mobile edge computing. 

source: Informa 

Edge computing in general might be viewed as having different value from mobile edge computing, in part because enterprises might prefer to control more of the function. Also, not all edge computing use cases require tight integration with the mobile network or 5G. 

And the enterprise deployment driver might well be cost savings on data storage or wide area communication costs, while conveniently enabling use of artificial intelligence to process data locally.

According to a report by Analysys Mason, the majority of organizations across all verticals expect “a 10 percent to 30 percent reduction in costs from using edge computing, with an average expected savings of 10 percent to 20 percent. 

To the extent that 5G and edge computing are useful, many potential use cases might be supported by a private 5G network, with on-the-premise computing. To be sure, 5G reduces local loop latency. It does not provide a remedy for latency to and from a remote data center. That suggests the value of on-premises processing of data from sensors, for example, especially when used for industrial process control, for example.  

To be sure, connectivity service provider executives often believe the potential value of their services is higher than demonstrated by customers. Connectivity providers often see themselves as trusted or preferred providers; customers do not always share the enthusiasm. 

Connectivity providers often believe the value of quality of service features, security or scale will be viewed highly by potential customers. But buyers often do not place the same value on those attributes.

SKT Earns 34% of Revenue From Outside Core Connectivity Services

With the caveat that in many cases only larger,tier-one connectivity providers have the scale to do so, diversification of revenue sources in areas related to, but outside the core connectivity business arguably is a strategic imperative. Slow to negative growth in the core business is one reason. An almost-certain need to replace about half of existing revenue over the next decade is another reason for developing new lines of business and revenue. 

SK Telecom, for example, earns money from entertainment video, security services, 

ADT Caps, a security business, quantum cryptography (security), e-commerce and semiconductor manufacturing (memory). 

So far, SKT earns about 66 percent of its revenue from mobility and broadband services. The rest--34 percent--comes from other revenue sources. 

source: STL Partners

That arguably is a robust level for a mobile service provider, though Reliance Jio is among the mobile operators with the most-significant application businesses. That strategy of moving up the stack or across the value chain and ecosystem is a response to the problem of connectivity provider dumb pipe functions in the value chain.    

source: GSMA 

The point is that SKT is not among the largest global providers, ranked by subscribers, and suggests that determined operators in the right places can diversify their revenue streams. 

source: GSMA