More Uncertainty Than Typical as 5G Rolls Out

Some possible fluidity is possible in the mobile operator business in the wake of the Covid-19 pandemic and the cost of 5G networks. There are relatively prosaic unknowns, but also some bigger challenges related to strategy. 

Network architects face a greater degree of uncertainty around usage patterns. After the pandemic, will downtown area traffic return to former levels, or remain permanently lower? Will more capacity be needed in residential areas? Will millimeter wave support be as important in high-traffic areas right away, or will the reinforcement demand now be more gradual?

Conversely, will residential tower sites need to be reinforced if more people use their mobile devices for group video calling, at a higher rate than originally forecast before the pandemic? Some permanent increase in demand seems most likely, but how much of an increase will be seen near term, as work and education patterns resume a pre-pandemic form?

Will network virtualization prove its value as traffic patterns assume new forms, or continue changing?

And if 4G performance gets better, even as 5G launches and also gets better, how will consumers evaluate the experiences? Where mobile operators require more-expensive 5G plans, will that be an inhibitor? Will more churn happen if rivals do not charge a premium? 

Aside from the immediate post-pandemic issues, longer-term challenges also will have to be met, ranging from debt reduction to new product development to earning a return commensurate with higher spending to acquire new 5G spectrum. 

As a practical matter, capital invested to acquire spectrum and build the network cannot be spent to acquire or build new revenue-generating assets and create new lines of business. As a practical matter, will mobile operator efforts to create new lines of business slow down as capital has to be deployed into the core connectivity function?

At a high level, new capex to boost capacity or performance is bumping up against relatively low financial returns from doing so. 

In many markets, subscription growth is quite low, as nearly everybody who wants to use a mobile phone already does so. For many customers, 4G might meet their needs, making an upgrade to 5G more challenging.

Since competition has not diminished and markets are saturated, gross revenues and profit margins from legacy connectivity services are falling. 

That implies a few key challenges: optimizing the cost of the legacy business and finding additional new and substantially-sized new revenue streams. 

So what if much invested 5G capital produces modest revenue upside, initially? And what if new revenue sources do develop over time, but are of relatively low magnitudes? At a high level, if a typical mobile operator must expect about five percent erosion of revenue every year from legacy services, new sources must generate five percent a year, simply to prevent revenues from falling, to say nothing of growth. 

What happens to consumer behavior after the pandemic ends is one set of issues. How to reap a reasonable return from 5G investments is the bigger concern.