How Big an Issue is the 5G Business Model?

One occasionally hears comments about whether 5G “is real” or “will succeed.” The implication is that 5G so far is over-hyped, and that is a reasonable view, for the moment. The longer-term issue is whether 5G could actually fail. That seems an infinitesimally-small danger. No mobile next-generation network has ever "failed" to replace the older generations.

In that sense, it is almost silly to question 5G's eventual success, as an access platform.

More common are concerns about the 5G business model, particularly whether it will lead to higher revenues or whether new levels of investment will be so high that mobile operators in some markets can question the viability of a financial return.

It never helps that suppliers such as Nokia have said “when it comes to making money from 5G, mobile operators need to think beyond the usual business models.” In some cases the perceived business model problem flows from the denser networks--featuring many more small cells and attendant backhaul--than was the case for macrocell 4G. 

But it is worth noting that mobile operators have on occasion been concerned about the business model for 3G and 4G as well. That, in turn, is driven by the need for licensing ever-more spectrum, in other cases by the dangers of overpaying for spectrum.  

In one sense, the concerns might be overblown. The cost of 5G networks is lower than originally expected or feared.  

Mobile network capital investments are amortized over periods of time up to 15 years, the point being that depreciation charges match the original capital investment over that same period. It is, in other words, an expected part of the connectivity business to reinvest in the core networks every 15 years, at least. 

Amortization of some assets such as buildings might have a 40-year depreciation schedule. But most active network elements such as cable, base stations and switches are depreciated over  10-year periods. 

In principle, that means network capital recovery should generally be substantially complete every decade. In other words, most of the network capital is a “replacement.” Spectrum added for each next-generation platform normally represents new capital investment. 

So yes, in a broad sense, capex requirements tend to grow over time, if only because new spectrum must be acquired. But opex and capex requirements can also change over time, decreasing or increasing. In recent decades we have seen opex improvements. Virtualization, open source, competition and other measures have led to reductions in opex and capex requirements. 

The payback, at a high level, is the ability to remain in business. So it might be more correct to argue that the 5G business model, as was the case for 3G and 4G, is largely the same as it has always been: the ability to create and sell a mobile connectivity service that is market competitive. 

Of course, every mobile operator prefers lower capex and lower opex. But the latest mobile next-generation network virtually always helps in those areas. In other words, part of the payback for any next-generation platform is its ability to reduce capex and opex. 

But each mobile generation also has surfaced new use cases and applications that drive incremental revenue. 2G brought text messaging revenues. 3G produced mobile internet access. 4G added fixed network backup, video entertainment support and full fixed network experience for most apps. 

5G is expected to produce incremental revenue from fixed wireless, internet of things connections (and possibly apps and platforms) as well as incremental revenue from edge computing. 

How much revenue or profit contribution will be made from those new sources can be contested. But the heavy lifting really comes from traditional mobile service revenues. To the extent that user data consumption continues to rise, but willingness to pay is much more limited, 5G is necessary simply to maintain the current business by slashing cost per bit metrics.

In the near term, that means higher capex in the form of new spectrum licenses, denser backhaul networks and many more radio sites to support small cells. In the longer term, those investments will help lower the cost of 6G and subsequent networks.

As always, offload to Wi-Fi also will help. The expected ability to connect to any available access network, terrestrial or wireless, also will help.

LEO Will Remain a Niche, But Will Take Share from Other Platforms

Low earth orbit satellite constellations such as Spacelink will allow satellite broadband provides to serve 3.5 million subscribers in 2021, growing at an eight-percent compound annual growth rate to reach 5.2 million users in 2026, according to ABI Research.

To keep that in perspective, in 2021 there are about 4.93 billion regular internet users, using 1.2 billion fixed connections and upwards of seven billion mobile internet subscriptions, supporting mobile phone users, PCs and internet of things devices.

The point is that, as important as LEO constellations might be, they will remain a niche supplier of internet access services. By 2026, says ABI Research, LEO service revenue might reach US$4.1 billion. 

On the other hand, LEO constellations stand to take market share from existing satellite services and low-speed fixed network service. Starlink appears often to be a better value than geosynchronous satellite service can provide.

LEO services might also limit uptake of fixed wireless in some areas, mostly rural. On the other hand, some rural fixed wireless services (incumbent wireless internet service provider or new mobile alternatives) likewise could limit LEO service uptake.

LEO services generally will not compete with high-capacity fiber to home or cable modem services.

It may turn out that LEO constellations are most often directly competitive with existing satellite services and fixed wireless.

In 2020 fixed network internet access in the United States alone generated more than $100 billion in annual revenue in 2013, by some accounts. By other accounts consumer access spending amounted to that much in 2013, without including business purchases. 

Business access contributes at least $115 billion annually.  

For that reason, other estimates suggest internet access sold to businesses and consumers generates $200 billion annually in service revenues. 

The point is that LEO constellations are probably going to be the driver of satellite internet access revenues in the future. But it will still be a niche within the internet access business.

Low earth orbit satellite constellations such as Starlink promise higher bandwidth, lower latency internet access that eventually might cover every part of the earth’s surface. With Starlink’s early commercial launch, how does the service stack up against other alternatives--fixed and wireless--in terms of value?

Starlink users in the United States and Canada have seen 50.5 Mbps download speed, 14 Mbps upload speed, and 52.5 ms latency, reports Speedcheck. Latency performance is better by an order of magnitude, according to Speedcheck. 

Compared to existing geosynchronous satellite offers, Starlink beats HughesNet for maximum downlink speed and trails Viasat. But value is a combination of performance and price. 

The Starlink price is arguably lower than HughesNet at 25 Mbps and Viasat at its top speed as well. But Starlink does not cap usage, as do Viasat and HughesNet. 

Company-	Starlink	Viasat	HughesNet
Price	Dish $499 + S&H, $99 per month	$299.99 (life time lease), $30-$150 (for the first 3 months)	$499.99, $59.99-149.99 (requires 24 months agreement)
Data Cap	No data cap- Unlimited	Yes, (12-300 GB/month)	Yes, (10-50 GB/month)
Speed	15 - 107 Mbps DL (Measured), *22.99 Mbps UL	12 - 100 Mbps DL (Advertised)	Up to 25 Mbps DL (Measured), 3 Mbps
Latency	* 33 ms, (Measured)	600-800 ms, (Advertised)	600-800 ms, (Advertised)
Accessibility	Limited-Only some cities of US and 11 other countries	All 50 states	Mostly Southern Sky. US, Brazil, Columbia, Peru, Ecuador, Alaska, India, parts of Europe

source: Speedcheck

Starlink also might be considered a reasonable value choice when compared to 4G fixed wireless access supplied by Verizon, but a bit less reasonable where Starlink competes against 5G fixed wireless. 

Both fixed wireless versions cost less than Starlink and do not require a satellite dish. But both fixed wireless options by Verizon also supply less bandwidth. 

All the services offer unlimited usage. But Starlink offers more downlink and uplink bandwidth. Latency performance is comparable to 4G but less than 5G. At the moment, Starlink and 5G fixed wireless do not overlap much in terms of coverage, while Starlink’s footprint covers southern Canada and the northern United States. 

Verizon 5G fixed wireless is only available in large urban areas of the U.S. Northeast. 

Company	Starlink	4G (Verizon)	5G (Verizon)
Price	Dish $499+S&H, and $99 per month	$80/month	$80/month
Data	Unlimited	Unlimited	Unlimited
Speed	50 Mbps DL, 13 Mbps UL	17 Mbps DL, 3.84 Mbps UL	40 Mbps DL, 9.74 Mbps UL
Latency	57 ms	58 ms	39 ms
Accessibility	Limited to parts of North America	Nationwide coverage	Only in big cities

source: Speedcheck

As is typically the case, Starlink will not compete well with fiber to home or cable modem services running at speeds up to a gigabit per second. 

Satellite remains a niche. “Because of the higher relative cost of bandwidth transmitted via satellite versus terrestrial technologies, satellite is currently primarily used in situations where fiber optic cables and other high-capacity technologies are not financially viable due to low population densities and large distances between high-capacity networks and last-mile networks,” the Asian Development Bank rightly notes. 

source: Asian Development Bank 

Low earth orbit satellite constellations such as Spacelink will allow satellite broadband provides to serve 3.5 million subscribers in 2021, growing at an eight-percent compound annual growth rate to reach 5.2 million users in 2026, according to ABI Research.

To keep that in perspective, in 2021 there are about 4.93 billion regular internet users, using 1.2 billion fixed connections and upwards of seven billion mobile internet subscriptions, supporting mobile phone users, PCs and internet of things devices.

The point is that, as important as LEO constellations might be, they will remain a niche supplier of internet access services. By 2026, says ABI Research, LEO service revenue might reach US$4.1 billion. 

In 2020 fixed network internet access in the United States alone generated more than $100 billion in annual revenue in 2013, by some accounts.

What is the Magnitude of Open Radio Network Savings?

Proponents of open approaches to radio access networks tout its cost savings. Opponents often argue the savings will be not as great as claimed. Much hinges on assumptions about radio access network cost. 

Some argue the radio access network represents 70 percent of capital investment. Others might argue it is as low as 20 percent. Also, assumptions about base station costs matter. Access network cost includes spectrum, construction and backhaul, which might or might not be included in any tally of radio access network costs. 

Operating costs can also be an area of cost savings, especially if virtualization allows centralization of active network elements to fewer locations. 

The advent of open radio access should reduce costs for hardware and possibly software. Just how much is the issue. 

source: Researchgate 

In principle, network densification, which implies many more radio locations and radios, magnifies the amount of potential savings. In other words, projected savings for a less-dense macrocell network should be different from savings for a dense small-cell network. 

In other words, a 20-percent savings on a category that represents 20 percent of cost is one thing. Saving 20 percent on a cost category that represents 40 percent of cost is another matter. 

The operating cost assumptions also might have to include higher costs for managing and integrating network elements from multiple vendors. 

All that noted, access networks traditionally have represented as much as 80 percent of fixed network cost and as much as 60 percent to 70 percent of mobile network cost. That is roughly the case for either capex or opex. 

Open approaches to radio networks should allow cost savings. Just how much savings are possible remains the issue.

Telefonica to Use IBM Global Services to Build 5G Core Network

In a move that tells us much about how telecom network have changed, Telefónica will build its cloud-native 5G core network using IBM Global Business Services as the system integrator while Red Hat and Juniper supply the networking platforms. 

In prior generations of mobile networks, the network would have been purchased almost turnkey from a legacy provider such as Ericsson or Nokia (or Alcatel or Lucent). It was monolithic. 

Now the network is integrated by a major system integrator using open source technology and a distributed, cloud-based and cloud native computing platform. It is loosely coupled. 

In other words, one builds a telecom core network as one would build any other computing network intended to scale. In other words, apps and functions are built how apps are created and deployed, not where they are created or deployed.  

source: Medium

"Time Connected to 5G" Does Not Mean What it Seems

In October 2020 U.S. 5G users spent about 21 percent of their time connected to 5G networks, according to Opensignal data. Some will interpret that as a measure of 5G network coverage, and argue that U.S. coverage is lacking. 

But 5G users in South Korea, which nobody would claim lacks 5G coverage, spent about 22 percent of time connected to 5G networks. 

Though network availabilityis part of the story, 5G subscriptions and 5G device ownership also matter. 

“The share of mobile data consumed over 5G varied across the three national carriers: 17.4 percent of mobile data consumed by our T-Mobile users was on 5G, followed by 9.8 percent for our AT&T users, and 4.2 percent for our Verizon users,” Opensignal reported in September 2021.

source: Opensignal

Keep in mind those figures refer to data consumed, not time connected. Still, network availability does matter. 

“These values reflect in large part the difference in 5G availability--the time users spent with an active 5G connection--among the three carriers,” Opensignal notes. 

Network availability continues to improve. “In our latest U.S. 5G Experience report, we found that our T-Mobile users spent a considerably higher amount of time connected to 5G networks--36.3 percent--followed by AT&T and Verizon at 22.5 percent and 10.5 percent, respectively,” says Opensignal. 

Those statistics actually track something else: the importance of Wi-Fi connections for smartphone users. In spring of 2020 U.S. mobile users consumed as much as 69 percent of phone data using Wi-Fi connections, not the mobile network, for example.

Only after 5G networks are nearly ubiquitous will we be able to determine how user behavior might change, including time spent connected to Wi-Fi. In the U.S. market, the shift of service plans to “unlimited” also should have an effect, as it eliminates much of the economic rationale for switching to Wi-Fi connections. 

If a user has an unlimited plan, and if 5G service is adequate for the applications a customer users and if indoor 5G reception is adequate.

But indoor signal reception has been a problem since mobile operators started using the mid-band frequencies (3G). There might still be an advantage to switching to Wi-Fi, because of the obvious attraction of stronger signal indoors. 

All the data suggests that we remain early in the process of building out 5G networks, a process that takes years for a national service provider. 

Service Providers See B2B as 5G Incremental Revenue Driver

With the caveat that we can always be wrong, connectivity service providers looking at 5G business-to-business revenue opportunities believe security services offer the most potential, along with the internet of things. 

Those opportunities are followed by cloud computing, managed services and edge computing. Relatively few executives see as much upside for creating marketplaces or platform business models. 

Source: TMForum

The issue, in nearly all cases, is cash flow: both the magnitude and the profit margin. If one assumes that core retail connectivity services can have cash flow in the 30-percent to 35-percent range, then many of the new B2B opportunities might have cash flow (EBITDA) in the 10-percent range.  

In some cases, as with security, there might be only indirect cash flow implications. Where security is included as a feature of a specific service, there might be almost zero incremental direct revenue, the value coming in the form of higher revenue, higher customer accounts, lower churn or length of engagement.

Why 5G Users Consume More Data

It has always been the case that faster internet access speeds result in higher data consumption, and 5G is no exception to that rule. So far, 5G users consume up to three times as much data as other mobile users. There are a few drivers of that correlation. 

source: Opensignal 

When speeds are higher, much more data can be consumed in a finite period of time. Also, if interactions happen faster, any user can conduct more operations. More operations means more data consumed. 

Also, the sheer amount of video advertising that appear and execute on consumer websites is substantial. So the more pages viewed, the more data consumed. 

In some instances, mobile users might find 5G fast enough that they do not shift to Wi-Fi access. That means more mobile data consumption. In a smaller number of markets, 5G users are on unlimited usage plans, so there is no financial incentive to switch to Wi-Fi. This also increases 5G data consumption.