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.