What Will Drive 5G Revenue?

Most connectivity service providers serving well-served and nearly-saturated mass markets would be happy if annual revenue growth chugged along at about a two-percent rate. Service providers in some markets can expect higher growth rates, but the global average will probably be in the two-percent range. 

Given some deterioration in legacy lines of business (negative growth rates), growth rates in one or more new areas might have to happen at higher-than-two-percent rates to maintain an overall growth rate of two percent. 

And that is the problem for new 5G services in the edge computing, private networks or internet of things areas, for example. The new revenue streams will be small in magnitude, while even a modest decline in a legacy service can--because of the larger size of the existing revenue streams--can pose big problems. 

Many service providers, for example, expect big opportunities in business services, which underpins hopes for private networks, edge computing and IoT. But revenue magnitudes matter. 

Consumer revenue always drives the bulk of mobile operator service revenues. And revenue growth is the key issue.  

But it will be hard for new 5G services for enterprises and business to move the revenue needle. 

Edge computing possibly can grow to generate a minimum of $1 billion in annual new revenues for some tier-one service providers. The same might be said for service-provider-delivered and operated  private networks, internet of things services or virtual private networks. 

But none of those services seem capable of driving the next big wave of revenue growth for connectivity providers, as their total revenue contribution does not seem capable of driving 80 percent of total revenue growth or representing half of the total installed base of revenue. 

In other words, it does not appear that edge computing, IoT, private networks or network slicing can rival the revenue magnitude of voice, texting, video subscriptions, home broadband or mobile subscription revenue. 

It is not clear whether any of those new revenue streams will be as important as MPLS or SD-WAN, dedicated internet access or Ethernet transport services, for example. All of those can be created by enterprises directly, on a do-it-yourself basis, from the network edge. 

source: STL, KBV Research 

In the forecast shown above, for example, services includes system integration and consulting, certain to be a bigger revenue opportunity than new sales of connectivity services. 

And though it might seem far fetched, the lead service sold by at least some connectivity providers might not yet have been invented.  

At least so far, 5G fixed wireless is the only new 5G service that is meaningful and material as a revenue source for at least some mobile operators. Even if network slicing, edge computing, private networks and sensor network support generate some incremental revenues, the volume of incremental revenue will not be as large as many hope to gain.

It is conceivable that mobile operators globally will make more money providing home broadband using fixed wireless than they will earn from the flashier, trendy new revenue sources such as private networks, edge computing and internet of things. 

source: Ericsson 

Wells Fargo telecom and media analysts Eric Luebchow and Steven Cahall predict fixed wireless access will grow from 7.1 million total subscribers at the end of 2021 to 17.6 million in 2027, growth that largely will come at the expense of cable operators. 

source: Polaris Market Research 

If 5G fixed wireless accounts and revenue grow as fast as some envision, $14 billion to $24 billion in fixed wireless home broadband revenue would be created in 2025. 

The point is that the actual amount of new revenue mobile service providers can earn from new services sold to enterprises is more limited than many suspect.

Enterprise 5G Use Cases: How Big?

Many observers expect that the bulk of net new 5G service revenues and use cases will come from the business use cases and customers, and not consumer customers. The possible debate is over the magnitude of those gains: how big a contribution new enterprise 5G use cases might make, over what time frame. 

Net revenue changes are key, as much consumer and business spending on 5G simply replaces former 4G spending. What matters is the amount of incrementally-new spending. Most observers believe that consumer 5G net revenue impact likely will be modest, since 5G largely replaces consumer 4G. 

New use cases such as augmented reality or virtual reality could affect consumer revenues by creating new demand for low-latency internet access and higher data rates, though possibly within the existing framework whereby performance increases over time but retail prices remain about the same, or drop. 

In contrast, most of the new 5G-enabled or supported use cases such as industrial internet of things, edge computing, autonomous vehicles, unmanned aerial vehicle control networks or private networks represent 5G products sold to business, commercial, government or other organization buyers, not direct to consumers, even if used to create products sold to consumers.

Hence the widespread belief that most of the incremental 5G revenue will come from enterprise use cases. So how big is that potential change? The denominator in this case is the installed base of spending on mobile services. The numerator is the spending delta created by enterprise 5G. 

Historically, in the fixed networks segment of the industry, “business customer” revenues sometimes represented as much as 30 percent to 40 percent of tier-one provider total revenues, though an outsized share of actual telco profits. 

Smaller consumer-focused service providers might have earned less, while specialized business-focused providers might have earned substantially all revenue from business customers. 

source: Deloitte

“Large, integrated operators such as AT&T, Vodafone and Telstra typically see B2B revenues contributing around 30 percent of overall revenues, while for smaller, mobile-only or fixed-only operators, it is closer to 15 percent, Deloitte consultants have said. 

So the issue is how much new 5G enterprise or business services can change the distribution of revenue sources, even if new 5G revenue streams are disproportionately generated by enterprise use cases.

Some believe the growth of enterprise fixed network revenue--for example-- could be in the seven-percent annual range through perhaps 2030. That is a good thing, of course. On the other hand, legacy products sold to enterprises also are expected to decline through 2030, perhaps to the tune of a negative 17 percent compound annual growth rate. 

source: Bain and Company

In that case, new use cases help offset legacy revenue declines, but the overall impact of new revenue sources is offset by legacy revenue declines. The same sort of process should happen in the mobility business. 

Some believe 5G and related services supporting business customers could approach mobile internet revenues in magnitude. That would be significant indeed, as mobile data now represents half of total mobile revenue. 

In turn, mobility services represent more than half of global telecom service provider revenues, and virtually all the revenue growth. IDATE estimates mobile drives 80 percent of revenue growth.  

The point is that enterprise services and attendant revenue is viewed as so strategic because it is the way incremental new revenues can be wrung out of the mobile platform. Among the key issues is how much of that upside can come from connectivity services, as opposed to other roles in the ecosystem. 

Some might argue that unless new roles are assumed by connectivity providers, even enterprise 5G might fail to replace half of total revenues over 10 years.

Post-Mobile Era is Coming with 5G

Though it might seem inconceivable, we are about to enter the "post-mobile" era of telecommunications. How can that be, you might ask, when virtually all consumers and most enterprises and organizations will use mobile devices and services?

Ubiquity is not enough to denote an "age." Everyone and every company and organization uses electricity and waste water systems, roads and airplanes. Yet we do not refer to the present age using any of those services.

Instead, it is the "new" developments that give rise to names. And the big new development with 5G is that, to the extent 5G succeeds, it will be because 5G has enabled creation of big new revenue streams from new applications and use cases.

In other words, if 5G succeeds, it will not be on account of new services for smartphones and human users, but because of big new use cases and revenue streams from computers, sensors and applications.

There will be "smartphone" related revenue, as humans using smartphones will start buying 5G network services in place of 4G services. But that is substitution and replacement of existing demand, not "new" customer demand.

That is key, as creation of new value from users other than people is the essential requirement for 5G.

It will come as no surprise to anybody who follows the industry that value in the communications (internet) ecosystem is shifting from access to apps.

Access provider share of the ecosystem profit pool has declined from 58 percent in 2010 to 47 percent in 2015 and is forecast to fall further, to 45 percent in 2018, the World Economic Forum (WEF) says. Among the beneficiaries are digital content creation, distribution and aggregation companies such as Google, Netflix and Facebook.

Together with device manufacturers, the combined share of industry profits of these segments (apps and devices) is expected to increase to 40 percent in 2018, up from 29 percent in 2010.

“Telecom players, already lacking OTT businesses in this respect, face a real threat of being left to compete on two inherently contradictory fronts – price and throughput – that could put margins under further pressure,” says the WEF. “Telcos could be left to compete as IP-connectivity pure plays.”

“In the extreme scenario, increasing commoditization of the core offering could see margins drop to the levels of utility companies,” WEF says.

source: WEF

“Over-the-top (OTT) applications generate 50 percent to 90 percent less revenue for communications service providers,” the World Economic Forum says. “While the exponential rise in data consumption has provided some relief, this has not been enough to overcome the consistent decline in mobile voice average revenue per user (ARPU).”

Web-scale players such as Google, Microsoft and Facebook are moving quickly to fill key gaps in core telecom services and connectivity, as well. Google Fiber, Project Loon and Project Fi are examples of what Google has been doing.

Amazon and Apple have been making investments to make access from any available netrwork possible, moves that further reduce access provider account control.

Facebook is developing open source public network standards, in addition to the open source data center standards it already has developed, and is using.

All that is driving a search for new business models and revenue streams. The World Economic Forum believes that search will require strong collaboration with vertical industries and internet platforms.

In large part, competitive advantage in digital services and IoT will be driven by the capability to collect and analyse large pools of data specific to vertical-market use cases and to target value opportunities through customization of services and offerings, WEF says.

source: World Economic Forum

The biggest revenue opportunities for the global telecom industry will come from deploying next-generation networks and creating services beyond access, the World Economic Forum believes. The next generation of networks could be worth $440 billion, while apps and services beyond access could represent $650 billion worth of value.

WEF believes Internet of Things (IoT) solutions, consumer and enterprise digital services and communication leveraging natural human interfaces and augmented reality / virtual reality are the areas where new apps will develop.

WEF believes virtualization and an abstraction of the physical hardware layer, to create self-optimizing and secure zero-touch networks will represent the value from next-generation networks.

source: World Economic Forum

How Will Mobile Operators Create $500 Billion in New Revenue Over 10 Years?

How big would edge computing, internet of things or private networks have to be to drive the next stage of revenue growth for mobile operators? 

Much hinges on the assumptions one makes about what happens to current revenue sources.

My own assumption is that mobile operators must replace half their current revenues over the next 10 years, because that is the pattern we tend to see based on product life cycles. As a rule, we can expect any next-generation network to displace earlier generations over any 15-year period. 

All other things being equal, that would mean 5G revenues would displace 2G, 3G and 4G over some period of time. Of course, all things are not equal. Average revenue per user or account drops over time. Profit margins drop over time. Global mobile revenue growth rates now are below one percent annually, though higher in some countries and regions.

The obvious conclusion is that next generation platforms, in and of themselves, used to support existing use cases, do not inevitably boost revenue too much, but arguably support the incremental revenue growth we typically see. 

Looking at products, not network infrastructure, we already can confirm that earlier product drivers--especially voice and messaging--have been displaced by internet access. And though nobody believes that will change much in the near term, eventually even “mobile internet access” will reach saturation, and cease to drive current growth rates. 

In other words, though it might seem unthinkable, there will come a time when neither mobile revenues, nor mobile internet access for present use cases, will drive the next stage of revenue growth. 

The issue is what such a source--or sources--might be. The obvious answers (and hopes) are the internet of things, edge computing and private networks. All three could add new use cases and revenue streams. And the hope is that those sources will eventually reach a magnitude big enough to overcome a lost of half of current revenue over the next decade, as voice, messaging and consumer internet access continue to mature. 

We can rather safely assume that 5G does not, by itself reverse the trend of declining voice and text messaging revenue. The ultimate impact on mobile internet revenue is not clear, but assume modest if any actual ARPU increases for consumer mobile data. On the other hand, 5G does allow operators to scale supply to meet consumer demand at near-equivalent gross revenue per account.  

Assume present global mobile revenue of about $1 trillion. So a loss of half of that revenue over a decade is $500 billion. That’s the theoretical revenue replacement bogey. 

Right now, it does not appear that any single new revenue stream (service provider IoT, edge computing or private networks) alone amounts to $500 billion globally in 10 years. IoT connectivity revenue is highly unlikely to represent a big enough new revenue source to move the needle on a $500 billion annual revenue target. IoT connectivity revenues might be in the $28 billion range globally by about 2025, Analysys Mason has projected.

The point is that IoT connectivity revenues are a fraction of total IoT revenues and are unlikely to reach even $50 billion in annual revenue by 2025. The somewhat obvious conclusion is that other roles in the IoT ecosystem will have to be successfully pioneered by mobile service providers if IoT is to become a revenue source making a meaningful dent in the $500 billion revenue target. 

Something like that also applies to edge computing. Mobile operators can make some incremental revenue as suppliers of edge real estate. But most of that revenue stream lies in the sales of servers, apps or actual “computing as a service.” So far, one would have to say hyperscale computing-as-a-service suppliers are on track to reap much of that revenue stream, unless mobile operators successfully acquire other roles beyond connectivity. 

Edge computing colocation alone is unlikely to drive $50 billion in new revenues by 2025, one might guess. In fact, edge computing revenues overall might not break out of single digits. 

Private networking might be even more difficult, as much of that market opportunity will accrue to suppliers of servers and software, as most Wi-Fi revenue accrues to suppliers of infrastructure. 5G private networking, for example, might not generate much more than single-digit billions of revenue for mobile operators by about 2025. 

The larger point is that, as promising as edge computing, private 5G, private 4G and IoT might be, they do not collectively seem capable of generating anything close to $500 billion in new incremental revenue for mobile operators over the next 10 years, at least not based on colocation, service and connectivity revenues. 

Either additional new--and substantial--new revenue sources must be found or big moves into other parts of the value chain will be necessary to reach $500 billion in new revenue within 10 years. 

It is a tremendous challenge.

5G is Vital, if Not Yet "Revolutionary"

Though we are early in its life cycle, some argue 5G remains “revolutionary,” a “transformative leap” that will “reshape” connectivity. Others say it is a disappointment, either as a driver of near-term enterprise use cases, or as an enabler of higher-value, higher-revenue consumer mobile services.  

The eventual “truth” is likely to be far more nuanced. Some valuable new lines of business eventually could emerge. By design, 5G supports device density quite a bit higher than was available on 4G or earlier networks. By design, 5G supports network slicing, which enables private networks with some quality of service features. 

But 5G was always going to be a bit of a disappointment for most consumer accounts, which drive roughly 60 percent of total mobile operator revenues, for reasons related to the dynamics of all internet access and transport services. 

At a high level, demand for data consumption does not have a revenue elasticity that matches the consumption elasticity. In other words, mobile and fixed network operators cannot assume that increases in supply will produce increases in average revenue per unit that match the rate of consumption. 

To be sure, typical recurring charges for home broadband, for example, have increased since 1990, and access speeds for home broadband have risen as well. The cost to supply, on a per-unit basis, arguably is less important than the ability to charge more for higher consumption or higher speed. 

In the U.S. home broadband market, for example, per unit prices have plummeted, but typical  home broadband speeds have grown by an order of magnitude about every decade. Retail prices for stand-alone home broadband have not increased that fast, taking five decades to grow an order of magnitude. 

Year	Typical Speed	Typical Data Consumption	Price per Unit	Monthly Consumer Subscription Charges
1990	14.4 Kbps	10 megabytes	$1 per megabyte	$20 per month
2000	1.5 Mbps	100 megabytes	$0.1 per megabyte	$30 per month
2010	10 Mbps	1 gigabyte	$0.01 per megabyte	$50 per month
2020	100 Mbps	10 gigabytes	$0.001 per megabyte	$70 per month
2023	1 gigabit per second	1 terabyte	$0.0001 per megabyte	$100 per month

The key business takeaway is that supplied capacity must continue to increase, but will happen faster than price increases to match. 

Mobile operators have arguably had better outcomes where it comes to capacity supply and retail prices. In the U.S. market, it has taken three decades for prices to increase by an order of magnitude, as capabilities have grown three orders of magnitude. 

Year	Typical Speed (Mbps)	Typical Data Consumption (GB)	Price per Unit (GB)	Monthly Consumer Subscription Charges (\)
1990	1	0.1	100	20
2000	10	1	10	50
2010	100	10	1	100
2020	1,000	100	0.1	150

For such reasons alone, revenue expectations for faster mobile or fixed network internet access are likely to remain challenging. The argument that 5G would bring significantly-higher revenues, in the form of the ability to “charge more” for access speed, always was going to be quite difficult. 

It remains to be seen how much incremental new revenue might be created by internet of things connections, private networks or edge computing, the services most-often cited as “new” enterprise features of 5G. 

As it has happened, an unexpected “new” revenue source of some significant magnitude--in the form of 5G fixed wireless for home broadband--has developed rather quickly. 

Mobile Operator	Subscribers (Q1 2023)	Annual Subscription Revenues (Q1 2023)	Growth Rate (Q1 2022 - Q1 2023)
T-Mobile	3.2 million	$1.2 billion	120%
Verizon	1.5 million	$600 million	100%
AT&T	0.5 million	$200 million	50%

Whether one views such new revenue sources as “revolutionary” or “merely” significant is the issue. Still, the growth of 5G fixed wireless for home broadband clearly is important for contestants in the home broadband space. 

And 5G fixed wireless remains, at the moment, the clearest “new” revenue source for mobile operators. It always is conceivable that other enterprise-focused revenue streams will emerge as well, though the magnitude of those revenue streams remains more uncertain.

The point is that we likely err when arguing either for “revolutionary” or “disappointing” outcomes for 5G. We still are early in global deployment. New revenue sources generally take time to develop. 

But 5G remains vitally important for other reasons. All internet access providers, all data transport providers and data centers must increase capacity on a sustained basis. Each new mobile generation is the way that capacity increase happens.

Mobile operators may indeed be disappointed at the revenue outcomes from 5G so far. But 5G is essential for protecting the value of the business, as will be true of 6G and subsequent platforms. 

“You get to keep your business” might sound like a rather-trivial outcome. It is not.