5G Era: Opportunity and Peril

The 5G era will represent both opportunity and peril, and not all for reasons directly related to 5G itself. Industry dynamics are the reason.

• Legacy revenue sources are mature or declining
• Service providers will need to replace half of current revenue over a decade
• Huge new revenue drivers must therefore be found
• We are near the end of the “connectivity drives revenue” period
• Scale always matters, but will matter more, in the 5G era

At a high level, it is easy enough to note that the industry has changed dramatically over the last four decades.

It also is clear enough to note that--in the most mature markets--all legacy revenue sources are declining. In developing markets, those trends often are not so clear, as the mobile markets are not yet mature, or at a peak, and subscriber growth continues to fuel revenue growth. Eventually, that stops.

To put matters starkly, revenue growth has stopped, in the mature markets.  

Most believe 5G is significant because it sets the stage for developing huge new revenue sources to replace declining legacy revenues. Even there, though, there are issues.

Will the new revenue sources be large enough to offset expected losses of legacy revenue? And will connectivity revenue continue to drive the business model?

Also, moving up the stack in the 5G era will require scale. Connectivity markets often are local. App businesses almost always involve huge scale. And that will favor those contestants with the ability to leverage capital and reach to assemble large market opportunities.

In other words, not every mobile operator will be able to “move up the stack,” and will have to be content with being a connectivity provider, operating with much-lower costs, since it will be very hard to grow the revenue top line.

In recent years, mobile internet access has driven revenue growth in developed markets, and is starting to assume that role in many developing markets as well, notes James Sullivan, Asia-Pacific equity analyst at J.P. Morgan.

That is why the search is on for new sources of revenue beyond voice, text messaging, linear video entertainment and even internet access.

The search will be difficult. It is fair enough to point out that telcos once were nearly exclusively in the “apps” business, first with voice, then with text messaging and more recently with video subscriptions.

The advent of internet access was a big move in the direction of “dumb pipe.” And it is hard to argue with the thesis that it is “dumb pipe” (internet access) that underpins all further generations of “telco” revenue models, even when not the exclusive revenue source.

Internet access is precisely a means to get access to apps and services, not an “app” in its own right.

So we might soon see other inklings that “connectivity revenue” ceases to be the single largest contributor to service provider revenue, even if it remains vitally important. As difficult as the effort will be, over time, growth has to come from app layer services and value, not simple connectivity (access).

Source: JP Morgan