Thursday, November 16, 2017

What Will Drive 5G Business Model?

Among the many unknowns about 5G is the business model: where will new incremental revenue sources develop, and will they develop?

The conventional wisdom is that “enhanced” mobile broadband is one of three key revenue drivers. The others are ultra-low latency services (connected cars, for example) and massive machine applications (internet of things).

If that proves to be true, then it also is possible to say that two out of three expected revenue drivers will be enterprise markets (low latency and machine applications), while one will represent consumer mobile broadband.

And, at least at first, consumer internet access is likely to drive incremental revenue growth. The value proposition (10 times faster) is clear, and the market is large (everybody) and well understood (internet access).

And while consumer internet access will continue to be a “horizontal” value (everybody needs internet access), that might not be the case for the other two drivers. It is logical that success providing low-latency services or machine applications could involve a healthy amount of industry vertical knowledge.

That would be a major evolution for telecom service providers, who arguably have done best supplying horizontal value in the ecosystem.

That noted, service providers are not strangers to specialized enterprise communications, to an extent. Generations of enterprise-specific data networks have been developed and deployed. Perhaps few of those efforts have had the requirements for intimate industry vertical knowledge, however.

That would represent one of several huge shifts. First, growth might change from consumer mobile broadband to growth lead by enterprises deploying huge sensor networks and new use cases where low latency is a fundamental requirement.

Growth might also shift to “vertical” from “horizontal.” That will require additional investment and focus from an industry used to horizontal value propositions, at least in some cases. It also is true to note that there are potentially so many vertical use cases that a rational service provider cannot actually customize for all of them.

That potentially means a shift away from “public networks” and towards “private networks,” as many potential customers decide they must build their own networks, to support their specific use cases. Just how far that goes is unclear.

To illustrate, it is conceivable that, by the end of the 5G era, Amazon is the service provider, not NTT or AT&T, in many use cases. What will matter is whether such providers are substantial wholesale customers, or build and operate their own facilities. If so, the extent to which they do so will affect public services markets.

Also, new network capabilities, such as network slicing, might just be enough to allow service providers to build customized private networks on behalf of customers, to a large extent.

The issue is the amount of uncertainty about 5G business models, not because of anything inherent in 5G, but simply because, over the last few decades, service providers have had to replace about half their current revenue every decade.

Mobility replaced lost fixed network long distance revenue Some service providers used business customer revenue to replace lost consumer revenue.

Cable operators replaced consumer revenue with business customer revenue, voice and data for video revenue.

Mobile operators replaced declining voice and text messaging revenue with mobile internet access.

To be sure, every next generation mobile network has represented some degree of uncertainty, in terms of enabling the growth of new revenue streams and use cases. That will be true for 5G as well.

What seems arguably certain is that legacy use cases will not drive growth. One might argue that never has happened with mobile platforms. Though digital 2G was more efficient than analog, the new revenue came from text messaging and affordability by mass market customers, which drove subscription growth.

The 3G network was the first to support mobile email and web browsing, as well as some amount of tethering and mobile internet access. The 4G network was the first to enable video content consumption and a user experience better than Wi-Fi.

The 5G network is expected to enable internet of things and machine to machine business models, as well as full substitution for the fixed network (internet access).

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