5G is a Big, and Risky, Bet on the Future

It is easy enough to point out that we are far removed from the days when telecom was a safe, slow-growing, low-innovation industry with little competition. Telecom used to be considered a "utility" industry. It retains some elements of that heritage, but now is anything but a "guaranteed rate of return" industry.

Today, nothing is guaranteed: not revenue, not profits, not customers, not the business model, nor continued existence. So pointing out that 5G will be risky is only to note that the whole industry now is far more risky than ever before.

Big bets have to be routinely placed, and 5G is no different.

Among the potential 5G business model challenges is a mismatch between the expected value of use cases and hoped-for revenue opportunities. Put simply, the gigabit speeds 5G will enable for “enhanced mobile broadband” are not generally needed, so value will be low. But operators making investments will be looking for a financial return, so there will be pressure to price faster 5G services at higher levels than 4G. But 4G still will work for most consumer applications.

How important will 4K or 8K video, virtual reality and augmented reality really prove to be, early on? And how much more will consumers pay to get such support?

At the same time, the greatest hope for incremental revenue growth might come from enterprise apps generated by various internet of things applications, even if those take longer to develop.

At least, those are reasonable inferences from what industry executives currently believe. A survey by GSMA Intelligence found 69 percent of respondents believed enterprise apps (for IoT) would be the most-important drivers of new revenues. Just 23 percent believed consumer apps would be the most-important new revenue source produced by 5G.

In fact, three of four very-important new drivers of revenue are in the enterprise space, not the consumer space. In other words, it is easily possible to argue that 5G is the first mobile network generation of greatest value for enterprise applications, not direct consumer use cases.

source: GSMA Intelligence

Still, big risks now are simply part of the industry context. My own rule is that service providers are going to need to replace at least half of all current revenue every decade, from now on.

Whether that can be done, consistently and sustainably, only on the strength of connectivity services is an open question. Moving up the stack (getting into new lines of business in other parts of the ecosystem with higher revenue, margins and value) is imperative, not optional.

Will Oligopoly Still be the Outcome, As New Platforms Emerge?

Capital-intensive industries tend to produce oligopoly market structures. Even some industries that are scale-intensive or moderately capital intensive also tend to do so, it seems. Look at Apple’s market share , for example.

So one reasonable question in the global access business is to ask whether technology platform advances can reduce capital investment hurdles enough to break the “oligopoly” market structure.

If so, then a wider new competitors might expect to break into the top ranks. If not, then only big firms can hope to do so.

At the moment, in several markets, it appears the latter thesis will be tested. In India, the entry of Reliance Jio already is rearranging market structure, forcing consolidation. In the U.S. market, Comcast and Charter Communications are getting ready to enter the market. In Myanmar and Singapore,  new competitors are being authorized.

So far, no breakthroughs in platform cost have occurred that could challenge oligopoly structures, though. In other words, the zero sum game continues to prevail, and one contestant’s gains will come at another’s expense.

It is unknown how much new fixed wireless and mobile platforms might change possibilities for non-oligopolistic market structures, on a marketwide basis. But it might be reasonable to suggest that the new platforms will lower provider cost, but not enough to overcome oligopoly assumptions.

That is not to underplay the potential importance of several new platforms, as well as continued advances by hybrid fiber coax networks. Lower platform costs are helpful in increasingly-competitive markets where capital and operating costs must be lowered.

Lower costs are required to serve rural customers as well. But, at least so far, none of the platforms seemed poised to break the background setting that business models assume costs high enough that oligopoly is the outcome.

In addition to devices, oligopoly also seems to prevail in the consumer applications market.

According to comScore, in the United States, the top seven apps, and eight of the top nine apps are owned by Facebook or Google.

Indeed, one might ask whether it is possible for any new apps providers to displace Google and Facebook, either.

Some might argue that stable oligopolies are possible somewhere between two and four providers, with many arguing three strong contestants is the optimal sustainable outcome. That four or more providers exist in many markets is considered by many a “problem” in that regard, generally called the rule of three.

Most big markets eventually take a rather stable shape where a few firms at the top are difficult to dislodge.

Some call that the rule of three or four. Others think telecom markets could be stable, long term, with just three leading providers. The reasons are very simple.

In most cases, an industry structure becomes stable when three firms dominate a market, and when the market share pattern reaches a ratio of approximately 4:2:1.

A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest, according to the rule of three.

In other words, the market share of each contestant is half that of the next-largest provider, according to Bruce Henderson, founder of the Boston Consulting Group (BCG).

Those ratios also have been seen in a wide variety of industries tracked by the Marketing Science Institute and Profit Impact of Market Strategies (PIMS) database.

Why New Forms of Spectrum Sharing Are Important

Spectrum sharing is highly unusual in the telecom business, with one exception: Wi-Fi. In the unlicensed Wi-Fi bands, users and service providers have been free to offer access, so long as interference is avoided, to the extent the standards allow. Basically, devices must limit output power, and interference therefore becomes a matter of how many devices want to use any particular block of spectrum at a particular place and time. 

Nevertheless, spectrum sharing is about to have much greater impact, as a growing range of countries are looking at how new forms of spectrum sharing can efficiently and effectively increase the amount of usable communications spectrum.

The difference is that the new forms of sharing will allow new users access, on a conditional basis, to spectrum already licensed to other users, typically government entities. The basic idea: when the licensed user has surplus bandwidth not used or lightly used, it will be possible for secondary users to receive licenses to use that same spectrum, so long as that use does not impinge on primary licensee usage. 

In at least some cases, as in the U.S. market, once primary and secondary licenses are issued, it might still be possible for available remaining spectrum to be used, opportunistically, by a third tier of users who have no guaranteed access rights. In such instances, access will operate as does Wi-Fi: best effort only, and only to the extent primary and secondary users have no immediate need for access. 

It is possible the first impact will be felt in a few licensed bands (3.5 GHz in the United States, 3.2 GHz in Europe), where regulators and users will essentially test the workability of such shared spectrum systems. Beyond that, it is likely that sharing also will happen in at least some new millimeter wave bands not presently used for communications purposes. 

Spectrum matters because communications matters, and wireless and mobile communications now dominate all communications globally.

Spectrum sharing matters because communications spectrum is a scarce asset, and demand is growing very fast, both because billions of new Internet access users will come online, and because new Internet apps and devices consume vastly more bandwidth.

There is, for example, almost no uncommitted communications spectrum available in the sub-2-GHz range.

So flexibility and efficiency gains are to be welcomed. Traditionally, spectrum has been licensed to specific users, typically with limitations on what they can do with that spectrum as well as technology-prescribed conditions as well.

That inflexibility is an issue when demand changes faster than regulation, which is to say nearly always.

Though there is an expectation that much spectrum in millimeter bands (3 GHz to 300 GHz) can be allocated for communications purposes, most of that spectrum will be severely “short range,” and hence best suited for indoor or small cell applications.

Global mobile data traffic grew 69 percent in 2014, and each succeeding mobile generation seems to grow consumption by an order of magnitude, according to Cisco estimates. Long Term Evolution (4G) devices consume an order of magnitude more data than a non-LTE device, for example.

Any smartphone tends to lead to consumption of 37 times the data of a feature phone, according to Cisco. And smartphones are becoming the standard global device. Where today 28 percent of customers use smartphones, that will grow to perhaps 52 percent by 2018.

Use of Internet access plans might reach 84 percent by 2020, according to Ericsson.

In other words, smartphones will be as common as toothbrushes.

All of that means spectrum matters, as both the number of users, and the amount of bandwidth consumed by those users will grow an order of magnitude in five years.

Some idea of the value of such spectrum is easy to illustrate. It has been estimated that  the value of licensed U.S. mobile spectrum is $500 billion, for example. Likewise, it has been estimated that the value of U.S. Wi-Fi spectrum alone represents $140 billion in value.

To be sure, spectrum sharing also introduces a new element of business model uncertainty, because spectrum sharing can replace a large measure of scarcity with a large measure of abundance.

And abundance means lower value for licensed spectrum, even as it increases the range of sustainable business models that can be built on spectrum.

Nearly all of the most-useful communications spectrum already has been allocated, and much spectrum is inefficiently used.

Today, the U.S. government, for example, possesses almost 60 percent of radio spectrum and possesses over half—1500 MHz—of the valuable 300 MHz to 3 GHz spectrum useful for terrestrial wireless and mobile communications.

Much of that spectrum is lightly used or even not used. At a time when most observers believe people, organizations and businesses will need vastly more Internet and communications capacity, that is a waste of scarce resources.

So the thought naturally occurs: can those users continue to have communications functionality while allowing others to create commercial services? Traditionally, that would have required high cost and much time, neither desirable when Internet and communications demand changes so rapidly.

In fact, a 2012 National Telecommunications and information Administration report found that moving Federal users completely out of the 1755-1850 MHz band would cost  approximately $18 billion and take 10 years.

And that is the reason spectrum sharing is so important. It holds the promise of communications abundance.

Spectrum sharing is a more-efficient way to maximize use of scarce resources, at less cost and delay than required to clear spectrum the old-fashioned way.

Spectrum Sharing Now is Commercially Feasible

Spectrum sharing now is practical because we are able to apply cheap and sophisticated signal processing to communications tasks. As a result, virtually all communications spectrum can be used more efficiently and effectively.

Cheap and sophisticated signal processing allows commercial use of millimeter wave spectrum (3 GHz to 300 GHz) for the first time. The same advances allow us to use existing spectrum more efficiently, moving beyond simple frequency or spatial separation.

Those methods work, but also create fallow resources. Since nobody but the licensee can use the capacity, when the licensee is not using spectrum, nobody else can use it, either. In some cases, as in the United Kingdom and United States, as little as 10 percent of spectrum gets used. In other cases, none of the capacity is used.

Two fundamental approaches now are feasible to allow many users to share capacity without causing interference to existing licensed users, but also vastly expanding the amount of capacity available to support communications and apps.

Devices themselves, or databases, are able to sense or predict where interference would occur, and then shift access operations to non-interfering frequencies or channels. Cognitive radio is an example of the former approach; databases an example of the latter approach.

In other words, where we traditionally have used “command and control” methods–giving certain entities exclusive rights to use certain channels or blocks of spectrum–it is commercially feasible to use other methods that efficiently reclaim unused spectrum.

As Google Principal Wireless Architect Preston Marshall has noted, traditionally we had to isolate users, usages or technologies in order to protect against interference. That is no longer are the only choices.

Licensing traditionally has used spatial division (different frequencies or geographies) to prevent interference. Today, we can use sensing or databases to allow users to share any specific block of spectrum or channels, while still avoiding interference.

The implications are very clear: though physical spectrum is a scarce resource, we often use such resources inefficiently. As Ofcom has noted, in many cases licensed or unlicensed spectrum actually is used at about 10 percent of theoretical maximums.

Spectrum Sharing Can Take Many Forms

Spectrum sharing is the simultaneous usage of a specific radio frequency band in a specific geographical area by a number of independent entities.  Simply, it is the “cooperative use of common spectrum” by multiple users.

Spectrum sharing also can take many forms, coordinated and uncoordinated. Coordinated forms include:

• capacity sharing between business entities (roaming, wholesale, pooling of assets)

• TV white spaces (database determines what you may use, when and where)
• spatial sharing between business entities (you use here, I use there)
• priority sharing between entities (I have first rights, you have secondary rights) Licensed shared access or authorized shared access are examples
• license assisted access (bonding of mobile and Wi-Fi assets)
• cognitive radio (devices determine how to avoid interference)

Uncoordinated forms of access historically is best illustrated by Wi-Fi.

The point is that spectrum sharing can take a number of forms, some confined to contracts and agreements between economic actors while others arguably are more profound.

One might argue that liberalized leasing or trading rules represent a simple case for spectrum sharing.

Forms of sharing that enable shared use of currently-licensed spectrum arguably are among the most innovative.

Someplace in the middle are use of cognitive radio or database approaches to allow shared use of new spectrum, whether licensed or license-exempt.

In some cases, sharing is a business arrangement between entities. Historically, mobile virtual network operator wholesale is a form of sharing. So too is “roaming,” in a sense. In other cases, mobile operators might agree to pool and share licensed spectrum assets.

The arguably more important forms of spectrum sharing use new technology to intensify the use of existing spectrum, such as LSA that allows many users to share a specific block of spectrum.

The concept is to free up capacity quickly by allowing commercial users access to currently-licensed spectrum on a secondary basis, while licensed users continue to retain priority use of their spectrum.

The advantage is that such sharing avoids the huge time and expense of relocating existing users so other users can move in.

So far, thinking has centered around such sharing 2.3 GHz in some regions and 3.5 GHz in other regions.

Licensed shared access (LSA) and authorized shared access (ASA) illustrate the concept.

Such sharing allows licensed services to share spectrum in a band with new users without disrupting existing users, while still increasing the amount of spectrum available for other users.

The new form of licensing is under formal review in the United States and European Union, and will be addressed by the International Telecommunications Union.

This is important for a number of reasons, the most important reason being that it is less disruptive than moving users from their current bands to give access to new users. Not only does this approach save the significant costs for relocating users and their access gear from one frequency to another, it also creates new capacity much faster than any relocation approach requires.

Under the licensed shared access approach, additional users can use the spectrum (or part of the spectrum) in accordance with sharing rules that protect incumbents.

Such approaches almost always will require incentives for the incumbent users to permit sharing.

That might include direct payments from the new user or the regulator, payments to upgrade equipment or take other costly actions than would facilitate sharing or savings on fees paid to the regulator for underused spectrum.

In Europe, such sharing likely will emerge first in the 2.3 GHz band, to support mobile services. LSA is being worked on in France, Finland, Italy and the Netherlands.

The United States is developing an approach to sharing in the 3.5 GHz band, as well. In the U.S. model, a three-layer model is envisioned, with protected incumbent access, priority access (some interference protection) and general authorized access (opportunistic access without interference protection).

An Era of Abundance and Change

Spectrum sharing is one method by which vast amounts of new communications spectrum–hundreds of megaHertz of spectrum–can be made available, faster and more affordably than would be the case if current users were relocated.  

The big coming change is that abundant and affordable computing now makes possible the use of spectrum that was commercially unusable in the past, and also shared use of spectrum that is inefficiently used at present, without moving existing licensed users, something that is both expensive and time consuming.

Spectrum is valuable. That will continue to be the case. Exclusive rights to use spectrum creates the foundation for commercial applications and also confers business advantage.

But exclusivity increasingly will be challenged.

What will spectrum sharing mean for Internet service providers and consumers? How might industry dynamics and the supply of Internet access services change? Who wins, who loses?

Those are the sorts of spectrum sharing issues policymakers, ISPs and their suppliers must confront, and why Spectrum Futures–a forum for “whole ecosystem” consider of those issues,  exists.

Simply, spectrum sharing affects the future of telecommunications and all businesses built on the use of communications.

So spectrum sharing directly encourages and shapes whole business models, partly by increasing the amount of spectrum; partly by reshaping the value of licensed spectrum and partly by creating space for new business models potential built on either cheaper spectrum or new unlicensed spectrum.

To the extent that use of licensed spectrum has underpinned mobile service provider (and other provider) business models, increased reliance on shared spectrum and license-exempt spectrum will reshape the fortunes of whole industries.

“The norm for spectrum use should be sharing, not exclusivity,” according to the President’s  Council of Advisors on Science and Technology report.

Be clear on this matter: spectrum sharing can be viewed as good public policy because it more efficiently makes available lots more spectrum for Internet access, mobile communications and other applications humans, governments, companies and industries find useful.

Spectrum sharing also represents a revolution in spectrum policy, a challenge to business models based on spectrum scarcity and an opportunity for business models based on sustainability.

We might all readily agree that freeing up lots of new spectrum, unlicensed or at low cost, will be directly helpful to the project of getting billions of new people connected to the Internet, not to mention the future business of connecting sensors and devices to the Internet.

What also matters, though, is the sustainability of business models that support Internet access providers. To the extent that scarcity underpins business models, less scarcity might be a threat of some magnitude.

Conversely, to the extent that license-exempt access supports many other endeavors, more spectrum–licensed or unlicensed–creates additional possibilities across the ecosystem.

And as we already have seen with Wi-Fi offloading of mobile device Internet access, the implications are subtle and complex.

Mobile and fixed service providers now see license-exempt access as part of the access infrastructure, even if larger amounts of unlicensed communications spectrum also might be competitors to mobile access.

Conversely, access to unlicensed spectrum also underpins other business models, including models that might envision use of license-exempt spectrum to create substitutes for some “mobile” services, at some times and some places.

To this point, mobile phone services (among others) have exemplified the former; Wi-Fi the latter. But something very new is happening: licensed and unlicensed capacity are being used in new ways to support all sorts of business models.

As a general rule, we should assume that both licensed and license-exempt communications spectrum will be supported in the future. The issue is how much of each will be used.

Ofcom, the United Kingdom communications regulator, identifies three areas where spectrum sharing will be important:

• indoor use, generally Wi-Fi
• outdoor use, generally mobile
• Internet of Things (IoT), on a variety of platforms

That might be too limited a list. But you get the idea: spectrum sharing is significant because it allows relatively rapid and affordable increases in communications spectrum, without the time and expense of relocating existing users.

Spectrum sharing is important because it also allows more efficient use of new bands of spectrum, often without the expense and overhead of command-and-control mechanisms.

Spectrum Sharing Matters

Spectrum sharing matters because communications spectrum is a scarce asset, and demand is growing very fast, both because billions of new Internet access users will come online, and because new Internet apps and devices consume vastly more bandwidth.

Even as national regulators release new blocks of spectrum for communications use, we also can use new technologies to improve the usage of valuable licensed communications spectrum, without the disruption of relocating existing users.

In one sense, spectrum is artificially scarce, the result of “command and control” licensing. In other words, when spectrum can only be used by one set of users, and those users do not use the assets, the capacity is “wasted.”

That might especially be the case for licensed government spectrum, where users do not have any economic incentives to maximize use of the asset.  

Efficient use of latent and already allocated bandwidth is possible and necessary. Consider present allocations of spectrum.

Total mobile spectrum in the United States is 608 MHz, for example. In France, 555 MHz is available. In Germany 615 MHz is available; in Italy 540 MHz; in Japan 500 MHz; in Spain 540 MHz. In India 220 MHz is available for mobile communications.

In the United States, that works out to 2.1 Hertz per subscriber; in France 9.3 Hertz per subscriber; in Spain 11.8 Hertz per subscriber. In Germany, 6.2 Hertz per subscriber is available.

In India, just 0.2 Hertz per subscriber is available. And that is in a market where voice connections on second generation networks dominate. As 3G and 4G networks come online, and more customers use mobile Internet access services, bandwidth needs will grow an order of magnitude initially.

Beyond that, the impact of smartphones, Internet access and changing application consumption is clear: bandwidth requirements continually increase. In fact, consumer mobile data consumption has grown at 57 percent annually.

At growth rates that high, a variety of remedies are necessary, but more efficient use of existing spectrum must be part of the solution. Spectrum sharing is key in that regard.