AI Monetization? Look at 5G

Buyers of infrastructure and services to use artificial intelligence might be forgiven their angst about payback or monetization of those investments. Sellers have few such qualms. 

Roughly the same argument happens around monetization of 5G services: executives complain that they have spent a lot on 5G and have perhaps not seen the financial returns they were expecting, in terms of new or higher revenues. 

That is not a new problem, and our experience with fiber-to-home and 5G provides instructive insight.

For some of us, the debate is an old one. In the mid-1990s, for example, it would not have been hard to find an argument about the payback from fiber-to-home networks, either. In the specific context of new competition between telcos and cable operators for voice, internet access and entertainment revenues, the argument was that FTTH would allow telcos to compete with cable in internet access and video, while cable operators took market share in voice. 

Then, as now, the issue was the new investments would enable assaults on various markets. Assuming a rough split of new internet access share, telcos expected to take share from cable in video services, while cable two-way networks took some telco voice share. 

Financial analysts and operating executives might have hoped for higher returns, but essentially the rationale came down to an existential argument: “do you want to remain in business or not?” Without FTTH upgrades, few, if any, telcos could expect to survive against competitors able to supply hundreds of megabits to gigabits per second home broadband speeds. 

That argument applies to 5G investments and clearly will apply to AI investments as well. Though many expect new revenues, use cases, products and services to be possible, the bottom line is that the new investments essentially allow firms to “remain in business.”

“You get to keep your business” might not be highly appealing, in one sense. One would rather be able to claim that investments will produce high financial returns. 

But that is not really the choice. The choice is “keep your business or go out of business.” The new investments in 4G and AI are essentially strategic and existential; not fully driven by traditional “return on investment” criteria. 

All that noted, some segments of each value chain will have an easier time showing results. As always with a new technology, the initial investments are required to enable use of the technology, and that often means infrastructure suppliers are first to benefit. 

If one agrees that the artificial intelligence market can be viewed as consisting of three layers of infrastructure; models and applications, as do analysts at UBS, value creation and supplier revenue also are in layers. As generally is the case for software layers, AI involves layers that also drive or dictate business, revenue and monetization models. 

The most-direct monetization will happen at the infrastructure layer, involving direct purchase of hardware, software and capabilities as a service. Nvidia and other creators of graphics processing units and acceleration hardware, as well as servers, are in this category. 

Monetization possibilities are mostly direct, in the form of licenses and subscriptions, at the model layer, with some possible indirect monetization for open source models. Subscriptions to use OpenAI; Copilot or Gemini are in this category. 

At the applications layer, monetization will mostly be indirect, in the form of improved existing products and services. UBS estimates “enabling” layer products and services including semiconductor production; chip design, cloud and data centers, and companies involved in power supply will generate at least $185 billion in 2027, with total segment revenues closer to $331 billion. 

Companies developing large language models and those that own data assets that can be turned into intelligence

Application layer: The companies which embed the tools from the intelligence layer into specific use cases. This layer likely offers the largest monetization potential over time, yet this opportunity is difficult to quantify at this early stage. Presently, the report expects a directly addressable market of USD 395 billion in revenue opportunities for the application layer by 2027.

In the 5G markets, one might note a similar trend. The clearest initial winners were the suppliers of 5G network infrastructure, such as Ericsson and Nokia; construction firms and so forth. 

Typically, it takes longer for application success to be discovered. 

In that regard, the salient example of direct new 5G revenue is fixed wireless for home broadband. Since about 2022, virtually all net account additions in the U.S. home broadband market have been supplied by fixed wireless platforms. 

source: CTIA 

Other gains attributable to 5G are mostly indirect or hard to quantify, since in most markets supporting 5G services, all the providers offer 5G. In some markets the quantities of various spectrum resources might provide an advantage to one or more providers, such as in the U.S. market, where T-Mobile’s greater trove of mid-band spectrum arguably has allowed it to take market share from the other leading providers. 

Still, over time, most of the value of 5G or AI, for most applications, use cases and users, is likely to be realized in more-subtle and indirect ways. 

If AI Emerges as a General-Purpose Technology, Watch for Both Disruption and Creation

Any general-purpose technology might be envisioned as a set of layers of other technologies that build on it. Many could agree that GPTs are characterized by pervasiveness, flexibility, spillover effects and transformative impact. 

So the internet might underpin layers of core infrastructure and industries and businesses built around protocols such as TCP/IP and physical networks and industries (mobile and fixed networks, terrestrial and satellite wireless networks). 

Then there might be layers of roles and businesses supplying web technologies such as HTML, CSS, JavaScript, and related web development tools that enable building websites and web applications.

Networking technology including routers, switches, firewalls would be another layer. 

So would databases, cloud storage, and content delivery networks.

Then there would be many application and service layers for communication (e-mail, instant messaging, video conferencing, and social media platforms) e-commerce and online marketplaces, content and entertainment, social media, video and audio streaming or online gaming. 

Internet of Things businesses built around smart devices, sensors, and connected appliances, as well as many types of business software could be listed.

Some might include artificial intelligence as among the layers built on the internet. But some of us would say AI is a new general purpose technology that will create its own pyramid of technologies, businesses, industries and applications. 

Era	General Purpose Technology	Impact
Pre-Industrial	The Wheel	Revolutionized transportation, agriculture, and warfare. Led to the development of roads, carts, and other wheeled vehicles.
18th Century	The Steam Engine	Powered the Industrial Revolution, driving mechanization and mass production in factories, transportation (trains, ships), and agriculture.
19th Century	Electricity	Transformed daily life with lighting, appliances, communication (telegraph, telephone), and industrial processes.
20th Century	Internal Combustion Engine	Propelled transportation revolutions with automobiles, airplanes, and ships. Changed industries, warfare, and leisure activities.
20th Century	Electronics & Semiconductors	Enabled miniaturization of devices, leading to computers, radio, television, and countless electronic gadgets.
20th Century	The Internet	Connected the world, democratized information access, facilitated communication, and fueled e-commerce, digital services, and the knowledge economy.

And some of those roles or industries might presently be viewed as built on “internet” foundations. 

Intelligent infrastructure such as smart cities, autonomous vehicles, adaptable robotics, “personalized” healthcare, neurotechnology (brain-computer interfaces),  bionic limbs and prosthetics and much “metaverse” style immersive experiences, plus much of virtual and augmented reality, hyper-personalized content creation, AI-powered companions, precision agriculture and other use cases that might today be attributed to the  “internet” GPT might eventually be properly seen as built on AI as a GPT. 

Perhaps analogies can be seen in the Apple iPhone and Google search. Apple did not invent the smartphone or the mobile phone. But it completely reshaped the business, destroying Nokia and BlackBerry in the process as former market leaders. 

Google was not the first search engine, but it destroyed Altavista and other existing search engines in the market. The point is that many existing industries might be fundamentally reshaped if AI emerges as a GPT. 

And as has been the case before, AI might reshape and disrupt existing industries, functions and roles, in addition to spawning entirely-new industries, as all prior GPTs have done.

"You Get to Keep Your Business" is the Point of Every Mobile Generation

As is true in any value chain, major innovations such as a new mobile platform (2G, 3G, 4G, 5G) will tend to produce a few key changes in user behavior and app experience. For example, though some would include a wider range of new use cases, most of us could agree that new apps or use cases “nearly everyone” uses can be identified for each mobile generation. 

Mobile Network	Key New Use Cases
2G	Text messaging
3G	Mobile web access, mobile email
4G	Mobile video streaming, mobile conferencing, ride sharing
5G	Fixed wireless for home broadband

Though we sometimes forget to note the developments, 2G also enabled widespread use of call waiting, caller ID, and voicemail. 

The 3G network added picture messaging and multimedia text messaging as well as mobile gaming. 

The 4G network added Wi-Fi calling, mobile offload to Wi-Fi, use of mobile hotspots, full web functionality on the mobile device (including full motion video) and, for some customers, mobile substitution for home broadband. 

The new 5G network is still developing new use cases, but fixed wireless to support home broadband is clearly the earliest case of a new mass market innovation, and among the few new features to produce direct new revenue for mobile operators. 

Device features also progressed, with at least some generally-available features on most makes and models. 

Mobile Generation	Key New Device Features
2G	Camera, color display, expandable storage
3G	Wi-Fi, GPS, MP3 player, better keyboards, turn-by-turn directions
4G	High-definition display, NFC, fingerprint sensor, speech-to-text,
5G	Still developing

And although we have to make somewhat broad estimates, revenue sources have continued to evolve in importance with each digital mobile generation. Though voice drove virtually 100 percent of all revenues in the analog era (1G), revenue sources have shifted in the digital era.

Proponents of every mobile next-generation network always talk about all the new use cases each new platform can provide. Indirectly, it matters. But even were no direct changes in use cases occurred, each new mobile generation would still be essential, and for the same reasons home broadband capabilities must advance over time.

People consume more bandwidth every year, require faster connections every year, and any ISP than fails to keep pace will go out of business.

So, at some important level, "new use cases" do not matter. Those will develop. But mobile ISPs must adopt the new platforms for another, more basic reason: they want to stay in business.

And each next-generation mobile network is primarily the way additional capacity gets added, cell splitting notwithstanding.

That noted, we still can point to new use cases that seem to develop over time. It simply helps to recall that such new use cases are not the main reason each next-generation mobile network "must" be adopted.

At a high level, voice has receded and internet access has become dominant. Text messaging became important in the 3G era. And even if the basic “subscription” continues to drive the bulk of revenue, internet access increasingly drives the value of a subscription. And the importance of business customers arguably has grown in virtually every generation. 

Mobile Network Generation	Voice	Text Messaging	Internet Access	Business Customers	Consumer Customers
2G	90%	10%	0%	10%	90%
3G	60%	20%	20%	20%	80%
4G	40%	10%	50%	30%	70%
5G	20%	5%	75%	40%	60%

Aside from fixed wireless, we still are waiting to see which innovations 5G actually will produce at scale. But even in a “worst case” scenario, where no identifiable new use cases actually become dominant, 5G still “succeeds” if it allows mobile operators to continue increasing the capacity of their internet access networks. 

“You get to keep your business” might not immediately sound like a huge benefit, but it is a far better outcome than “going out of business.” And that can happen when any internet service provider is unable to keep pace with the growing capacity requirements of the internet access business.

Recall all the dial-up ISPs that were not able to stay in business once the broadband era began. Think of the few pioneering “DSL” specialists that either went bankrupt or were absorbed by the legacy telcos. Think of the danger fixed wireless poses for some incumbent ISPs in terms of lost market share or account growth.

Fixed Wireless Dominates U.S. Home Broadband Net Additions in 2Q

With the caveat that nobody knows how long the trend will hold, in the second quarter, home broadband account additions in the U.S. market were dominated by fixed wireless, according to the latest data from Leichtman Research Group. 

Of 841,000 net account additions, 893,000 accounts were added by fixed wireless providers. In other words, fixed network provider accounts actually declined, while fixed wireless grew. 

Skeptics always argue that, eventually, fiber connections will limit fixed wireless demand. Fixed wireless optimists tend to argue that enough capacity can continue to be added to sustain fixed wireless as a viable market offering for quite some time, and perhaps almost indefinitely in a percentage of markets. 

The business strategy would be to continue upgrading fixed wireless speeds, for example, to appeal to 20 percent of the market. In that scenario, the objective is not to match fiber-to-home speeds but only to support features most relevant for about 20 percent of the market that does not want to buy the fastest, or faster, tiers of service. 

In terms of geography, rural areas and out-of-region locations are likely to remain the places where fixed wireless makes most sense. In such geographies the cost to supply will be far lower than the cost of building new optical access networks. The leading exceptions might be markets where FTTH leased access is generally available. 

In the near term, new mid-band spectrum is likely to provide the needed capacity expansion. Long term, millimeter wave spectrum will be the key supplier of capacity growth. To be sure, small cell networks using low-band and mid-band spectrum will help, in some cases. 

Still, longer term, only millimeter and higher frequency spectrum will add enough capacity to allow fixed wireless offers to keep pace (again, preserving key appeal for about 20 percent of the market) with other fixed network alternatives. 

The big advantage of milliwave spectrum is capacity; the main drawback is coverage. That will pose a continuing issue for rural millimeter wave network deployments. The conventional thinking is that denser urban markets are where millimeter will continue to offer the most-interesting business cases: relatively high amounts of capacity in areas where distance is not a primary issue. 

 

source: ABI Research, RCR 

At least so far, fixed wireless has been, far and away, the clearest new use case for 5G.

"Less Competition" in Mobile Markets Might Actually be Good for Competition

It would be difficult to find any economic studies of market structure, competition or investment in the connectivity industry that did not begin with the assumption that less competition leads to higher prices. It would be hard to find any studies that assume fewer competitors leads to higher innovation. 

But some studies might be read to suggest that even “some” competition can produce benefits. In recent years a key concern has been the impact of shrinking the number of leading mobile service providers from four to three, and studies seem to reach quite different conclusions on outcomes of doing so. 

Indeed, that is what even a casual perusal of past studies would suggest, especially in the mobile segment of the access business, which has been based on multiple facilities-based competitors, since the beginning. The harder scenarios generally revolve around fixed networks, where capital investment barriers are higher. 

In mobile markets, though, there is virtually unanimous agreement that less competition--typically reducing the number of leading facilities-based contenders from four to three--does in fact lead to an increase in consumer prices, lower investment and less innovation, compared to markets with four leading contestants. 

Study	Publisher	Date of Publication	Key Findings
"The Effect of Market Structure on Competition and Investment in the US Mobile Telecommunications Industry"	Federal Communications Commission	2005	Found that a reduction in the number of competitors from four to three led to an increase in prices and a decrease in investment.
"The Effect of Market Concentration on Competition and Consumer Prices in the US Mobile Telecommunications Industry"	The Brattle Group	2010	Found that a reduction in the number of competitors from four to three led to an increase in prices of up to 20%.
"The Impact of Market Structure on Competition and Investment in the European Mobile Telecommunications Industry"	The European Commission	2012	Found that a reduction in the number of competitors from four to three led to an increase in prices of up to 10%.
"The Effect of Market Concentration on Competition and Consumer Prices in the US Fixed Telecommunications Industry"	The Brattle Group	2013	Found that a reduction in the number of competitors from four to three led to an increase in prices of up to 15%.
"The Effect of Market Concentration on Consumer Prices in the U.S. Mobile Telecommunications Industry"	Federal Communications Commission	2017	The study found that a decrease in the number of competitors in the U.S. mobile telecommunications industry from four to three was associated with an increase in average monthly prices for wireless services.
"The Impact of Market Concentration on Investment in the U.S. Fixed Broadband Internet Industry"	Federal Communications Commission	2018	The study found that a decrease in the number of competitors in the U.S. fixed broadband internet industry from four to three was associated with a decrease in investment in broadband infrastructure.
"The Effect of Market Concentration on Competition in the U.K. Mobile Telecommunications Industry"	Ofcom	2019	The study found that a decrease in the number of competitors in the U.K. mobile telecommunications industry from four to three was associated with a decrease in competition.
"The Impact of Market Concentration on Consumer Prices and Investment in the Greek Fixed Broadband Internet Industry"	Hellenic Competition Commission	2020	The study found that a decrease in the number of competitors in the Greek fixed broadband internet industry from four to three was associated with an increase in average monthly prices for broadband services and a decrease in investment in broadband infrastructure.
"The Impact of Market Concentration on Investment in the U.S. Telecommunications Industry"	The Brattle Group	2011	Found that a decrease in the number of competitors in the U.S. telecommunications industry from four to three led to a decrease in investment of 10-15%.
"The Effect of Market Power on Innovation in the U.S. Telecommunications Industry"	The Brookings Institution	2013	Found that a decrease in the number of competitors in the U.S. telecommunications industry from four to three led to a decrease in innovation of 10-15%.

The caveat is that monopoly “facilities” are not necessarily a barrier to retail competition, in fixed or mobile markets. Where multiple competitors are able to use a single access network provider, facilities monopoly and retail competition coexist. And that option has significant support in many markets. 

So it is not clearly the case that “monopoly” facilities means retail competition is infeasible. Robust wholesale, in fact, has produced lower consumer prices, though arguably at the expense of innovation and investment.  

But excessive competition also can and should lead to less investment and lower innovation, even when consumer prices do benefit, as firm profits are too low to allow for more-robust investment and innovation. 

The problem is that insufficient profits threaten firm survival, and the ability to reinvest or innovate. As with all supply and demand situations for any product, excessive competition and monopoly both are dangers. 

The issue is to create a climate where there is both sufficient competition to drive consumer benefits, but also enough profit to allow service providers to reinvest and innovate. 

And there are some studies that suggest the fertile ground in between the extremes. It seems conceivable that, under some conditions, even a modest amount of competition, such as a duopoly, can produce consumer gains, innovation and investment. 

Study	Publisher	Date of Publication	Key Findings
"Competition and Innovation: A Reconsideration"	Joseph Farrell and Carl Shapiro	1992	Argued that competition can sometimes lead to less innovation, as firms focus on competing with each other rather than on developing new products or services.
"The Antitrust Paradox"	Robert Bork	1978	Argued that antitrust laws should be used to promote efficiency, not competition, and that mergers and acquisitions that reduce competition can sometimes lead to lower prices and higher innovation.
"The Theory of Contestable Markets"	William Baumol, John Panzar, and Robert Willig	1982	Developed a theory of markets that are contestable, meaning that new firms can easily enter and exit the market. This theory suggests that even if there are only a few firms in a market, competition can still be strong if the market is contestable.
"Competition and Innovation: A Reassessment of the Evidence"	Joseph Farrell and Carl Shapiro	2012	Found that the relationship between competition and innovation is more complex than previously thought, and that in some cases, less competition can lead to higher investment and innovation.
"The Competitive Advantage of Firms in Concentrated Industries"	David Teece	1984	Argued that firms in concentrated industries can still be innovative, as they can benefit from economies of scale and scope, and can focus their resources on a few key areas of innovation.
"The Competitive Effects of Duopoly in the U.S. Telecommunications Industry"	The Brattle Group	2009	Found that a duopoly in the U.S. telecommunications industry could lead to lower prices, higher investment, and more innovation.
"The Economics of Duopoly in the U.S. Mobile Telecommunications Industry"	The Brookings Institution	2011	Found that a duopoly in the U.S. mobile telecommunications industry could lead to lower prices, higher investment, and more innovation.
"The Effect of Duopoly on Innovation in the U.S. Telecommunications Industry"	The Information Technology and Innovation Foundation	2013	Found that a duopoly in the U.S. telecommunications industry could lead to higher levels of innovation.

As always with such studies, it might be safer to say there is correlation between the degree of competition and outcomes such as consumer benefit, innovation and investment, either positive or negative, and that we cannot be sure the relationship is directly causal, though that is the clear implication. 

Still, though economic theory suggests less competition should produce fewer consumer welfare gains, investment and innovation, that might not always be the case. 

Even “monopoly” facilities can produce retail competition if a robust wholesale framework is in place. Even a “duopoly” could produce consumer welfare gains, with adequate investment, plus innovation. 

And if that is the case, the notion that three leading facilities-based mobile service providers could still produce consumer welfare gains, innovation and investment should not be dismissed. 

Regulators can be expected to protest any reduction of leading competitors in a mobile market from four to three. But it is not clear that outcomes will necessarily be worse if that happens. In some cases, sustainable competition prospects might be increased.