Should Business Services for 5G Go Vertical or Stay Horizontal?

Should 5G services strategy for business customers go horizontal or vertical? Mobile executives in different regions take different positions. 

There is a growing consensus that vertical 5G use cases will prove important. But nearly half of survey respondents in Asia believe the better approach is the traditional horizontal connectivity approach, BearingPoint says. 

One important reason some businesses do not see service providers as the most important player to help them develop 5G use cases is that they are looking to buy solutions, and service providers are looking to sell standard products, BearingPoint says. 

That is not a new problem. Telcos alway prefer to sell horizontally when they can. Businesses, on the other hand, sometimes prefer a vertical approach, since that provides a “complete solution” ready to be consumed in a bite-sized way, with no upfront investment or risk.

And most buyers seem to recognize that partnerships are necessary for telcos--or any other solution provider--to create those solutions. 

source: BearingPoint

Many European and Asian service providers consider their knowledge and expertise of 5G technology as their sole selling point. That is dangerous, BearingPoint suggests. 

“it’s the same approach that saw service providers become disintermediated during the 4G era,” BearingPoint says.

To be sure, connectivity providers have not been especially successful in most attempted solution provider roles. Their efforts to become computing suppliers, app providers, app store providers, data center operators, content creators, device manufacturers or mobile payments suppliers have generally faltered or failed. 

One might therefore be skeptical of telco efforts to become edge computing suppliers or internet of things solution providers, as crucial as those initiatives might be in creating sizable new revenue streams. 

On the other hand, the pattern is not monolithic. Connectivity providers have in some instances managed to become successful suppliers of subscription video services, mobile payments and banking in Africa, data center operators in some instances, successful technology integrators in some instances 

So some optimism about service provider 5G business solutions is not unrealistic. In fact, a BearingPoint survey suggests potential enterprise and smaller business customers believe telcos can be solution providers. 

Business customers seem to be much more confident that connectivity providers have a key role to play as suppliers of 5G-enabled solutions than many service providers do, in Europe and Asia. But service providers might be more realistic than customers are, at the moment. 

Asian service providers are more likely to focus their 5G efforts on more traditional connectivity-driven models than higher value services approaches, BearingPoint says. To be sure, 46 percent of Asian service providers see themselves as solution providers, going beyond the connectivity plus IT infrastructure services that are common today. 

Another 17 percent see themselves as end-to-end actors facilitating an ecosystem of providers But Asian business customers have more confidence in their service providers. Nearly all customers believe telcos are positioned to be more than communications providers.

source: BearingPoint

Full 92 percent of Asian businesses would consider buying new technology solutions from service providers BearingPoint’s survey finds  Enterprise and SMB customers would rather work with service providers due to their ability to orchestrate ecosystems of partners, manage complex programs, their knowledge and expertise around 5G and the fact they trust them more than other market players.

Nearly 70 percent of Asian business IT leaders think service providers should be offering 5G solutions combining connectivity with IT infrastructure, applications and other capabilities that would be offered through an ecosystem of partners. 

In Europe, service providers seem even more pessimistic about moving out of the connectivity role. Just a third of service provider executives believe their role will extend beyond basic connectivity and infrastructure offerings. 

Only 10 percent  of European service providers believe they will enact a role of end-to-end providers facilitating an ecosystem of partners. Yet 92 percent of European businesses agree that service providers have a bigger role to play in the market than simply providing communications and connectivity.

More than three quarters of North American service providers agree that creating vertical specific solutions using ecosystems of partners represents a big 5G opportunity, though. Half of North American service providers expect to evolve into 5G solutions providers, with 40 percent of these service providers anticipating a role in which they’re end-to-end providers facilitating an ecosystem. 

North American businesses are most positive about the role service providers will play in 5G, with 96 percent saying they  believe telcos will do more than provide connectivity.

Will 5G Become a Platform for Connectivity Provider Solutions?

Will connectivity service providers sustain themselves strictly on connectivity revenues through 2030? Maybe not. Bearing Point forecasts negative two percent industry revenue growth to 2030. Will 5G help?

Many business customers and service providers believe 5G will help.

Many service providers expect revenue lift up to 15 percent from 5G. The issue is whether this is a reasonable expectation, and where the anticipated revenues will be produced. Will the boost--and how much--come from connectivity services (more accounts, more revenue per account) or solutions built upon 5G?

At least at this point, an overwhelming percentage of surveyed business customers believe connectivity providers do have a role to play in 5G-enabled business solutions, especially when telcos partner with app providers, integration specialists and others. 

source: BearingPoint

Connectivity service providers generally anticipate that 5G business-to-business (B2B) use cases will have a significant impact on current revenues. On average, service providers expect a 15 percent revenue bump, with North American and European suppliers slightly more bullish at 16 percent. How that happens is the big question. 

Connection growth can help, especially if billions of new distributed internet of things connections are bought, and if a great bulk of those connections accrue to telcos, and not to rival suppliers, and if substantial numbers of connections are wide area, not local. 

But most observers believe the bigger revenue upside will come from solutions, not connectivity, potentially. And that is likely where the big challenge will come. 

A survey by BearingPoint found that “roughly a third of enterprises and four in ten SMBs perceive the CSP’s role in 5G use cases as a simple connectivity provider.” Those are significant numbers, if they prove to be correct. 

If service providers were to limit themselves to this role, and maybe five percent of enterprise and SMB ICT spend, then they will both be commoditized and struggle to fund 5G investments, particularly standalone 5G networks, BearingPoint argues. The economics simply won’t work, BearingPoint argues. 

Perhaps the good news is that significant percentages of end users believe connectivity providers, partnered with other entities, will be reasonable choices as solution providers. 

source: BearingPoint

Loon Speeds Might Range in Low to High Single Digits

Wireless networks other than Wi-Fi tend to have capacity far less than networks built using cables. That is likely to remain the case even as new platforms such as 5G using millimeter waves and small cells; low earth orbit satellite constellations, millimeter fixed wireless networks and more exotic platforms such as balloon networks or drones become possible. 

Alphbest’s balloon-based Loon network features a 2x10 MHz channel in Band 28 (DL = 795.5 MHz). 

In recent tests, “we observed sustained data speeds in the high teens (Mbps) and a peak physical layer throughput that was just over 40 Mbps,” says Signals Research Group. “We believe more typical data speeds with Loon are in the mid- to high- single digits.”

The point is that many wireless networks will feature coverage where wired networks cannot reach, but that data rates also are unlikely to reach cabled network speeds. As always, wireless networks face a trade off between coverage and capacity. 

Voice Product LIfe Cycle Shows Magnitude of Product Replacement

Product life cycles now are recognized to apply to the telecom industry as much as any other. The basic idea is that any new product goes through cycles, from development to growth and eventually maturity and then decline. 

source: Harvard Business Review

The management task in any industry is to develop new products to take the place of declining products, in a timely manner. Almost by definition, the next set of products must be large enough to replace the lost revenues driven by legacy products. 

source: Idea Genius

The magnitude can be glimpsed by looking at what happened to U.S. fixed network voice. Between 2000 and 2020, U.S. telcos lost 86 percent of traditional phone lines. One has to add back telco VoIP lines to measure the net loss of accounts, but telco VoIP lines are not such a big deal. 

source: Bureau of Labor Statistics

There are about 34 million VoiP accounts in service in the U.S. market, according to Statista. 

source: US Telecom

Perhaps 15.7 million of those VoIP lines are sold by traditional telcos. Some 62 million are sold by new suppliers in the market, including independent VoIP suppliers and cable TV companies. 

So if U.S. telcos sell 27 million switched lines, plus 15.7 million VoIP lines, all U.S. telcos sell about 32.7 million lines, roughly 17 percent of what they sold in 2000. 

source: US Telecom

All that points out the magnitude of product replacement telcos and other service providers must undertake.

How Do You Replace $750 Billion in Revenue over 10 Years?

When the global telecom industry faces the prospect of losing half its total $1.5 trillion revenue over a decade, that shortfall alone is $750 billion. That illustrates the magnitude of the “find new revenues” challenge. Simply to replace lost current revenues, service providers must create more than $750 billion--without inflation adjustment--simply to keep revenues where they are at present. 

The point is that a few billion in revenue here and there will not move the needle. The telecom industry would require a hundred to a few hundred new revenue sources of that size to fill a hole of $750 billion. 

To the extent it matters, the single biggest “revenue” boost mobile service providers will get from 5G will come from consumer subscriptions. In terms of gross revenue, no new revenue stream enabled by 5G is likely to surpass the annual recurring revenue from two billion mobile phone subscriptions. 

source: Omdia

Mobile-enabled sports content is seen as a growth area, with Omdia estimating that device sales plus recurring revenues from sports events could reach $11 billion globally by 2024. The issue is that much of that revenue will be device sales, not recurring or pay-per-view revenues. 

Live sports might generate $2.6 billion by 2024, part of $4.9 billion in over the top media revenues earned by mobile service providers in 2024. In other words more than half of total mobile OTT revenues will be earned by device suppliers in 2024. 

Net margins might be an issue, as there is a content cost of goods issue: gross revenue is shared with content owners. Historically, content rights consumed as much as half of gross revenue. 

source: Omdia

Consider that Omdia also predicts 5G fixed wireless will generate $7.4 billion in 2024 revenue, likely with substantially higher profit margins, as the content cost of goods is absent.

Software Can Eat the World Even if its Direct GDP Contribution is Small

Some argue that information technology now changes everything; others argue IT cannot be that big a deal, as it represents such a small percentage of total U.S. gross domestic product, for example.  But that matters when observers try and estimate the impact of industries on the overall economy. 

In principle, one can argue that electricity, the internal combustion engine and information technology or communications are important only as their contribution to GDP suggests. Others might argue that misses the point. Innovations such as electricity are essential inputs to most other parts of the economy, and therefore have importance far beyond direct revenues.

But measurement alone is complicated, as there are methodological issues, for example.

Industries have every reason to inflate their economic impact. Furthermore, if one adds up all the claimed economic impact, the number is greater than the actual stated GDP. The reason is that multiple inputs (electricity, fuel, transportation, warehouse operations, information technology, communications, marketing and advertising all contribute to the defined output of any single “industry.”  And each industry can rightfully claim that economic activities in the infrastructure are part of the total economic contribution made by each industry.

In other cases all we can measure are expenditures by customers and suppliers, which means there is some risk of double counting, as, in principle, all producer costs are recouped by retail sales to actual users and customers. 

Finally, it is next to impossible to measure quality improvements. Computing, communications and device prices might go down, even as value and capability go up. We cannot measure qualitative changes using our quantitative methods. 

The U.S. electrical energy industry represents, in some analyses, six percent of gross domestic product. That seems too high. The U.S. Energy Information Administration estimates total expenditures on energy--including natural gas, fuel and electricity--of close to seven percent. So it is doubtful electricity as such represents more than a few percent of GDP. 

We see the same issue with information technology, said by some to represent about 2.3 percent of U.S. GDP (six percent of real inflation-adjusted GDP, some say). Other estimates have U.S. “telecommunications revenue” at about 3.5 percent of GDP.  

Likewise, the U.S. Bureau of Economic Analysis suggests “digital economy” category that represents perhaps six percent of U.S. GDP. That definition includes computing hardware and software, communications equipment and services, data centers and internet of things, collectively. 

source: BEA

By definition, none of those contributing industries can represent more than a couple percent of total. But industry size does not capture total economic value. In other words, it is still possible to argue that  software is eating the world and yet still attribute relatively little direct value to the software or computing industries.

Telcos Must Choose Their B2B Roles

As much as 18 percent of the total value of “digital business transformation” and 47 percent of 5G-enabled business-to-business value can be addressed by service providers, according to Ericsson.

Service providers could take different roles ranging from connectivity to B2B service delivery and end-user application creation, Ericsson argues. 

That represents revenue of as much as $700 billion by 2030. It is possible that revenues service providers can earn might become meaningful, reaching possibly $50 billion about 2022 or 2023, A.D. Little forecasts. 

source: Ericsson

The total value of the global 5G-enabled market for service providers across 10 industries is projected to be USD 700 billion in 2030, beyond mobile broadband, Ericsson argues. 

source: Ericsson

One obvious observation is that any strategy beyond the horizontal “access” connection will require choosing from a few verticals, as no service provider, no matter how big, can create sizeable vertical competencies in more than a few industries. The cost to acquire or build domain competence is simply too high to allow realistic pursuit of industry platforms across the board.  

source: Ericsson

As always, the logical role is the horizontal connectivity role, shown below in light blue. The larger enablement role represents both larger revenue upside but higher cost and risk profiles. 

source: Ericsson