Who Wins With 5G and Why

In retrospect, we might argue about whether the adoption rate of 4G globally or in any single country "has really mattered," and if so, how, and for whom. Without a doubt, 4G has mattered for video content providers, social media apps and platforms. Given widespread consumer use of such apps, it is arguably the case that consumers have benefited. It is less clear it has benefited mobile operators as much.

What happens with 5G is unclear at the moment.

We aren’t sure yet how fast 5G will be adopted, compared to 4G experience. For that reason, subscriber totals in five years will vary quite a lot: as much as 100 percent. What is more important is the average revenue per user or average revenue per account trend.

Can 5G lift ARPU or ARPA, and if so, by how much? 

If there is no ARPU or ARPA change, then the number of 5G accounts swapped for 4G will not matter much, in the near term. Longer term, it will matter if new use cases--requiring 5G capabilities--develop. 

Scale matters, so adoption rates matter. New use cases will develop faster when developers can assume a significant portion of users have the new 5G capabilities. 

There will be 3.9 billion 5G mobile subscriptions globally by the end of 2026, GlobalData predicts. GSMA, on the other hand, estimates there will be 1.8 billion 5G mobile subscriptions in 2025. At a 20-percent growth rate, that implies 2026 subscriptions of perhaps 2.2 billion. 

On a base of nearly nine billion accounts, those forecasts imply adoption ranging from a low of 20 percent to more than 40 percent by 2026. 

Statista estimates 2026 5G subscriptions at about 3.5 billion; Bankr suggests 5G subscriptions will reach four billion as early as 2025. Ericsson forecasts about 3.5 billion 5G accounts by 2026. 

Much hinges on the  predicted adoption rate, the expected adoption inflection point and the time of 5G availability. It took four to five years from launch for 4G to reach a growth inflection point, where the rate of adoption accelerates. 

source: Ericsson 

The issue is whether 5G is adopted at the same pace, faster or slow than 4G. It also matters when 5G is launched in each country and how fast mobile operators decide to deploy. Many operators are controlling 5G capital investment by deploying at a deliberate and measured pace. That also has implications for subscriber figures. 

source: Bankr 

Perhaps of equal importance are 5G average revenues per account. GlobalData expects global 5G service revenues in 2026 of $609 billion, propelled by monthly average revenue per user (ARPU) of $14.15, more than double 4G’s monthly ARPU. That would be a really big deal, if it happens. 

As always, “average” might not mean much, as account revenue ranges from a dollar or two dollars in some countries to more than $40 in other countries. 

source: S and P Global Market Intelligence 

Still, the real question is not how fast 5G is adopted, but what the revenue implications might be. A bit faster or slower is an issue, but not so much as wether revenue per account is the same as 4G, lower than 4G or higher. 

A doubling of ARPU or ARPA would be truly significant. 

App providers might gain from new 5G platforms able to use specific 5G-enabled capabilities (speed, latency, network slices, edge computing, internet of things, private networks). As those features are rolled out, consumers should benefit from experiences not possible on 4G and older networks.

The big surprise would be if mobile operators also directly benefited in terms of business models, revenue and profit. Also, how much they could benefit will be important.

70% or More Digital Transformation Initiatives Fail

When digital transformation initiatives fail--and there is no particular reason to believe the track record for DX will be much different than the history of all information technology projects--the reasons for failure will also likely be the same:

• Company Culture is not aligned

• CxOs do not really support it

• Silos

• Knowledge gaps about cause and effect

• Indecision or tepid initiatives

• Technology novelty not harnessed to business processes

• Expectations not in line with reality

• Not iterating fast enough

• Human capital mismatch

• Lack of continuity and consistency

• Unclear vision

• Business and IT execs do not agree on objectives

• Organizational inertia

• Lack of employee buy in

• Governance not aligned

source: BCG 

Historically, up to 70 percent of information technology projects fail to meet their objectives. Some would argue the digital transformation failure rate is the same. Some industries do better than others, especially consumer-facing businesses and industries. The success of e-commerce is one likely reason why that occurs. 

The important point is that only 20 percent to 30 percent of digital transformation efforts are likely to succeed. 

source: KPMG 

And some industries do better than others. Consumer-facing businesses do better because e-commerce is such an easy decision to make. You might not be surprised that public sector initiatives are the least successful, according to an analysis by BCG. 

source: BCG

 

source: BCG

 

Are "Customer Experience" and "Digital Transformation" the Same?

You could get an argument about whether “digital transformation” is a subset of “customer experience” or vice versa. Many will use the terms interchangeably.  Marketers will tend to subsume DX as part of CX. Some will argue DX includes CX, as DX affects the whole business model, not just customer interactions with a brand. 

Supporters of the “DX is a subset of CX” might say Customer experience is how your customers perceive all of their interactions with your brand.So DX would represent all interactions between an organization and its customers experienced through a digital interface like a computer, smartphone or tablet. 

Others who might view the terms interchangeably might argue that digital transformation is the integration of digital technology into all areas of a business, fundamentally changing how a firm operates and delivers value to customers. 

 

Supporters of the “CX is a subset of DX” would base their views on the idea that DX represents digital transformation is all about becoming a digital enterprise: an organization that uses technology to continuously evolve all aspects of its business model.

The business model, in turn, is the framework for everything a business or organization must do to identify a need, a customer, a solution, a means to produce and deliver that solution. 

It might be fair to argue that CX is a platform for customer engagement, the ways a firm digitizes marketing and sales experiences. It might also be argued that DX refers to business operations more broadly, including product development and manufacturing, not just sales, marketing and customer support. 

But the view of “DX as business model change” also centrally involves potential changes of problems; customers; solutions and fulfillment. 

Depending on the context and job role, user experience might also be an issue, with UX a subset of CX, with DX changing CX. Some marketers will wrap user experience inside customer experience which is nestled inside brand experience. 

source: Brian Solis  

So it is helpful when discussing digital transformation to understand which sense of the phrase we are using. All of the definitions involve brand perception in some way; sales and marketing in some way; customer support and interaction in some way. 

There are several ways to create Venn diagrams we might use in describing CX and DX and others that incorporate user experience, brand experience or other dimensions of firm operations. 

source: Gartner 

To avoid confusion, it is helpful to know which context we are using when discussing DX. 

For Most Telcos, Net Revenue Gain Comes not from 5G but Elsewhere

For the foreseeable future, net changes in telco revenue can happen only at the margin. Over the next decade, mobile operators, for example, will replace half their 4G accounts by 5G accounts. So the issue is whether average revenue per account stays the same; increases or decreases. 

Assuming at least a stable ARPA, the balance of revenue changes will come in fixed network services. And there the issue is whether new revenue sources offset expected losses in consumer and business service revenue. 

Keep in mind that revenue-neutral product replacement is necessary, but will not help telcos grow total  revenues. Product replacements only swap legacy revenue for new sources, as in the example of 4G accounts being replaced by 5G accounts. 

All things equal (operating costs; marketing costs; capital investment; revenue per account), swapping 5G for 4G results in zero net revenue gain. All revenue growth beyond zero must come in other areas. 

On a global level, revenues appear flat. But revenue contributors change substantially every decade. In fact, telcos routinely lose half of present revenues every decade. That seems unthinkable, but has happened. 

“Over the last 16 years we have grown from approximately 25 million customers using wireless almost exclusively for voice services to more than 110 million customers using wireless for mostly data services,” said Lowell McAdam, former Verizon Communications CEO.

It is an illustrative comment for several reasons. It illustrates Verizon’s transformation from a fixed network services company to a mobile company. But the comment also illustrates an important business model trend, notably that of firms in telecom needing to replace about half their current revenues every 10 years or so.

In the U.S. telecom business, for example, we already have seen that roughly half of all present revenue sources disappear, and must be replaced, about every decade.

According to the Federal Communications Commission data on end-user revenues earned by telephone companies, that certainly is the case.

In 1997 about 16 percent of revenues came from mobility services. In 2007, more than 49 percent of end user revenue came from mobility services, according to Federal Communications Commission data.

Likewise, in 1997 more than 47 percent of revenue came from long distance services. In 2007 just 18 percent of end user revenues came from long distance.

Though revenue attrition has been clearest for fixed network voice, the same process has been seen for mobile voice, text messaging, long distance revenues, mobile roaming and business customer revenues overall, in many markets. 

We can disagree about how much new revenue some communications service providers will have to create over a decade’s time, to replace lost legacy revenues.

If global telecom revenue is about $1.6 trillion to $2 trillion, and assuming about half the revenue is earned in mature markets, then the revenue subject to disruption ranges from $800 billion to $1 trillion.

Half of that represents $400 billion to $500 billion. That, hypothetically, is the potential amount of global revenue that might be lost, and would have to be replaced. The good news is that most of the replacement will come as 5G displaces 4G subscriptions. 

What is equally certain is that a huge amount of revenue from new services will be necessary, even if consumer purchases of Internet access--and replacement of 4G by 5G--happens.

One fundamental rule of thumb is that, in mature markets,  service providers must plan for a loss of about half of current revenue every decade or so. That might seem shocking, but simply reflects historical developments.

Nor is that rate of change unusual. In the digital consumer electronics business, it might not be unusual for an executive to predict that half the products that drive sales volume in 10 years “have not been invented yet.”

What is new for the telecommunication business is that product replacement now is a fundamental issue, even if for 150 years the only product was voice.

source: IBM

In 2001, in the U.S. market, for example, about 65 percent of total consumer end user spending for all things related to communications and video services went to "voice."

By 2011, voice represented only about 28 percent of total consumer end user spending.

Over that same period, mobile spending grew from about 25 percent to about 48 percent. Again, you see the pattern: growth of about 100 percent (losses of 50 percent require gains of 100 percent, to return to an original level,  as equity traders will tell you).

Video entertainment spending likewise doubled.

In the U.S. market, one can note roughly the same pattern for long distance and mobile services revenue. Basically,mobile replaced long distance revenue over roughly a decade.

At one time, international long distance was the highest-margin product, followed by domestic long distance.

That changed fundamentally between 1997 and 2007.

Over that 10-year period, long distance, which represented nearly half of all revenue, was displaced by mobile voice services.

In the next displacement, broadband is going to displace voice.

That is not yet an issue in some regions that still are adding mobile and fixed network subscribers, but already is an issue in most developed regions, where voice and messaging revenues already are declining.

source: STL Partners

Though some might continue to hope that higher Internet access revenues will offset voice and messaging revenue dips, the magnitude of voice revenue declines will be so sharp that in many markets, even additional Internet access revenues will be insufficient in that regard.

In fact, rates of revenue growth have been dropping in all regions since at least 2005, according to IBM.

At least so far, ability to fuel growth by extending service to customers with low average revenue per user will continue to drive revenue growth, even for legacy services, for a while. The only issue is when saturation is reached in each particular market.

When that happens, the same pressure on voice and messaging revenue already seen in mature markets will be seen in presently-growing markets.

Those changes can be hard to discern, as the top line obscures changes in revenue contribution from the largest sources. Voice, messaging and long distance services have fallen dramatically. Consumer fixed network usage of voice no longer drives financial results, its place taken by internet access (broadband). 

Mobility now drives growth in most markets, and especially the data services component of mobile revenues. Subscription growth still is highly meaningingful in developing Asia and Africa. 

source: Delta Partners 

Basically, 5G mostly prevents telco revenue from declining. It does not drive revenue growth. If we expect continued declines in fixed network voice, then broadband and other new services will have to be relied on for most of the growth, in most markets, by most operators. 

The lucky scenarios will happen when mobile-first operators actually are able to drive higher ARPA in the 5G era.

Where Growth is Most Needed: at the Margin

Growth is the paramount issue for the glocal telecom industry; perhaps most obvious in saturated developed markets, but eventually an issue for every market, including those that are growing fast as more human beings use mobile phones. 

Growth was not always the primary objective. In the monopoly era, telcos were a slow-growth utility with guaranteed rates of return and not expected to “grow” revenues very much. They were expected to support high-quality voice services at affordable mass market rates. 

In the competitive era all that has changed. Telcos compete for sources of capital along with all other industries; face competition as do most firms and also face fundamental disaggregation of the value generation mechanism, which also means less revenue upside from the core business. 

source: Arthur D. Little 

As helpful as projected telco growth drivers are in the edge computing, internet of things, private networks and 5G areas might be, they are not likely to generate revenue growth at a rate faster than the attrition of legacy service revenue. Essentially, telcos are running on a treadmill that will reach an unsustainable pace. 

Enterprise and business services have always represented close to half of total revenues and are expected to be a key upside driver in the 5G era. 

On a global basis, telco revenues have experienced low-single-digit growth since 2014, faster in Asia; slower in Europe. North America has been perhaps the strongest-growth area among developed regions, where mobility revenues grew at 3.5 percent annually between 2008 and 2018, for example, compared to Asia mobile revenue growth of 6.4 percent and negative growth in Europe of -4.4 percent. 

That is the good news. The bad news is that some analysts expect mobile revenue growth to go negative in North America as well, with global mobile revenue growth slowing to below one percent per year.

There is a widely held perception that rapid growth of IoT devices will, in turn, drive connectivity revenue for operators. European Telecommunications Network Operators (ETNO), in its 2019 Annual Economic Report, estimates that the number of IoT connections in Western Europe will increase from 78 million to 433 million in 2023, but IoT connectivity revenues will increase from EUR 1.5 billion in 2017 to EUR 4.1 billion in 2023.

While helpful, that is not sufficient to replace half of all existing revenues over 10 years. The volume simply is not there. One might make the same argument about edge computing or private networks: the incremental revenue will not be large enough to offset a 50-percent loss of existing revenues. 

Service provider edge computing revenues will be helpful, but at relatively low magnitudes. Private networks likewise offer upside, but not at a level sufficient to really move the revenue needle overall, for large telcos. 

For large telcos, perhaps the good news is that--although mostly a zero-sum game--replacement of 4G accounts by 5G accounts could easily drive most of the replacement revenues over the next decade. That will not supply much growth, but likely is the only feasible way for telcos to replace half their present revenues, assuming average revenue per account does not change in a negative way. 

 “Lose half of 4G accounts and replace them by 5G” would represent most of the revenue transformation necessary over a decade. 

What then needs work is a way to replace lost fixed network revenues with other new sources. And that is where IoT, edge computing and private networks, plus other new revenue sources, really do matter.

Rational Supply Chain Behavior at the Firm Level Leads to Irrational Systemwide Impact

The supply chain distortions exacerbated by the Covid pandemic were not unprecedented. The same sorts of things happened during the Great Recession of 2008, when demand changes arguably were the big impetus. 

“Output in the steel industry dropped by an unprecedented 30 percent and prices by about 50 percent from June 2008 to December 2008,” McKinsey notes. Demand side behavior concatenates through the value chain. 

 source: McKinsey

But supply side behavior also matters, and could be a key issue as the recovery from Covid continues. As we have seen with shortages of all sorts of things--computer chips, lumber, toilet paper, boats, container ship capacity, port unloading--supplier effort to compensate for shortages can overshoot, leading to supply excesses. 

Chip shortages have lead to shortages of new vehicles, as new cars and trucks cannot be built without ample chipset supply. That, in turn, has lead to shortages of used vehicles. The logical course of action, when possible, is to stockpile inputs. We might be seeing that in the retail grocery area, for example. 

But stockpiling can be inefficient, can exacerbate supply shortages, might contribute to inflation, and also eventually leads to oversupply, as manufacturers step up production to meet demand which is inflated by stockpiling behavior. It corrects, but not without damage. 

Grocery retailers are stockpiling goods in an effort to avoid shortages and keep retail prices lower, but in doing so will inevitably increase inflation rates, as the stockpiling will increase shortages, which increases scarcity, which leads to higher prices. Rational behavior at the firm level still leads to irrational results for the market. 

source: McKinsey 

The point is that both shortages and excess inventory are problems that firm behavior tends to exacerbate. 

SMB IT Spending to Return to Pre-Covid Levels in 2022

One legitimate question we all should have is what changes are relatively permanent post Covid and which trends revert to the mean (back to pre-Covid states). Most might agree that various attempts at “digital transformation” have accelerated. The issue is whether we have simply accelerated temporally, but at similar rates, or whether the rate of change has increased. Nobody seems to believe demand has decreased. 

Analysys Mason suggests that on at least one metric--the volume of information technology investment--Covid caused a change in investment. Analysys Mason also believes the rate of investment will return to pre-Covid levels in 2022. 

Many industries will be making bets about the level of demand for all sorts of  products as “normalcy” returns. 

source: Analysys Mason 

Irrespective of investment levels, virtually everyone expects more growth for cloud computing solutions. In some respects, that is a simple reflection of the fact that computing architecture has changed. Cloud or remote computing now is the norm, as apps are nearly universally expected to be consumable using internet networks.