How Do Researchers Try and Quantify 5G Private Network Markets?

When attempting to quantify the size and possible growth of a new industry, any market researcher has essentially a few choices, but almost all approaches include looking at similar existing markets and assume some percentage cannibalization. In other words, estimates of electric vehicle sales would include some estimate of conventional car sales in a market and an expected rate of substitution. 

So any estimates of possible 5G private network activity and spending would include some estimate of what enterprises currently spend for private networks dominated by wifi and Ethernet. 

According to Markets and Markets, enterprise Wi-Fi spending will reach about $26 billion by 2026. 

Region	Spend (USD billion)
North America	9.6
Europe	6.6
Asia Pacific	4.7
Rest of the World	5.6

Some estimate that enterprises spent $64 billion or so in network gear in 2022, for example, including spending for Ethernet, W-iFi and all other private networks. Add to that the sums spent for system integration and consulting. 

Global enterprise information technology spending is estimated at $4.6 trillion in 2023, an increase of 5.1 percent from 2022, according to the latest forecast by Gartner, including spending on software, hardware, and services.

Of this, $2.5 trillion is expected to be spent on software, $1.6 trillion on hardware, and $460 billion on services. Most would likely consider the bulk of any substitution effect to come in the hardware and services categories. But most also would consider that data insufficiently granular to guide assumptions about product substitution. 

Perhaps the other common approach is to look at industry verticals, estimate their annual spending for networking-related information technology, and then make assumptions about a shift of spending in support of new categories.

Global enterprise spending on factory automation is expected to reach $320 billion in 2023, according to MarketsandMarkets, growing at a compound annual growth rate of 8.2 percent from 2023 to 2028.

But only about five percent of that spending is for networking devices. So perhaps $16 billion in annual networking could be shifted to other technologies such as 5G, in the manufacturing industries, which seems to be everybody’s bet for the leading use case for private 5G networks. 

Category	Market Size (USD Billion)
Networking devices	115
Control systems	45
Robotics	35
Sensors	25
Others	15

The point is that new enterprise IT markets often develop as spending is shifted from one existing area to the new areas. Since most enterprise budgets only change in single digits from year to year, it is reasonable enough to expect that category shifts are the primary source of funds for any new innovation’s deployment. 

So many of us would expect 5G private networking investments to pull from other areas such as spending on Wi-Fi or Ethernet networks.

Are Industry Profit Margins "Too Low?" Compared to What?

Many “utility” or “infrastructure” industries are regulated as natural monopolies, with one sanctioned provider in any area, and rates controlled by law. Fixed network communications used to be regulated that way, but now is less-regulated and generally operates without formal price controls or monopoly-style market entry limitations. 

The argument for deregulation has been that competition would produce better prices for consumers. In the case of telecommunications, it also has been believed that more innovation also would result. 

It is hard, after several decades of experience, to argue with either of the two main expectations. Consumer prices are generally far lower, and there has been far more innovation, with one caveat: most of the application innovation has not come directly from service providers but third parties able to use those networks. 

For that reason, any evaluation of innovation has to include not only deregulation and privatization but also the fundamental shift to “the internet”as the driving force for innovation. 

And while executives in the mobile and internet access industries might be forgiven their belief that their profit margins are too low, requiring additional support in the form of “fair share” funding of access networks by a handful of app and content providers, are unusually low profit margins a reality? 

Depending on the sample size (all providers or only tier-one; all countries globally or only in a single country), profit margin rankings for infrastructure industries might show mobile and fixed telecoms at the top of the list or among the top industries ranked. 

Industry	After-Tax and Depreciation Profit Margin (%)	P/E Ratio	EV/EBITDA
Mobile Telecom	25-30	15-20	8-10
Fixed Network Telecom	20-25	12-18	6-8
Electrical Power Utility	15-20	10-15	8-12
Water Utility	12-18	8-12	6-10
Airports	10-15	8-12	10-15
Seaports	8-12	6-10	8-12
Roads	8-12	6-10	8-12
Wastewater Utility	6-10	6-8	8-10
Natural Gas Utility	6-10	6-8	8-10

Almost alone (commercial airline industry is the other main exception) among “utility” type industries, mobile and fixed telecommunications have profit margins significantly higher than most other utility-type industries, with energy suppliers at the top of the list, in general. 

Industry	Profit Margin (%)	Regulatory Framework	Degree of Competition
Natural Gas	10-15	Natural Monopoly	Low
Electricity	8-12	Natural Monopoly	Low
Mobile Telecommunications	5-8	Competitive	High
Fixed Telecommunications	3-5	Competitive	Medium
Wastewater	2-4	Natural Monopoly	Low
Fresh Water	1-3	Natural Monopoly	Low
Airports	1-3	Natural Monopoly	Medium
Seaports	1-3	Natural Monopoly	Medium
Commercial airlines	9-2	Competitive	High
Roads	0-1	Natural Monopoly	Low

In other words, it might not be the case that connectivity service providers experience profit margins that are sub-optimal compared to those of regulated natural monopolies, which was the case for fixed communications historically. 

Mobile communications, in contrast, have never been regulated as natural monopolies. The higher profit margins in mobility might be explained for many reasons other than regulatory treatment, however. Some 75 percent or more of global connectivity revenues are produced by mobile services. 

So displacement of fixed services, huge growth of the subscriber base and a different cost structure have favored the mobile segment for decades. 

But telecom executives prefer to compare themselves to internet app suppliers, which often have growth profiles and profit margin characteristics quite different from that of any utility providers. 

But margins across the internet ecosystem vary quite a bit, from the 20 percent to 30 percent margins a search firm might command, to the low margins most chip suppliers and content firms command, in general. 

Industry	Profit Margin
Content	6-7%
Internet commerce	5-10%
Computing Hardware	4-5%
System integration	3-5%
Chip suppliers	20%
Search firms	20-30%
Social media	15-20%
Software	10-20%
Advertising	10-15%

As always, differences between firms in any single industry can have a higher dispersion than differences between industries. 

Industry	Typical Industry Profit Margin	Range of Margins Within Industry
Chip Suppliers	10-15%	5-20%
Software	10-15%	5-20%
Hardware	5-10%	2-15%
Data Centers	10-20%	5-30%
Content	0-1%	0-5%
System Integration	3-5%	1-10%
Advertising	10-15%	5-20%
Internet Commerce	5-10%	2-15%
Social Media	15-20%	10-30%
Search Firms	20-30%	15-40%

The point is that although profit margins in the mobile and fixed telecom industry are fairly low, they are higher than found in most other utility-type industries, generally speaking. Application providers always seem to have the highest profit margins among participants in the internet value chain. 

All complaints aside, mobile and fixed access provider businesses seemingly are more profitable than many other types of network or utility businesses, and more profitable than some other parts of the internet value chain, including content, which is unpredictable and varies show by show.