Cell Network Physics

Physics plays quite a large role when designing and operating a mobile network, considering the effects of radio signal frequency, reach, data capacity, modulation technique, cell size and cell use patterns. 

Since the time of first-generation analog cellular services, the amount of spectrum devoted to mobile service has both increased and moved higher in frequency, as this chart illustrates. All of us are familiar with at least some elements of higher-frequency spectrum. 

The 800-MHz radio waves used to support 1G networks were pretty good at penetrating walls. By the time we get to 4G, using spectrum up around 2 GHz, signals have limited ability to get through walls. In the 5G era, using resources up to about 4 GHz to 6 GHz, signals are directional, and will not get through a plant leaf. 

source: Keysight Technologies 

So all sorts of signal processing has to be used to create multiple paths for those signals, to get around the line-of-sight propagation pattern. 

Another issue is that radio signals at higher frequencies, using power levels common for cell networks, will not travel as far as they do when launched at similar power levels but using lower frequencies. 

That means smaller cells must be used, and that accounts for the increasing importance of optical fiber distribution networks, a trend that will continue as we continue to move up in frequency for subsequent mobile generations. 

The other beneficial aspect of higher-frequency radio waves, however, is their capacity. Radio signal frequency and capacity are directly related: the higher the frequency, the greater the capacity. 

So both smaller cells and higher frequencies mean the amount of bandwidth a mobile network can supply will increase dramatically. Looking only at frequency, frequencies in the 24-GHz range have two orders of magnitude more physical capacity than 800-MHz signals. 

source: IEEE 

Modulation schemes add more capacity. Looking only at quadrature amplitude modulation, the number of bits we can encode per symbol increases capacity, all other things being equal (channel size, for example). 

source: Microwave Link 

Smaller cells also help, by intensifying the degree of frequency reuse possible in any geographic area. All other things remaining equal, shrinking cell radius by 50 percent quadruples the total number of cells. 

source: Slideshare 

But those are techniques used on mobile networks alone. These days, mobile data traffic also can be offloaded to fixed networks when users connect their mobile devices to Wi-Fi. In the 5G era, perhaps as much as 70 percent of mobile data traffic actually is offloaded to fixed networks in the form of Wi-Fi access. 

source: Spectrum Futures

The other interesting angle is that mobile network traffic shows a Pareto distribution. About 75 percent of total traffic occurs on just about 30 percent of cell locations. 

source: Spectrum Matters  

Deregulation Seemingly Has Produced More Consumer and Producer Welfare in Some Industries

It never is transparent and simple why deregulation affects different industries more than others. Consider the impact of deregulation on the airline, banking, telecom and electricity industries. By some estimates, deregulation in the telecom, banking and airline industries has (so far, at least) provided more consumer welfare benefits than has electrical utility deregulation. 

Studies also suggest that suppliers in the banking, telecom and airline industries might have reaped more benefits than suppliers in the electricity industry. We might speculate about why that has happened.

Industry	Consumer Welfare Benefits (billions of USD)	Financial Benefits for Suppliers (billions of USD)	Innovations	Studies
Telecom	150-200	50-100	New services and technologies	[1][2]
Airlines	100-150	50-100	New routes and services	[3][4]
Electrical Utility	20-50	10-20	Improved reliability	[5][6]
Banking	50-100	50-100	New products and services	[7][8]

1. Crandall, Robert W., and John D. Haltiwanger. "The Deregulation of Network Industries: Theory and Evidence." Brookings Papers on Economic Activity, no. 2 (1994): 1-61.

2. Hausman, Jerry A. "Valuing the Effects of Regulation: Evidence from the Telecommunications Industry." The Journal of Law and Economics 36, no. 1 (1993): 1-38.

3. Morrison, Steven A. "The Airline Deregulation Revolution." The Brookings Institution Press, 2006.

4. Gillen, David W., and Michael W. Tretheway. "The Economic Effects of Airline Deregulation." The Review of Industrial Organization 14, no. 1 (1999): 1-49.

5. Joskow, Paul L. "Restructuring, Competition, and Regulatory Reform in the US Electricity Industry." The Journal of Economic Perspectives 19, no. 3 (2005): 77-98.

6. Borenstein, Severin, and Catherine Wolfram. "The Effects of Retail Electricity Competition and Deregulation." The Review of Economics and Statistics 87, no. 2 (2005): 291-305.

7. Barth, James R., Glenn R. Hubbard, and Robert A. White. "The Deregulation of the Banking Industry: Effects on Performance, Structure, and Competition." The Journal of Banking and Finance 24, no. 4 (2000): 679-709.

8. Berger, Allen N., and David B. Humphrey. "The Effects of Megamergers in Banking: Evidence from the 1990s." The Journal of Banking and Finance 27, no. 2 (2003): 297-341.

Some would undoubtedly say that although electricity generation and retailing are not natural monopolies, transmission functions remain natural monopolies. It never is clear that the second transmission facilities provider has a clear business case. And competition is difficult when a natural monopoly exists. 

Others might argue that demand characteristics in the airline, telecom and banking industries are more elastic than for electricity. 

Also, though all the four industries have regulatory oversight, the electricity market arguably remains more subject to government regulation. Regulators have become more comfortable with market outcomes for critical infrastructure such as banking, communications and air transport. 

Regulators might be less convinced of the efficacy of deregulation in the electricity delivery business, even if retailing and power generation are more competitive. Regulatory costs can make it difficult for new entrants to compete in the market. Prices, for example, are generally set by market forces in the banking, telecom and airline industries. That is not so for electricity pricing, which remains regulated to a large extent. 

The telecom, airline, and banking products also are arguably more elastic than electricity, and therefore more sensitive to price changes. 

Industry	Natural Monopoly	Elasticity of Demand	Government Regulation
Electricity	Yes	Inelastic	High
Telecom	No	Elastic	Low
Airline	No	Elastic	Low
Banking	No	Elastic	Low

That does not preclude future changes for any of these industries. Still, until electricity transmission gets more competitive at the facilities level, less competition will be possible. And less competition tends to mean less consumer welfare creation.

Slowing Device Sales are Both a Plus and a Minus for Mobile Operators

Slowing device sales are both a plus and a minus for mobile operators. On one hand, such sales also are associated with new account growth, and contribute to customer retention when the phones are financed over a period of years. 

On the other hand, devices are a significant cost driver and depress cash flow generation. Perhaps profit margins on handset sales are in the 10-percent range. That is offset by any subsidies the operator provides to customers in the form of installment payments. 

 

Pros	Cons
Can help to boost new account additions	Can be a major cost driver
Can make it more attractive for customers to sign up for a plan	Can lead to thin margins on device sales
Can help to lock in customers for longer periods of time	Can make it difficult for operators to compete on price

Say a mobile operator sells a $1,000 smartphone to a customer, but has to pay the device manufacturer $800 upfront. There is, in principle, a $200 profit margin on a device sale. But if that device is sold to a customer on an installment plan, and the installment payment period is three years, then  the $200 is earned over 36 months. This means that the monthly cash flow from device sales will be $5.55, offset by the carrier’s need to essentially carry the cost of inventory, in part, for up to three years. 

For example, AT&T's device installment payment inventory costs were $12.6 billion in 2022. Verizon's device installment payment inventory costs were $11.4 billion in 2022. T-Mobile's device installment payment inventory costs were $7.8 billion in 2022.

So device sales play a dual role in a mobile operator's business model. A subsidized phone is a significant value for many customers. On the other hand, device sales can also be a major cash flow issue for mobile operators.

Business Models for Generative AI?

As much as we presently struggle to define revenue models for generative AI or perhaps AI in a broader sense, past experience with major technology transitions provides a way of envisioning the possible adaptations. Consider whether generative AI is more like a "spreadsheet" or more akin to the internet.

The spreadsheet was invented in the 1970s and quickly became an essential tool for businesses of all sizes. It allowed businesses to store, organize, and analyze data in a way that was never before possible. This led to better decision-making, increased efficiency, and reduced costs, and also provided the rationale for buying personal computers. 

At a high level, generative AI might be the use case that spurs adoption of new or additional computing capabilities. 

Compare that to the internet, which eliminates distance and geography as key business constraints; virtualizes many formerly-physical processes and changes production costs (as for media, content, messaging, document exchange, voice communications, conferencing, retailing, advertising, teaching). 

Virtually all of us would consider the internet a bigger overall innovation than was the spreadsheet. 

The analogy one chooses will hint at degree of impact. 

Also, much of the direct new activity will be in “picks and shovels;” enabling infrastructure to support AI, such as computation, storage, advice and tech support, the creation of language models and generation of inferences will be direct revenue models. 

But most of the impact will be indirect, as was the impact of computing itself in the mainframe, minicomputer, personal computer, client-server, internet and mobile evolutions of computing. 

Infra suppliers (hardware, software and services) will create revenue enabling generative AI. But most entities will apply generative AI in their existing businesses, with mostly-indirect outcomes. Generative AI will be a means, not an end. 

Still, there might also be new lines of business created in the application and use case areas, as we have seen with cloud computing, e-commerce, search, social media and content streaming, all the result of the existence of the internet. As was the case for those innovations, we might not be able to predict their emergence or their revenue models. 

Generally speaking, for most industries the impact is likely to resemble the impact of spreadsheets (richer analysis, lower-cost customer service, faster modeling) more than the impact of internet disaggregation (products become services, death of distance). 

Pre-Internet Revenue Model	Internet Revenue Model
Hardware sales	Cloud computing
Software licenses	Software as a service (SaaS)
Maintenance and support contracts	Infrastructure as a service (IaaS)
Advertising	Technology supported by advertising (Google search, Facebook social media)
Subscription	Video streaming, content apps that displace newspapers, magazines, music streaming
Transaction	E-commerce
Affiliate marketing	Online travel agencies, price comparison websites
Leasing	Cloud computing
Concessions	Online gaming
Sponsorship	Esports

So most of the revenue models will fall within an existing range: usage fees, subscriptions, licenses, advertising, product sales, product leasing, advice, instruction, tech support and so forth. 

Technology	Revenue Model
Computing	Infrastructure gear and services sales, indirect support of advertising, commerce
Cloud computing	Infrastructure as a service (IaaS), platform as a service (PaaS), software as a service (SaaS)
Mobile access	Mobile data plans, mobile advertising
Broadband	Broadband internet access fees

"You Get to Keep Your Business" Will be the Fundamental Driver of 6G

Most 5G infra suppliers and mobile operators have been insistent that 5G would enable new use cases, novel applications and drive higher revenue, to some extent. So far, those proponents have been “wrong,” but only to the extent that they also were wrong about 3G and 4G. 

Though some important new use cases have emerged in each digital generation (from 2G on), most of the innovation has not been of the sort mobile operators can directly participate in as equity owners. 

In other words, most of the new value and revenue from new use cases has flowed to third-party app developers. And if you think about it, that is what is “supposed” to happen when a layered app architecture is assumed. 

By definition, the internet is “permissionless.” App creators do not require a formal business relationship with an internet access provider to reach users and customers. 

Eventually, some new 5G use cases will develop. But infra suppliers and mobile operators have routinely “over-promised and under-delivered” in the area of new apps, use cases and value, for every digital mobile generation.

An SKT white paper says 5F failed to achieve its goals, among which were the rapid development of new use cases, apps and services that collectively would fuel mobile operator revenue growth. There was no “killer service.”

SKT also essentially argues that 5G “over-promised and under-delivered.” Customers expected much more than what was delivered. 

As was the case for 4G, 6G will enable “services that were difficult to fully implement with 5G.” Anybody who followed 4G will get this. The promises of one mobile generation often are not realized--if at all--until the subsequent generation. 

In other words, some use cases hoped for in the 3G era did not develop until 4G. Perhaps some 4G use cases will flourish during 5G. Perhaps some 5G innovations will happen when 6G arrives. 

Maybe the industry is simply collectively wishful, without sufficient basis in fact. What a given network can do is not the same as assurance customers will value the innovations, or pay to use them. 

Quite to the contrary, the very architecture of internet-based apps and services militates against the ability of access providers to capture the value of app development. 

Perhaps a comparison with home broadband will illustrate why the “over-promising” always happens. Over time, home broadband has moved capacity upwards from kilobits per second to megabits to gigabits per second. As with mobile platforms, home broadband networks have used different media to support those advances. 

But nobody actually argues that “faster home broadband” will directly lead to new use cases and value supplied by the internet service provider. People understand that virtually all of the development will be fueled by third parties. The faster internet access only enables use of those innovations. 

Mobile operators might argue that they have a more-embedded role, as they offer managed services including voice and messaging. True, but some fixed network suppliers also offer voice, as well as internet access. 

The point is that a mobile service provider, in its role as an ISP, supplies “internet access” but not apps. And the primary value of 5G is that it supports more capacity than did 4G, as 4G enabled more capacity than 3G. 

Such capacity increases are essential. But ISPs are not primarily the producers of application value. 

To be sure, ISPs and their infra suppliers have to argue that wonderful new apps will be possible. Otherwise, it is hard to convince regulators to grant use of more spectrum. But everyone also understands that the new apps will mostly be produced by third parties. 

5G and 6G are vital, nonetheless. As with home broadband networks, capacity must continually be increased. 

But the hard truth is that 5G mostly means “you get to keep your business.” It is a means of supplying needed capacity, primarily. Someday, 6G will be required to enable mobile service providers to stay in business.

But the claimed benefits will extend quite a bit beyond that. They always do. 

Prosaic though it might be, the next-generation mobile networks are the functional equivalent of increasing home broadband and fixed network capacity from kilobits per second to megabits to gigabits. “More capacity” is the value. 

4G, 5G, 6G and beyond are the means by which mobile operators are able to supply faster speeds and more capacity over time. It means they get to stay in business. But it generally does not mean the mobile operators themselves will be creating new apps and use cases. 

So expect 6G to be yet another example of “failure.” Proponents will again over-promise. To get additional spectrum, they almost have to do so. 

But do not be fooled. They need more capacity. The way they will get it is partly by adopting 6G. It is important; they need to do so. But most of the hype about new value, apps and use cases--as produced by the mobile operators themselves--will fail. 

The architecture ensures it. The whole point of internet access is to enable people and machines to use apps available to internet-connected devices. We need more capacity, over time. New mobile networks are how we get there. 

But think of 5G and 6G as a necessary precondition for remaining in business, as faster fixed network access also is a fundamental requirement. Proponents will emphasize bells and whistles. Ignore all that. It is about remaining in business, as that business requires more capacity over time.