What Does "Winning 5G" Mean?

Winning the 5G race is a term we hear quite a lot. What it means, and whether it is feasible, are the big questions. In industrial policy terms, mobile platforms such as 4G or 5G are viewed as “zero sum” games, where a fixed amount of success (revenue, jobs) exist and winners take winnings from losers.

At one level, this is nonsense. Customers of mobile networks in India or Columbia do not directly affect subscriber counts in Canada. What policymakers and advocates of “winning the 5G race” refer to is something else, namely economic benefits in other parts of the mobile ecosystem.

At another level, scale does matter. A critical mass of users is necessary to create conditions where innovators have a pool of potential customers large enough to justify developing new features and functions. So, in that sense, getting quickly to critical mass (getting scale) does matter.

But most of the benefits of “winning a race” in the mobile platforms area are to be found elsewhere.

Most observers would agree that, in terms of device or network infrastructure supply, a few European firms (Nokia, Ericsson) were market share leaders in the 2G and then 3G eras. FCC Commissioner Brandon Carr says that is because “other parts of the world, including the U.S.,  to move quickly enough to modernize our regulatory frameworks. “

“For example, the FCC required that carriers continue to support their analog 1G networks long after Europe dropped that requirement,” Carr notes. “By requiring carriers to maintain essentially two networks, our outdated regulations drained capital and resulted in less efficient spectrum use.”

Regulation clearly matters. “In the 1990s, Europe tied spectrum bands to particular technologies, which delayed the repurposing of spectrum from 2G to 3G. Japan had no similar constraints, and the country launched three separate 3G networks by 2002,” Carr says. “It took years for the United States to come close to Japan’s 3G deployment.”

At least in principle, that means U.S. suppliers of apps and features requiring 3G could not move as quickly to market as in Japan. As a matter of fact, most observers would say that mobile app innovation in Japan was far higher than in the United States, in that era.

Most observers would likely agree with Carr that “the U.S. learned some lessons and bounced back to win the race to 4G.”

But here is where matters get a bit tricky. Was the “winning” based on ubiquitous access networks? Sure, because scale matters. But what arguably was decisive was a shift in the mobile device and service value proposition.

The 4G era was the first where mobile phones become computing devices (“smartphones”), and therefore were the beneficiaries of huge innovation in mobile apps, features and capabilities made possible because Silicon Valley, Silicon Rainforest, Silicon Hills, Silicon prairie emerged as global leaders in applications (Facebook, Google, Netflix, Amazon and others).

For many of us, thinking about on our preferences in phones, there was a point where keyboards became important because mobile email had become a killer app. But there also was a point where internet apps became paramount, and that was when device leadership shifted to the Apple iPhone and other touchscreen devices optimized for web, apps and related services. The killer app became the mobile internet.

That seems clear enough in CTIA’s new report on the race to 5G. Says Carr: “4G leadership increased our country’s GDP by $100 billion per year and cemented American preeminence in the tech sector more broadly.”

And that might be the real basis--application, device and infrastructure leadership-- for claiming “leadership” or “winning” in the 5G era. And there are probably few who believe the global winners can come from anyplace other than China or the United States.

If there is a race, it is a two-nation race.

"AT&T Watch" and "Terminal Decline"

It is not always so obvious why new services such as AT&T Watch, a $15-a-month streaming service, is so fundamental for mobile operators and retail- and consumer-focused telecom service providers.

The  fundamental problem is that the core business model--connectivity services--is incapable of driving future revenue growth. In fact, we are likely to see an actual erosion of such revenue in developed and developing markets, sometime within the next five to 10 years.

Terminal decline is the phrase the Economist Intelligence Unit uses to describe the fixed network telecom business. Harsh words, perhaps, but instructive if one honestly has to assess the direction of public policy about fixed telecom networks.

It is too early to use that term for the mobile business, which continues to grow, globally, even if the business is mature in developed markets.

Still, developed market revenue trends have been dipping since 2008, for example, according to the Organization for Economic Cooperation and Development.

source: OECD

So movement into new value-generating lines of business--beyond connectivity--is essential, to replace lost core revenues. In the consumer services space, video entertainment has been the latest new service to offset declining voice and messaging revenues, and slowing internet access account growth in developed markets.

In developing markets, subscription growth has slowed, but not abated, and mobile internet access growth is nascent and growing. Still, eventually subscription growth will stop, and adoption of mobile internet will saturate. That is how product life cycles work.

There are many warning signs.

Since 2010, service provider share of industry profits has dropped from 58 percent to 45 percent, as every other segment has grown its share of profits, according to the World Economic Forum.

source: AT Kearney

In 2008, internet access revenue was 18 percent of ecosystem revenue, dropping to 14 percent in 2015 and headed to seven percent by 2020, according to A.T. Kearney.

Since 2008, service provider revenue growth rates in developing markets dropped from 15 percent to three percent percent this year, while developed market growth dropped from four percent to zero, according to GSMA.

Global telecom revenue in the 60 biggest markets will fall by two percent in U.S. dollar terms, to $1.2 trillion, in 2018, according to the Economist Intelligence Unit.

In developed markets, subscription growth has shifted from consumer access for phones, tablets and PCs to growth lead by internet of things devices and sensors.

But one of the few growth areas for consumer services is mobile substitution for internet access. The coming 5G network will be foundational in that respect.

Using 5G, cost per gigabyte will fall 100 times, according to Mobile Experts. That drop in per-gigabyte pricing is essential if mobile alternatives are to be price competitive with fixed internet access services, allowing mobility suppliers to cannibalize the fixed network business.

source: Mobile Experts

At the same time, the next big opportunity in the applications arena, as apps create potential for mobile operators, is edge computing that will reduce app latency from thousands of milliseconds to single digits, enabling internet of things apps such as the $79 billion AR, VR market in 2021, according to Artillry Intelligence and $87 billion in automated vehicle revenue by 2030, according to Lux Research.

The satellite industry faces the same slowing growth trend as the rest of the telecom industry.

Global satellite revenue growth slowed from 18 percent in 20 to two percent in 2016, according to researchers at Bryce.

Going forward, growth will shift to high-throughput satellites and new LEO constellations, according to Northern Sky Research, with 5.8 million satellite IoT connections in use by 2023, out of 20 billion total IoT connections.

Growth potential is challenged in a different way in the undersea or wide area network business.

Private networks operated by tier one app providers now dominate undersea traffic, carrying more than 70 percent of all internet traffic across the Atlantic, according to TeleGeography. On intra-Asian routes, private networks in 2016 carried 60 percent of all traffic.

On trans-Pacific routes, private networks carried about 58 percent of traffic. Though capacity demand continues to grow, which drives demand for cable construction, only a fraction of total capacity services demand can be captured by sellers of capacity.

Overall, it can be noted that applications, content, devices and platforms represent 97 percent of the value and revenue in the internet ecosystem. By definition, these are the ways value and revenue is created beyond pipes.

And that is why connectivity services providers are compelled to seek growth in apps and platform areas.

Tier-One Telcos Looking for Roles in Virtual and Augmented Reality?

As is true in almost every other part of the retail-focused telecom business, service providers are exploring roles in the artificial reality or virtual reality area that extend beyond mere connectivity, and move either up the stack or across the value chain.

“Telcos have a key role in enabling VRAR services as providers of broadband and mobile network services, but we see them beginning to explore revenue opportunities in VRAR that are beyond 5G data and connectivity, with some leading players entering key segments of the VRAR supply chain in the past two years,” says Ozgur Aytar, GlobalData director of research.

“Take Verizon, for example, that has made acquisitions in VRAR content platforms, while SK Telecom is building its own, or, AT&T that is investing to develop compelling VR experiences and AR apps and Orange is taking steps to increase its participation across the board in devices, platforms, services and original content,” he says.

source: GlobalData

Though it might be easy to focus on the need for “more bandwidth,” in the case of VR and AR, it might be latency which is the more-important requirement. That, in turn, is underpinning thinking about the role of edge computing in reducing latency, and the related role of 5G in slicing access latency to single-digit milliseconds, the threshold of human perception being about 50 milliseconds.

How Much Longer Can Fixed Internet Access Continue to Grow?

U.S. net new internet access accounts grew by about 2.1 million accounts in 2017, according to Leichtman Research Group.

A separate analysis by Convergence Research Group suggests U.S. internet access accounts grew by about 2.33 million accounts in 2017, reaching 96.95 million total accounts. At the same time, subscription revenue grew seven percent in 2017 to $56.8 million.

Convergence Research Group expects 2.57 million internet access additions and six percent revenue growth to $60.5 billion in 2018.

The issue is how close we now are to peak internet access. By at least one estimate, there are 95 million U.S. buyers of fixed network internet access.

In the fourth quarter of 2017 there were an estimated 136.9 million U.S. housing units. Vacancy rates are an issue, though. Some 16.7 million of those units were vacant.

In the fourth quarter of 2017, some seven percent of rental units were unoccupied, as were some 1.6 percent of owned residences. So assume the number of residences where fixed network consumer telecom services could be sold is about 120.2 million.

So that implies 79 percent of all U.S. households buy a fixed network internet access subscription. Assume another 1.6 million buy a satellite internet access service (about one percent of occupied U.S. residences. That implies 80 percent of occupied homes buy internet access.

But we also must add another six million subscribers served by all the smaller telcos, cable TV companies and independent internet service providers (assuming those smaller fixed network suppliers supply five percent of homes). That adds another five percent, bringing consumer household buying of internet access up to about 85 percent.

Also, some 10 percent of homes use mobile internet access exclusively, according to the Pew Research Center. So add another 12 million occupied U.S. homes to the total of buyers of internet access.

That brings buyers of internet access up to about 95 percent of U.S. occupied homes. The point is that we fast are approaching the point where at-home internet access is saturated. There simply are not that many more U.S. homes to convert, possibly six million or so (unless the percentage of occupied homes grows and millions of new households are formed, driving demand for new housing stock).

Backwards-Looking Policy Not Suited to Tomorrow's Telecom

Times of rapid technological change make poor climates for major waves of new regulation. Consider the Telecom Act of 1996, the first major revision of U.S. telecom law since 1934. The whole point of the act was to open up competition for voice services.

As all now know, that was just a few years before the absolute peak of usage of voice services, and the beginning of the internet era.

As the old adage goes, generals always prepare to fight the last war. That is a useful historical reminder as competition, innovation and business models in telecom prepare to enter the next big era of change.

Our past understandings of how value is created, by whom, and what all that means for business models and competitor fortunes, are about to face historic change. Consider only the fact that unprecedented and huge amounts of new mobile and wireless spectrum are going to be released to support services in the 5G era, dwarfing all existing capacity.

Over the next few years, new spectrum allocations will add more capacity than presently is available for all mobile and Wi-Fi use, by at least an order of magnitude (10 times). Combined with new architectures (small cell), the net increase in capacity might be two orders of magnitude (100 times).

Beyond that, "who" the important providers are might also change. Not only are the two largest U.S. cable TV companies entering the business, but the shift of value towards application, device and platform providers might also mean such firms might become leading providers of mobile and wireless service in the future.

The point is that it is perilous to regulate what might happen in the future when multiple markets now are reforming, blurring the lines between "telecom service providers," application providers, device suppliers and platform companies, all of whom now are taking on new roles.

source: World Economic Forum

The Federal Communications Commission has published proposed auction rules for 24-GHz and 28-GHz spectrum intended to support mobile service. The auctions will represent an additional 1550 MHz of spectrum, more than presently allocated for all mobile operations in the United States, by a wide margin.

Among other implications, the new spectrum means the cost of acquiring spectrum, on a cost-per-MegaHertz basis, is going to fall. That also means the retail cost of using spectrum, on a cost-per-bit basis, is also going to fall.

In principle, those cost reductions also mean the value of spectrum licenses will fall, on a cost-per-MegaHertz basis.

Such cost reductions are necessary if mobile operators are to challenge fixed network services and become full product substitutes for fixed network internet access.

At the same time, all the new spectrum--especially when deployed to support 5G networks--is likely to erode the commercial possibility of “paid prioritization,” the possible offering of quality-assured consumer internet access.

The reason is simply that 5G services will have latency so low, and bandwidth so high, that the value of any “for fee” quality-assured access is going to be nearly zero.

A cynic might well conclude that most of the frenzied concern about network neutrality is political posturing. As was the case with the Telecommunications Act of 1996, policy advocates are essentially living in the past.

In the 5G era, it will be virtually impossible to argue that a quality of service tier of consumer internet access has much value, since the standard offers will be so much better than anything yet seen on mobile networks.

The same sorts of performance improvements on fixed networks likewise will erode the potential value of paid prioritization, in the consumer services realm.

Business services, as in the past, are not covered by network neutrality rules in any case, so enterprise services can take different paths. Still, the consumer grade 5G services will be difficult, if not impossible, to improve upon.

It is the universal vision that 5G, with a move to edge computing, is going to reduce application latency in ways that likewise make paid prioritization a non-viable commercial possibility.

source: Wavelengths

In the 28 GHz band, the Federal Communications Commission plans to auction 425-MHz blocks of spectrum. In the 24-GHz band, licenses will be for 100-MHz blocks of spectrum.

The 28-GHz licenses will be auctioned by county, and two licenses per county will be available. That auction potentially will place 850 MHz of new spectrum into commercial use, on a nationwide basis (850 MHz in every area).

The 24-GHz licenses will be by partial economic areas, which amalgamate numerous counties. Seven licenses will be available in each 24-GHz PEA. That auction potentially will add 700 MHz of additional mobile spectrum in commercial service, on a national basis (700 MHz in each area).

That is only the beginning of the Spectrum Frontiers process that aims to free up 11 GHz of spectrum for mobile and wireless use, including 7-GHz worth of unlicensed spectrum.

source: FCC

new millimeter wave spectrum