5G Economics

An Economics Based Analysis of the Future of Wireless Network

After analog (1G) cell phones started to make inroads in the western markets, European wireless leaders got together to create GSM and dominated the 2G cycle. Japan got a head start with 3G and captured the imagination of the industry with what’s possible. NTT DoCoMo’s iMode lit the industry on fire and with many firsts in ecosystem design, business models, developer engagement, and new revenue streams. Meanwhile, in the US, after falling behind for a couple of cycles, WiMax forced Verizon to commit to LTE early on and the 4G timelines accelerated globally from there on. 2007-9 was the time frame when iPhone took the world by storm as well. What AT&T learned about data traffic growth informed
operators around the globe. At the same time, what will become the 4^th wave ecosystem was starting to form in the US.

The combination of LTE network deployment along with devices that were getting better with each release cycle which in turn fed the application ecosystem enabled US to take the lead and just completely dominate the narrative. Of course, South Korean 4G penetration grew faster than that of the US market, however, their influence on the global ecosystem was much smaller because of the relative scale. US operators really drove the standards, created economies of scale for the industry and 4G grew to become the fastest standard adopted in the history the industry. The other two major markets – Western Europe and China started late and are still behind the US. Western Europe is at least 2 years behind the US as of 2016. China started late but went past Western Europe and is only one year behind the US.

It is clear from the activity in the ecosystem that 5G talk has the whole industry energized. Korea and Japan are driven by their respective Olympics deadlines. European Union has enunciated its deep desire to rediscover the glory days of GSM and has been making a number of investments and proclamations over the course of last couple of years. China, a new leader on the world stage wants to leave its own stamp on the 5G evolution. But gaining leadership in a technology cycle requires much more than mere declarations. It comes down to the fact if the governments and the players are putting their money where their mouth is. It also depends on which countries can drive the economies of scale for the ecosystem?

US generates the most amount of the revenue in the mobile ecosystem, more than the sum of revenues from the next two countries combined. Though it is premature to say which country or region will drive 5G, early indicators are that US is likely to be in the driver seat again. Consider the following key events. US became the first country to allocate high-band spectrum for 5G in both licensed and unlicensed bands. Additionally, mobile operators have been trialing their 5G systems and building the business case for an accelerated rollout.

Infrastructure vendors have also been actively participating in these trials to learn and strategize. Furthermore, National Science Foundation (NSF) has allocated substantial funds to research key problem areas that will eventually contribute to 5G technology deployments. Internet players such as Google and Facebook are also investing in researching new modes and models to provide connectivity. All this bodes well for the US market.

However, there is a fundamental question about the pace of deployment and how fast will the 5G technology cycles shape the US and the global markets. For 4G, we went from 0% to 25% penetration in 60 months, 25-50% in 21 months, 50-75% in 24 months and by the end of 2020, we will have 95%+ penetration. By 2020, US is likely to be 4 years ahead of Europe and 3 years ahead of China in LTE penetration. In fact, the industry vastly underestimated the growth of 4G in the US market. Will 5G growth curves be any different?

The paper is a first of its kind exploration of 5G from an economics angle rather than a technology one. 5G cycle is going to be different from the past ones for one most important reason – there is financial pressure on operator revenues like in no other cycle. The competition dynamics have drastically changed with the influence of the 4^th wave players as documented in our 4^th wave series of papers.

The 5G Economics paper will look at the lessons learned from past generations and build a model for 5G capex and opex to evaluate the economic factors that will determine the pace of investment in the 5G cycle. We will primarily focus on the US market for two simple reasons: US will play a very important role in determining what 5G eventually becomes and the US leads the 4^th wave ecosystem by a distance. Understanding the dynamics in the most vibrant mobile market has significant lessons for the global markets. We will discuss the 5G economics model to think about cost structures. The paper will go into the details of the key determining factors for 5G evolution and growth curves.

It is more than likely that economics and not technology will define what 5G becomes over the course of next decade.

The purpose of the paper is to open an economics-led discussion in the industry. The 5G capex and opex models also indicate which areas will need the most innovation to accelerate 5G growth. The paper delves into mobile data economics and how at the end of the day this cost metric will perhaps be the most determining factor in the 5G evolution cycles worldwide.

5G Economics paper will be published as part of the upcoming Mobile Future Forward 2016 Book and will be available to summit attendees. We will be discussing various aspects of the 5G technology, business models, and economics with senior industry leaders at the summit.

Your feedback is always welcome.

Chetan Sharma