Research Notes

10 things that to be in place before 5G will be a commercial success – It’s more than building and running mobile infrastructure. How to avoid the situation that the iPhone gets all the revenue – again.

The media has much focus on 5G, creating hype around high speeds, low latency and new revenue for mobile operators. It’s as if operators just build a 5G network, and then traffic and revenues come by themselves and create unique growth in the market. If that was that easy, the mobile industry would look very different than it does today.
Strand Consult has followed the mobile industry for the last 24 years. Much of what is being written about 5G today reminds us of key turning points in the past: the 3G launch at year 2000; the iPhone launch in 2007/2008; and the 4G push around 2014. None of these celebrated events has created growth in mobile industry’s revenue. In fact, average revenue per user (ARPU) has fallen for the last 18 years. Will 5G increase ARPU for mobile operators? Probably not. So why then should mobile operators invest in new networks?
Strand Consult published many reports around the launch of 3G. The research was based in large part on business models and experiences from South Korea, the world’s most advanced mobile market at the time. Since then our research on has expanded considerably, covering other regions such as the US, Europe, Asia, Africa and Latin America as well the business models, devices, and practices that have evolved with each successive mobile standard generation. Strand Consult is pleased to unveil its newest research project: “How to maximize 5G: Best practices for infrastructure, regulation and business models.” In this research project, Strand Consult identifies the 10 requirements for 5G to be a success.

1. The Ecosystem. 5G is a network of interconnecting parts: suppliers, networks, services, devices, customers etc. Creating a success is more than just the bare bones of the network. It is about how the different elements interact and create value.  To date, mobile operators have built networks, but the third-party devices and services have reaped most of the revenue.  5G should be a chance to reset the balance so that all of the parts of the ecosystem can flourish. 
2. Roles in the value chain. Operators need to decide where they will be in the value chain. Will they continue to build networks so that third parties such as Google, Facebook, Netflix, Apple, and Amazon get the revenue without having to contribute to the underlying cost? Or will a new set of services and players emerge, players like content, API and payment aggregators which figure out how to make future services more intelligent?
3. Business Models. The media focuses too much on 5G features such as speed and latency and not on its benefits, ways it can create value. Will 5G be just another fast and dumb pipe, or will operators be more creative for the business model they propose and implement in the future? 
4. Competition. In the short and medium term, 5G should have an impact in the fixed line broadband market, as consumers cut the cord, opting for getting the home broadband connection via wireless, not wires. This will shift the economics for the fixed line players, DSL, cable, and FTTH providers.  It will also force regulatory authorities to update their assumptions, definitions, and measurements of broadband. 
5. Regulation. The success of 5G will be mediated the level and quality of regulation. Countries will either support 5G or not.  We can see how China, South Korea, and Japan fast-track 5G with a pro-deployment policies. As the EU continues to add regulations to the industry – net neutrality, roaming, GDPR, e-privacy and so on, the European roadmap has been pushed off another 5 years. In the US, the FCC has made 5G a priority with its FAST plan. 
6. Spectrum. 5G offers a new and efficient way to use spectrum, which will provide us with a much better utilization of spectrum. 2G and 3G will be phased out, and in the interim, there will be a symbiosis of 4G ad 5G working together. While network planning will be more complex, we have better tools to manage complexity and use bandwidth efficiently. 
7. Infrastructure Deployment. The costs for building and running mobile networks is one of the biggest cost for mobile operators, including increasing site and pole attachment rental. Simply put, if there are no networks, there is no 5G.  Strand Consult estimates that about one-fifth of planned infrastructure is either delayed or never built because local authorities make it too difficult to deploy. Municipalities in a country such as Denmark, since 2012, have a streamlined national framework to fast-track to minimize time for building permissions and rental costs. This has helped reduce the mobile operators total rental costs by 20%
8. Consolidation. Antitrust authorities should study 5G as an opportunity to update their knowledge about how technology creates competition in the mobile industry.  We expect that many authorities will rely on their outdated rules of thumb, rather than investigate the actual effects. It will still be difficult to make a 4 to 3 consolidation in parts of the world despite the fact that networks efficiency is important for consumers to realize low prices and good mobile coverage.  The bottom line is that countries want operators to invest billions of dollars in spectrum and infrastructure, they need to be more flexible about allowing firms to join complementary assets in consolidation so that they can realize 5G.
9. New kinds of network ownership. With 5G we will also see new types of network ownership. Some operators will split their network from the retail and service businesses and create a “carrier’s carrier”.  We will experience that many FTTH players extend their fiber with 5G will impact competition in the mobile market. Countries like Mexico, Italy, Norway and Denmark will be interesting to watch. 
10. Distribution optimization. How does a mobile operator build up cost-effective distribution that makes all customer segments (including those with low ARPU) profitable? For many mobile operators, the costs associated with sales and marketing are greater than the amount they invest in infrastructure. In the future’s 5G market, it will be necessary to bring sales and marketing costs down.
With the launch of the iPhone in 2007, it became clear that mobile operators would not increase their revenue by having the iPhone on their network, and mobile operators got a nil to marginal share of the revenue that third party apps enjoyed. Not only did mobile operators foot the bill for networks, they offered subsidies for iPhones, a move that made Apple shareholders very wealthy. Just look at the stock price of mobile operators and Apple between 2007 and 2018—the wealth transfer is clear.

The question is not whether mobile operators’ subsidies have helped keep the price of iPhones up and increase Apple’s profit. The question is how much value the mobile operators have added to Apple since 2007, which is directly attributable to subsidies from mobile operators. In 2009, Strand Consult published The moment of truth, a portrait of the iPhone. It described how much the iPhone had cost mobile operators. Strand Consult fears a replay of this scenario with 5G – in which mobile operators make a big investment, and the devices and services get the greater part of value.
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While operators are stepping up their investments in spectrum, infrastructure, and technology, consumers increasingly complain about mobile coverage. Demand for data has exploded but subscriber revenues have not kept pace. As such, operators need to take concerted steps to optimize the expected benefits and costs when they deploy 5G. Operators need to learn how to rollout infrastructure, to find partners for business models, and to address the regulatory challenges that impede its business.
Strand Consult’s How to deploy 5G: Best practices for infrastructure, regulation and business models. helps operators save time and money. Based upon Strand Consult’s success to reduce cost and improve regulation for mobile infrastructure in Denmark, this report and workshop describes the 10-step process to get results. This engagement includes knowledge, training, and tools provided to operators over a 3-24 month period.
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