Research Notes

American consumers are already buying 5G products and services while the EU falls further behind on networks and innovation

The US and East Asia are in a horserace to rollout 5G while Europe is a donkey going the wrong direction. This was clear from the 2018 Mobile World Congress, which Strand Consult described. It is one thing for operators to build a 5G network, but another as to whether consumers will use its services. The 3G flop in year 2000 proves that consumers won’t necessarily adopt new services and technologies. But Strand Consult’s analysis shows, Americans are already buying “pre-5G” services, creating a four-lane highway for US mobile operators. This research note describes the exciting developments in the US compared to the backward situation in the EU.

Voice-based platforms Google Home and Amazon Alexia are already mass-market phenomena in the United states. These platforms can be used with smartphones and other intelligent software and hardware solutions that can be purchased relatively inexpensively from Best Buy, Home Depot, Ikea, and other retailers.

These pre-5G solutions let consumers manage their connected digital lives for greater health, productivity, and efficiency.  Such pre-5G solutions let consumers manage their music, TV, lighting, thermostats, door locks, door bells, security system, garage opener, vacuum cleaner and so on, and companies are pumping out more ideas all the time from body thermometers to weather stations. About 20% of US homes, some 25 million households, have already purchased such a platform, a reality that reflects that the US is a single market with a common language and currency whereas the EU is still many markets.

Just as the prerequisites for the app economy were user-friendly smartphones, Google Home and Amazon Alexa are greasing the wheels for the Internet of Things (IoT) technologies that will comprise 5G networks and ecosystems. If the appetite for pre-5G technologies is any indication, American consumers will likely make the transition to 5G seamlessly. The new technologies work on home Wi-Fi networks and will migrate to 5G and integrate with Google Home and Amazon Alexa.

Outside of the United Kingdom and Germany, the spread of such platforms is quite limited in the EU. It is difficult to find Google Home, Amazon Alexa, or other variants in stores or online. Not only is Europe not building new networks at the same rate as the USA, its consumers are not buying pre-5G technologies. Simply put, Europeans are not only behind, essentially, they haven’t even begun the 5G revolution, which also entails a technological, economic, and cultural evolution.

The historical perspective – Pre-3G and pre-mobile apps
Europe wasn’t always backward and behind. Indeed, Europe was once a leader in mobile wireless technologies.  What happened in Europe was very similar to South Korea’s development in 1998-2002 which Strand Consult described in Korea’s Mobile Market – A window to 3G and The Korean Market for Mobile Services – A window to 3G. Europe’s market for mobile services started with primitive information services delivered via SMS. With the introduction of Nokia’s smart messaging, a market for ring tones was created that was stimulated by premium SMS that worked as the payment solution across operators. A single short code worked across all operators and seeded a new industry with annual revenue in 2005 of €2.5 billion in Western Europe alone. This was all before the iPhone ever hit the market.

In a series of reports from in the period 1998 – 2006, Strand Consult described how mobile operators created an ecosystem and a the market for value added services through premium SMS. The premium SMS market helped to educate consumers how to buy products and services on mobile phones in the same way that Google Home and Amazon Alexa educate people how to consume 5G IoT services today.

Operators launched these SMS-based business models around year 2000 and succeeded to make significant revenue. Premium SMS in Europe taught consumers to buy products and services (ringtones, logos, Java games) on their mobile phones, and it ignited mobile service innovation in Europe. Europe dominated the global mobile services market from 2000 to 2008, but with iPhone, it shifted to US and Asia.

In 2007 with the introduction of the iPhone, the market for smartphones and apps entered the next stage. Armed with their smartphone, consumers migrated away from premium SMS to the app stores of Apple and Google.

The most fascinating thing about this market was that it was essentially free and unregulated in most European countries. To keep regulators at bay, operators practiced an effective form of self-regulation and competed fiercely to keep their customers happy. But as we know, regulation follows not market failure, but market success.

Fast forward to the European regulatory environment in 2018
Not only did the EU lose out mobile innovation after the launch of the iPhone, but regulation, promulgated under the premise that it would promote innovation, accomplished the opposite. Here’s a short list of the rules that Europe’s innovators face today.

1. Net neutrality limits the amount and type of business models and technologies that telecommunications companies can use when partnering with other actors, depriving the ecosystem of valuable assets, capital and distribution.
2. Roam like at home means that mobile operators can’t charge their customers a price that covers the actual cost of the service when they consume it abroad.
3. The Payment Services Directive regulates all payment services with a set of regulators’, not consumers’, preferred obligations.
4. Regulation on ecommerce, distance and off-premises sales, erects entrance barriers for those who sell online.
5. The General Data Protection Regulation with its whopping 47 provisions from submitting annual privacy assessments to one of the EU’s 62 data protection authorities to the enshrining of class action lawsuits.
6. ePrivacy, a rebooted regulation for any provider on online communication, tracking or online marketing service.

The rules might have been justified if regulators had prepared cost benefit analysis to describe what they hoped to achieve and at what cost, but no, these regulations are decided by committees of advocates, behind closed doors, on what they think would be good. The volume and complexity of these rules are great, so much so that new firms have been killed in the cradle. Increasing regulation in Europe has a negative impact on innovation, entrepreneurs’ willingness to start a business, and companies’ willingness to invest.  Strand Consult has described many of the challenges in a number of reports and research notes on net neutrality, roaming, GDPR, and other EU regulation and how it impacts investment and innovation.

The consequences – EU vs. USA.
The US has at least a 2-year head start on Europe in 5G, and American consumers are already off and running buying pre-5G solutions. Already one-fifth of the nation’s households have taken up some kind of pre-5G solution.

It’s not clear how or when the 5G education process will start for European consumers. There’s already a €150 billion network investment gap from where the EU should be vis-à-vis its connectivity goals. Europe can try to seed 5G services, but the ecosystem is weak and fragmented with only a few scattered customers. That is, if the innovators can succeed against the mountain of regulations.

The US hasn’t considered the EU a competitor in mobile technologies for at least a decade. Instead the US benchmarks itself to China, and the 5G competition is fierce between the two nations. The new Presidential administration in US is trying to play catch up to get more spectrum available after years of dithering from the previous administration, as well as the having to clean up many regulatory messes from the earlier regime. Nevertheless, things are moving quickly in the US while the EU is standing still, or rather, falling behind.

Strand Consult has described many of these challenges in relation to deploying 5G infrastructure in our research project How to deploy 5G: Best practices for infrastructure, regulation and business models and the report Understanding the GDPR and Its Unintended Consequences describes the challenges imposed by GDPR and in a series of reports about net neutrality and how the rules have been made in Europe, we have described how the net neutrality regulation has a negative impact on innovation in Europe Net Neutrality in EU after 1 Year: Unintended Consequences for operators, content providers, and consumers

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