5G connectivity burst onto the world stage at last year’s Winter Olympics in Seoul, South Korea and gained pop culture visibility again at the April 2019 NCAA Final Four men’s college basketball games in Minneapolis. Why the rush to 5G though, when most of the world is still rolling out 4G mobile service or still waiting for it? Consumers don’t yet have 5G enabled phones anyway. And why should mobile phone manufacturers push new 5G phones out to market before there’s any connectivity across coverage areas large enough to justify replacing a smartphone? According to the Wall Street Journal, most industrialized countries, including the U.S., are just starting to build out 5G infrastructure and it won’t be ready for at least another year.

Why Telcos Should Look Beyond Consumer Mobile Rate Hikes to Rationalize Capital Investment in 5G Infrastructure

The ‘chicken and egg’ dilemma is real, but telecom operators at least, might do well to focus on the bigger picture beyond consumer mobile markets. To be sure, 5G networks require substantial capital investment in three big areas: obtaining more spectrum via auctions, installing new technology in radio access networks (RANs), and deploying additional fiber cabling for data transmission in core networks.

However, emerging demand from enterprise customers for 5G connectivity integrated with massive Internet of Things (mIoT) use cases and data processing services, could provide a stronger impetus to invest in network transformation than fancy new consumer mobile services do. One industry association suggests in a detailed white paper, “Rather than delivering only connectivity, operators can become digital enablers, co-creating new services with partners and customers… but [they] must lay the groundwork now…”

Telecoms and Risk Don’t Mix

Most telecoms originated last century as heavily regulated, risk-averse utilities with little or no market competition. So it’s not surprising that some of them are hesitant to make major investments in 5G network infrastructure when there’s no evidence that consumer demand for 5G service will be enough to justify it. Telcos seem most concerned about how much more consumers are willing to pay for faster data speeds on a monthly basis.

They are also hamstrung by misconceptions and flawed thinking that ignores the strongest business cases out there. For such large corporations, they tend to cling to a short-term focus on quarterly profits, and a faulty ‘all or nothing’ view of the capital investment required to make a difference in what they can offer to business customers.

Sweden’s Ericsson, a major telecom network equipment vendor, asked 900 decision makers in large companies across 10 industries about how they expect to use 5G. Ericsson has published the resulting insights about how 5G can generate new revenue streams for network operators from IoT services and related value chains. Juniper, an American vendor of smart network equipment, also put out a white paper on how operators can secure 5G ROI.

Compelling use cases have been made for civic, commercial and industrial IoT and mission-critical applications. VC funding and patent licenses are available to support these new layered-on digital services, but only the network operators can upgrade the underlying transmission infrastructure. It is they who have to envision and create new business models to tap into the revenue opportunities made possible by foundational, general purpose 5G infrastructure.

Massive IoT Opportunity

While Verizon is focused on charging its consumer mobile customers $10 more per month in a couple of test market U.S. cities, and South Korea’s carriers have rolled out elaborate 5G pricing tiers for consumers, the bigger story is widespread global optimism about the economic growth potential for the Internet of Things (IoT) to be accelerated by 5G connectivity. Operators who remain mobile-only or fixed-only risk being left behind by those with converged network architectures.

There’s no formal consensus definition of IoT. It’s a broad umbrella term to describe a multiplicity of sensors and devices connected to each other, and to the Internet, across potentially all industry sectors, residential properties and government services. IoTs come in many flavors including industrial, commercial, medical, residential, and civic (smart cities). IoT enables automatic remote digital communications among simple devices and sensors that may be either fixed or mobile. It also enables wireless machine to machine (M2M) communication. Interoperable IoT devices are designed and produced for the world market and for global mobility.

Predictions by market research firms such as Bain have put the combined IoT devices and services market worldwide at $520 billion by 2021, with IoT customers planning and executing many proof of concept pilot projects, such as for remote monitoring. Investment in IoT by enterprises and governments is increasing steadily. GSMA estimates that by 2026 the IoT revenue opportunity for mobile network operators will reach $1.8 trillion.

IoT devices require continuous telecommunications network access and connectivity. Global upgrades to 5G network infrastructure, including network densification, will be required to handle the resulting explosion in data traffic volumes. B2B business models for IoT are driven by the potential for either revenue growth or cost reduction. Government and non-profit enterprise (NGO) uses of IoT are driven by the potential for operating cost reductions and greater efficiencies in the delivery of public services. Parallel infrastructure advancements in transportation and utilities could produce an economic impact of up to $1.6 trillion annually by 2025, according to a 2017 policy paper issued by the U.S. Department of Commerce’s NTIA.

IoT encompasses applications for nearly all industry sectors: monitoring and alarms for homes, office buildings, factories and warehouses to improve security systems; smart metering for utilities and solar power production and use, smart grids for energyconsumption; vehicle fleet management, cargo and fuel consumption tracking, traffic management in transportation; water resource management and monitoring of weather conditions for automated agriculture; smart sensors and data collection in manufacturing;tracking of cash and card payments in retailing;interoperability among consumer electronicsdevices, and remote healthcaremonitoring.

Automotive and manufacturing sectors have been the been the first to embrace IoT, but connectivity providers can boost revenues by using 5G infrastructure to enable many more industries—from healthcare to agriculture to retail. One estimate suggests that by 2026, the IoT revenue opportunity will reach $1.8 trillion.

Industry leaders consider transport and supply chain logistics, and energy/environment as the sectors most likely to see IoT benefits from M2M communications in the short term, according to a 2016 RAND Europe report. The largest share of IoT contracts as of 2017 were for transportation fleets/logistics, smart metering, connected cars and healthcare platforms. The RAND study also highlighted these top economic benefits of IoT: increased environmental sustainability (smart lighting and energy efficiency), organizational efficiency, and enhanced wholesale and retail customer experiences.

New Business Models for Network Operators Could Drive 5G Investment

Telecoms will miss the boat if they are planning to remain dumb connectivity providers or if they try to calculate and generate return on investment (ROI) for 5G only by charging consumers more for faster data rates. While the 4G rollout that began in 2012 helped launch a social media explosion and gig economy apps, there was not much in it for the network operators, so they want to avoid repeating that disappointing result. To ensure a fair return on 5G, operators must embrace innovative monetization opportunities.

It may be the right time for telcos finally to take some risks, bet on massive IoT growth and change their approach. They could start providing new ‘smart’ data services, becoming an advisor, systems integrator, computing provider and connectivity provider for their enterprise customers. As an incremental step forward in B2B services, they could become partners in their customers’ digitization plans, providing valuable congestion relief and fixed line displacement. With some long range planning, there’s far more opportunity out there. Telcos will still provide connectivity, of course, but increasingly they can also provide computing at the local ‘edges’ of their networks.

Telecoms must be willing to transform not only their networks, but their business models and business support systems as well. Network operators can choose whether to become an integrated connectivity and IoT service provider on their own, buy IoT capabilities from a partner that enable the sale of managed services, or simply sell connectivity to independent IoT providers. The first option requires either acquisition of substantial domain expertise in the business or government verticals to be served or formation of new partnerships. The largest telecoms could opt to try out all three business models across various geographical markets, developing separate platforms for specific industry sectors such as autonomous vehicles, connected healthcare or smart cities.

Some IoT app developers will work simultaneously with both network connectivity providers on the one side, and enterprise users on the other, on creating a 2-sided platform designed for a specific purpose. Integrated platforms may turn out to be the ‘killer use case’ for 5G technology.

More Capabilities Needed To Leverage Network Technologies

Innovative business models for IoT are sometimes called B2B2X, where X can be a consumer, a business enterprise or a public agency. Network operators can act as either the first or second “B” in the chain. Vital additional capabilities network operators needed to fully leverage this 5G IoT opportunity include: applications, platforms, IT systems integration, sensors/devices and data flow management. The connectivity they provide at the core of their expertise, including spectrum, fiber cabling capacity, network management, and 3/4G interoperability may represent only a small fraction of the total IoT value chain, but yet a significant new revenue opportunity.

An advanced architecture technology called network slicing, allows logically independent network “slices” to run over a shared physical infrastructure. Using network slicing, operators can tailor each network slice to highly specific use cases such as telemedicine and remote surgery, or to unique business requirements for capacity, latency, quality of service (QoS) and security. Telemedicine requires a higher bandwidth and near zero latency, while billions of sensors from less mission-critical industrial IoT-enabled devices can use a low-power network slice. Ericsson and UK network operator BT have formed a partnership to explore the economic benefits of scalable network slicing.

National Approaches to 5G

U.S. telecoms are among those reluctant to fully commit to 5G. Some of President Trump’s advisors are so anxious about keeping up with the Chinese on 5G while American deployment lags, that they have proposed nationalizing 5G networks, under a wholesale model in which a public private partnership would lease spectrum to operators. This is a very controversial idea first floated in early 2018. The Trump Administration is also currently ‘at war with itself’ over auctioning and use of high band 24 GHz spectrum for 5G.

The EU’s regulatory Commission announced a plan in late 2016 for 5G across its two dozen plus member states.

China, on the other hand, has positioned 5G since 2015 as the centerpiece of its 21st Century national economic and military strategy. Transportation and power grids augmented by AI running on 5G are integral parts of China’s infrastructure deployment. Commercial competition among Chinese network operators is not part of the picture like it is the West, so messy capitalist markets will not get in the way of national interest as determined by the government. Chinese equipment vendor Huawei, meanwhile, is way out ahead globally as the only comprehensive supplier of 5G gear.

Conclusion

To recoup major investment in 5G networks, telcos will have to approach the market in a completely different way – as providers of managed solutions and as systems integrators. By branching out to offer more complex services encompassing various types of connectivity and computing orchestration, they could discover a diverse array of revenue opportunities. Providing “smarter” services to enterprises, rather than just popular consumer video content and 3D gaming, brings the possibility of higher margins from longer-range contracts. This approach could actually lower long term risk for those telecom network operators brave enough to go there.

In this scenario, most everything in the traditional comfort zone of telecom operators will have to change: how to innovate for new markets beyond connectivity and entertainment content, how to sell into those markets, how to partner with enterprises, how to deliver services and provide customer support. Unfortunately, many operators will stumble because they won’t be able to change their regulated utility DNA, and so will miss out on the 5G and IoT opportunities so close at hand.

Marin Ivezic
marin@ivezic.com | Website | Other articles

Marin Ivezic is a Partner at PwC (PricewaterhouseCoppers) specializing in risks of emerging technologies. He leads PwC’s 5G cybersecurity efforts. He also leads cybersecurity for the Telecommunications, Media & Technology sector; and Industrial, IoT, Critical Infrastructure & Cyber-Kinetic security capabilities in the region. All these focus areas are being transformed with the emergence of 5G. Marin worked with critical infrastructure protection organizations in a dozen countries, 20+ of the top 100 telecom companies, and a number of technology companies on understanding the geopolitics of 5G; uncovering as-yet-unknown security and privacy risks of 5G, AI and IoT; and defining novel security and privacy approaches to address emerging technology risks.

Luka Ivezic
luka@5g.security | Website | Other articles

Luka Ivezic is an independent consultant and author exploring geopolitical and socioeconomic implications of emerging technologies such as 5G, Artificial Intelligence (AI) and Internet of Things (IoT). To better observe policy discussions and societal attitudes towards early adoptions of emerging technologies, Luka spent last five years living between US, UK, Denmark, Singapore, Japan and Canada. This has given him a unique perspective on how emerging technologies shape different societies, and how different cultures determine technological development.