Collaboration: The Unexpected Key to Success in Canada’s 5G Ecosystem
In 1967, Lynn Margulis, a young biologist, published a paper that challenged more than a hundred years of evolutionary theory. It proposed that millions of years ago, the eukaryotes emerged not from competition, as neo-Darwinism asserts, but from collaboration.
Margulis’ research showed how single-celled lifeforms working together created an entirely new organism that became the foundation of all advanced life on earth. This was an inflection point in the development of evolutionary biology, shifting the scientific and cultural narrative away from “survival of the fittest” towards “survival of the most cooperative.”
Though competition contributes to better individual or organizational performance, it can have the opposite effect on larger systems.
In building a world-leading 5G ecosystem in Canada we need to appreciate that success will depend on all stakeholders contributing in a collaborative way. This includes government and technology developers, but most importantly telecommunications companies who will need to adapt their view of investment risk in 5G.
Why telecoms need to re-imagine 5G’s potential
It is impossible to imagine a world devoid of cellular technology. Without it we wouldn’t have a framework that allows people across the planet to stay connected. From 1st Generation networks through to 4th, the evolution of cellular has been the evolution of modern communication.
Many regard the internet as humankind’s greatest invention, but it is cellular, specifically 3G and 4G, that has opened the world wide web to citizens of developed and developing nations alike.
The birth of the internet is a good example of the type of tectonic market shifts that telecommunications companies have needed to face over the past few decades. For the most part, they have responded quickly to capitalize on changing consumer needs.
However, it wasn’t long ago that telecom operators were caught off-guard by the rise of over-the-top (OTT) applications that cannibalized telcos’ traditional bread and butter: voice and text. Between 2010 and 2014, telecom businesses saw revenue decline from 4.5 percent to 4 percent, EBITDA margins drop from 25 percent to 17 percent, and cash-flow margins decrease from 15.6 percent to 8 percent.
As we enter the age of 5G and all the possibilities it holds, telecoms will be eager not to make the same mistake again. Yet, locally and internationally, telecommunications companies seem committed to strategic caution and soon-to-be-outdated business models.
5G is not just a new generation of cellular network, it is a completely new way of being. Most of what worked in the past will not work in the future, and that applies most critically to telecoms. Those telcos who continue to thrive in the 5G environment will be those who are able to transcend a legacy of risk-aversion and redefine themselves as 21st Century service providers.
Not only will this willingness to pivot be necessary for corporate sustainability, it will also be fundamental to Canada’s economic prosperity. 5G promises to unleash the country’s latent potential for digital innovation and technological development, but without investment from Canadian telcos those opportunities may never be realized.
The road to change starts within
It seems the halcyon days of ‘easy’ telecoms earnings are over. With voice and messaging services becoming increasingly redundant, telcos are required to be more innovative to stay competitive. This is hard. Margins are decreasing and revenue streams seem to be drying up.
And, mostly offering the same solutions packaged in slightly different ways, telecoms struggle to differentiate themselves, leading to high customer churn and low brand loyalty.
At the same time, telecommunications is a heavily-regulated industry that doesn’t always offer players a lot of room for movement. Telecommunications companies often point to onerous policy restrictions by government or national regulatory authorities (NRAs), and in many cases they are right. The industry would benefit from greater collaboration in policymaking between regulators and sector leaders.
But this hasn’t always served telecoms badly. In Canada, the protectionist approach enshrined in the Telecommunications Act of 1993 limits foreign ownership and management of domestic telcos. Though these limitations have been relaxed slightly over the last few years, Canada’s telecommunications sector is still ranked as one of the most restrictive in the world by the Organisation of Economic Co-operation and Development (OECD), alongside countries like Iceland, South Korea, Mexico, Israel and Japan.
Debate continues about whether this has been good for the Canadian consumer. Some argue that industry protection has reduced competition, leading to inflated prices and below-par customer service.
Whether or not one agrees, price sensitivity will become an increasingly big issue as Canadian telecoms explore revenue models in 5G. Currently, it seems most providers internationally are unclear about how to monetize the higher speeds and low latency of 5G.
In the United States, Verizon aims to charge its consumer mobile customers $10 more per month in test scenarios, while South Korea’s carriers have rolled out elaborate 5G pricing schemes. In the small, more protected Canadian market it is very unlikely that simply charging the customer more will be a viable long-term solution.
Instead, Canadian telecommunications businesses need to be more assertive in exploring alternative income opportunities. However, if there is one major negative side effect of having a cloistered local sector it is this: companies have become too comfortable, too risk-averse and too reliant on past success.
In order for Canada’s economy to expand, 5G will need to be embraced. This will require telco investment in 5G infrastructure and support systems which, understandably, is not an appetizing proposition for providers who cannot see a clear revenue opportunity.
But the opportunities are plentiful; seeing them simply requires a new way of looking. That is perhaps the biggest challenge facing our telecoms companies. The obstacles are not external (regulations, policy, market conditions), they are internal.
In order to profit from the next generation of cellular connectivity, Canada’s telcos will need to enter, or even create, new markets beyond connectivity and entertainment content. They will need to sell into and service those markets, and learn to partner with enterprises that can help them deliver optimal value. In short, they will need to reprogram their regulated utility DNA, and they will need to do it soon.
Seeing beyond the horizon
Canada’s 5G network deployment is reported to be on track. However, it’s important to note that this is the opinion of Ericsson and Nokia, companies responsible for physical rollout, not the telecoms companies who will be footing the bill and relying on network services to make their money back.
The positive view of Canada’s 5G deployment status is largely based on the country’s favourable outlook in frequency allocation. Having a single standard makes the process far simpler than in many other countries so, as frequency allotment is often the biggest obstacle to deployment, Canada seems well-placed to begin implementing 5G in the near future.
The first round of 5G spectrum auctions in March split up the 600Mhz band across nine telecom companies and raised over $3.47 billion. These are the low-band frequencies, though; the real 5G gold lies in frequencies 3.5Ghz and up, which will be on auction early next year.
Theoretically, once that auction round is complete deployment can begin. Predictions suggest we could see discrete 5G networks with dedicated hardware in place by 2022. But in order to keep to this timeline Canadian telecoms will need to invest heavily.
We are already a year behind the U.S. That may not sound significant, but U.S. telcos face heavy frequency allocation challenges. Because the United States government has reserved low-band frequencies for the military, telecommunications companies are required to work with higher-band frequencies which have lower coverage. Consequently, the spectrum that has been set aside in the U.S. for commercial 5G makes it significantly slower and more expensive to roll out than most countries.
Will Canadian telecoms commit to the major CAPEX required to deliver world-class national 5G infrastructure? Time will tell, but we can be certain that no such development will occur to its full capacity unless shareholders are confident in seeing handsome returns. That prospect relies on cogent business cases based on realistic 5G use cases.
Quite simply, selling connectivity will not deliver the required outcomes. Nor will it tap into the unprecedented possibilities promised by 5G - possibilities for the consumer, but also for the telecoms companies willing to explore some of these innovative new revenue models.
New avenues to growth
To recover investment in 5G networks, telcos will have to approach the market in a fresh way, offering managed solutions and systems integrations that facilitate the creation of a full 5G ecosystem. This will see the victors in this space delivering more complex connectivity services and computing arrangements serving the internet of everything, as well as customized network solutions that will accelerate industrial and commercial growth.
Instead of high-speed gaming and instant video, these are more sophisticated services that have the potential to deliver greater returns from longer-range commercial contracts. The telecom operators who are willing to engage the investment risk now will see their long-term risk decline as their offering matures.
Though the applications and services that can and will be developed for the 5G ecosystem are virtually limitless, for telcos there are a few distinct revenue opportunities that are already crystalizing:
1. The internet of everything
The internet of things (IoT) is almost as revolutionary as the internet itself. Harnessing global connectivity, the IoT creates a hive of devices, sensors, chips, and machines. It is currently estimated to connect 26.6 billion devices. By 2025 that number will almost triple.
Bain research suggests that the combined IoT devices and services market worldwide will be worth $520 billion by 2021. Investment in IoT by enterprises and governments is also increasing steadily. GSMA estimates that by 2026 the IoT revenue opportunity for mobile network operators will reach $1.8 trillion.
This revenue opportunity does not sit exclusively in consumer-facing applications. Though the IoT is usually seen as one connected mass it can actually be split into multiple IoTs including civic, commercial and industrial. Each of these has its own income potential for telecoms.
Accenture estimates that the Industrial IoT (IIoT), which includes smart robotics, intelligent warehousing, remote AR-driven management of industrial machinery, and self-driving trucks, could add $14.2 trillion to the global economy by 2030.
Through better efficiencies, greater economies of scale, higher outputs, and lower OPEX the IIoT will change the fabric of the industrial world. And telecoms operators are best placed to benefit from the IIoT - and all IoTs’ - rise. Telcos were built to connect millions of devices across broad distances, and they understand the security, privacy, and customer service components of connectivity as well.
These potentials, however, rest on the deployment of 5G networks. Only 5G will be able to carry the exponential leap in data volumes that will be produced by expanding IoTs. And, in being responsible for implementing 5G, telecoms have a tremendous opportunity to develop new B2B, even B2B2X propositions, where X can be a consumer, a business enterprise or a public agency.
With an enterprise focus telecoms companies could provide diversified services, augmenting connectivity with smart data, systems integration, and computing power. They could become partners in their customers’ digitization plans, guiding and facilitating customer development towards digital operations residing at the computational edge.
To access these pathways telecoms will need to do more than build 5G networks and systems. They will need to reconsider their ways of doing business. Canada already has a solid reputation for IoT innovation with established firms. Local telcos should meet the new IoT frontier with the same spirit.
There are numerous exciting revenue models available to them. They can reposition themselves as full-scale connectivity and IoT service providers, building clear vertical offerings that serve specific industries or business types, delivering everything from tailored IoT applications to fully bundled end-to-end solutions.
They could be connectivity partners to specialized IoT service providers, taking advantage of multi-sided IoT markets and negotiating relationships between 3rd party application developers and customer enterprises. With large books of B2B clients, this should be an easy win for most telecoms.
More progressive operators may work directly with technology developers to build then manage integrated platforms that connect enterprises and developers. Such platforms could become lucrative digital assets for those telcos.
Telecom companies are also uniquely positioned to help businesses store, manage, and protect the mass of data produced by the IoT. As Bain Insights point out, telecommunications specialists could assist clients with:
Connectivity and Compliance: Telecom companies have experience and systems in place for keeping devices connected while also complying with the regulatory requirements of multiple governments.
Life Cycle Management: Telecom companies have experience with managing products from beginning to end, and this experience will be essential for managing and upgrading the tremendous amount of connected devices in the IoT.
Vertical Platforms: Telecom operators can offer platforms and turnkey solutions for companies who need help with device management, data storage, and data analysis.
These all have strong revenue potential, which will be augmented, perhaps even eclipsed, by the income-generating opportunities of network slicing and computing orchestration. It is these services that will enable all the innovative IoT use cases which could generate huge new revenues.
2. Network Slicing
Network slicing is paradigm-shifting technology and one of the most exciting aspects of 5G. It allows operators to “slice” one physical network into multiple, virtual, end-to-end (E2E) networks.
Because network slicing allows independent network “slices” to run over a shared physical infrastructure, it promises telecoms companies reduced CAPEX and OPEX over time. Operators can also tailor each network slice to highly specific use cases such as telemedicine and remote surgery, or to unique business requirements depending on 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. Intelligently slicing the network responsively in real-time will eventually rely on AI - a bonus for Canadian telecom companies who have access to a growing number of leading-edge AI businesses.
Being so new and untested, network slicing with 5G is still in its formative stages of exploration and development. Telecom players will need to collaborate with non-telecom parties to establish best practices, standardize services and procedures, solve cybersecurity challenges, and ink service level agreements between multiple role players.
Business models also need to be refined, but initial assessments suggest good profit potential for telecom companies who are able to supply customers with tailored network slices that deliver optimal efficiency.
3. Orchestration of computing
Computing requirements vary across the network, and even within a network slice, depending on the IoT use case.
Some computing, including analytics and correlation of data between a number of devices, has close-to-real-time requirements. For example, a smart-traffic light system that collects data from all autonomous vehicles approaching an intersection would need to make millisecond decisions on how to control the traffic.
There would not be time to send the data to the cloud for processing, nor could it be done on any single vehicle because it takes correlation of information across multiple vehicles. Some would not even have a line of sight between them. So, it would have to be achieved through “edge” or “fog” computing: performed close to the device to achieve low latency. There could be some computing performed directly at the device, but that would be minimal because of limited computing power.
Other IoT functions may have less real-time requirements but potentially higher computing requirements. These could be performed at telco's data centers.
Trends, business analysis, other analytics-heavy requirements that don't have to be performed quickly could be outsourced to public clouds or enterprise-controlled multi-cloud setups.
Yet more data and computing could be outsourced to 3rd parties such as device vendors and other specialist SaaS providers.
All this orchestration of computing could be performed by telcos. It is also a different value proposition from a network slice which provides isolation and communications quality of service, but doesn't orchestrate use cases’ computing across different layers.
This high-knowledge service would allow telcos to charge a premium, and 5G will be the catalyst for demand.
Not all about the telco
In order for telcos to become such a provider, they will have to fundamentally change their internal business processes. Sales teams will no longer be able to rely on inbound calls from customers with defined communication requirements. Telcos will need to become consultants and systems integrators.
This is a huge cultural shift. They have to understand the business case they are supposed to enable, and then implement them on top of a new virtualized 5G-based platform that could span many levels and many vendors of different elements of computing.
Similarly, all telcos' other internal business processes - legal, management accounting, risk, quality, service delivery - will have to change.
Some telcos may not be able to change themselves to become such a higher-value provider. However, they can still play a role by being a central player in organizing a facilitative ecosystem of technology and service providers around them.
5G is a game-changer, but not if the only adaptation of the telecoms model is to charge $10 more per month for faster movie downloads. The true benefit to the economy will accrue when 5G is combined with the power of network slicing and dynamic computing orchestration, and when all of that is coordinated and simplified as a platform for innovation. It is then that we will see a blooming of society-shifting IoT use cases.
But it's not fair or realistic to expect telcos to achieve all that.
Though some telecoms providers will have the business appetite and adaptability required to maximize 5G’s revenue potential, the ecosystem will require multi-stakeholder development. Canada will need cooperation between telcos, government, new-tech vendors, and other technology and system integration service providers. Telcos should be working closer with government to remove obstacles and with private enterprise to capitalize on emergent opportunities. Through this type of collaboration, everyone will see increased financial benefits while contributing to the greater good.
Conclusion
A recent report on Canada’s economic outlook predicts continued economic growth in a risky world. According to the author,
“Just as there are hazards, every economic and financial outcome also creates opportunities that can be capitalized on by those better prepared to navigate the rapidly evolving economic environment.”
These are timely words for a Canadian telecommunications environment on the brink of a sea change. Whether they are prepared for it or not, whether they embrace it or not, 5G will disrupt local telecom companies’ operations.
But they are not helpless. They have a choice: adapt or be left behind.
In this case, adaptation means undertaking massive organizational change. Even where telecom businesses see the need to move away from being a connectivity supplier towards being a 5G digitization partner enabling network slicing and IoT services, manifesting that shift will require dramatic internal reorientation.
Telcos will need to rethink who they are, what value they offer, how they deliver that value and how they tell people about it. They will need to turn their backs on past approaches and become exemplars of an agile digital mindset that helps a nation access the full potential of 5G technology.
It won’t be easy but they will not be alone. Telecom companies have everything they need to succeed while discharging their responsibility to shareholders, and the country as a whole, but they will also be surrounded by multiple stakeholders seeking cooperative development.
(Disclaimer: Postings on this site are my own and don't necessarily represent PwC positions, strategies or opinions.)