What is the real business case for 5G?

5G will require a large investment

According to a recent GSMA report, Telcos worldwide will invest more than $1.4 trillion in mobile Capex between 2019 and 2025. 70% of this Capex will be invested in 5G technologies including access, core and IT infrastructure. The $1 trillion investment will be heavily back loaded in the coming 5 years with a strong focus in Asian, US and European markets.

Most analysts expect that 5G share of mobile connections by 2025 will reach between 15% to 20%. The rest of mobile connections will be mainly managed by 4G connectivity.

This means that 4G and 5G networks will coexist and remain complementary for many years, with 5G as an added layer. Carries could service a large share of data traffic on 4G, leaving 5G to absorb overflow capacity and address specific use cases that require higher speeds and/or lower latency.

5G network deployments will be more targeted than 4G in most markets around the globe, reflecting consumer and enterprise needs. At a global level, 5G coverage will reach around 40% of the population and 1.4 billions connections by 2025. For comparison, it took five years for 4G to reach around 40% population coverage.

Due to the way 5G standard has been developed there will be two phases of 5G deployment. In the first phase (2019-2021), Telcos will start rolling out non-standalone (NSA) architecture before eventually moving to standalone (SA) model. In this scenario, Telcos will be able to leverage on their LTE footprint and use 5G as a hotspot solution. Furthermore, dynamic spectrum sharing will allow to seamlessly use 4G and 5G connectivity in the same spectrum band.

In a second phase, when 5G SA model becomes available, Telcos will need to invest in new radio and 5G core. Around 80% of the Capex will be spent in access network while the remaining 20% will be in Core/IT networks.

Despite the initial investment, Telcos will maintain similar Capex/Sales ratio

Due to the growing scale of the mobile industry, Capex per mobile connection has dramatically fall in the last 25 years. This ratio has remained fairly stable due to limited growth in mobile penetration. Analyst suggests that the mobile industry as a whole is stabilizing at a ratio of $2 per month and will fall to 1.35 by 2025.

Where is the 5G business case?

Mobile industry future revenues looks challenging; most analysts believe that overall Telco revenues will grow at a CAGR between 1-3% per year. On the other hand, traffic is expected to growth between 7 to 10 times in the next 5 years.

So, how mobile operators can justify an investment of $1 Trillion USD in 5G networks?

1.The killer case for 5G is to reduce mobile data costs

Managing 10x more traffic with existing 4G technology and a flat revenue outlook is not sustainable for any Telco in the world. The growth of mobile internet is a unstoppable force and will keep demanding faster speeds and generating bigger volumes.

Between 2017 and 2018, global mobile data traffic increased 88% to 28 exabytes per month. Half all this data sent over the world's mobile networks is some form of video, and that proportion is expected to grow to to roughly 75% within the next six years.

5G standard has been build to manage bigger volumes of traffic in a more efficient way. This is achieved by a mix of technology advancements. 5G standard allows radio equipment to handle much more spectrum bandwidth per component. For instance in mid-band spectrum scenario, 5G can easily handle 100Mhz of spectrum per component compared to 20Mhz on 4G.

In millimeter-wave band 5G radios can handle more than 1Ghz of spectrum bandwidth. This means that the "5G highway" is much more wider than any other technology. Also, 5G radio standard has been optimized to leverage on technologies like Massive MiMo and beanforming making it between 15% to 20% more efficient than 4G standard.

In Summary, its is much cheaper for carriers to deliver data on 5G than with 4G. Analysts estimate that the cost per GB can be reduce 5 to 10 times compared to 4G.

Today, carriers are producing one Gigabyte of data at cost of $0.7 to $1 USD . 5G could reduce this cost of production to below $0.1 due to the ability of serving more traffic in each site.

This cost improvement will be crucial for Telcos to remain profitable in a market where the average revenue per user is falling at 40% every year.

2.Fixed wireless access will create new revenues, but will be niche

Fixed wireless access use case will get benefited by 5G technology with the introduction of mmWave spectrum to achieve "fiber-like" speeds to the home. Avoiding the need for time-consuming and high-cost civil works to lay fiber, 5G providers faster time to market and opens up the home broadband market by enabling Telcos to compete against fixed line carriers. Nevertheless, this use case is dependent on many factors including house density, network topology, spectrum availability, affordability among others. These factors will limit the addressable market for carriers and make it a viable alternative option only for very specific geographic areas.

Ovum forecast that 5G will account for 22% of the global FWA market by 2023, and FWA will account for 3% of the global fixed broadband market at the same point.

5G FWA could have a good revenue potential in some markets, but most experts believe it will be just a fraction of the overall broadband market, and of mobile operators’ revenues.

3. Enterprise connectivity is the most attractive mid-term revenues but will require Telcos to transform

Ericsson’s latest report, The 5G business potential - Industry digitization and the untapped opportunities for operators, analyses the 5G business opportunity that comes from industrial digitization, focusing on eight key global industries, including: manufacturing, public safety, financial services, healthcare, automotive, public transport, media and entertainment and energy and utilities.

According to the report there is a large opportunity for telecom operators to address industry digitization, and predicts a revenue potential of USD 582 billion by 2026. This represents a possibility to add 34 percent growth in revenues. The largest areas of interest are manufacturing and energy/utilities sectors.

Many of the use cases in these verticals will be enhanced by 5G faster speeds, higher reliability and lower latency. For example, factory automation, robotics, unmanned operations, remote machine control will be possible to achieve with 5G deterministic reliability and near-real time latency.

Despite the huge opportunity to address industry verticals, it requires Telcos to invest not only in 5G technology, but also business development, go-to-market models and organizational adaptation. Operators need to consider what roles to take in the value chain and expand and move up the value chain to be able to capture these opportunities.

Many of these industries will demand Telcos to build 5G private networks in order to ensure high performance and strong security standards. 5G new capabilities including network slicing will allow mobile carriers to address several enterprises demands with the same networks

--------------------------------------0--------------------------------------------------------------------

In summary, 5G will allow Telcos to reduce dramatically their marginal cost of production of data to cope with the exponential traffic growth. In a second phase, Telcos will have the opportunity to address the enterprise market to create new revenue streams but this will require a large organizational and cultural transformation.