YOU ARE AT:5G5G: The bear case

5G: The bear case

Some skeptics believe the world won’t pay a premium for 5G. Are they right?

With the vocal support of most vendors, many mobile operators and some governments, 5G – a key enabler of the Industrial IoT – seems to be gaining momentum. But there are still experts who harbor serious doubts about whether this technology will be widely deployed.

One of these skeptics, William Webb, the CEO of the Weightless Special Interest Group and a former director of technology resources at U.K. regulator Ofcom, has published a thoughtful post (What’s wrong with the 5G vision?) that questions whether there is a business case for 5G.  This article takes a close look at Webb’s arguments as to why 5G is unlikely to increase telco’s revenues.

Webb notes that while the technical logic behind the 5G vision is “reasonably strong,” the “business reality is that there is no new money” to pay for the acquisition of more spectrum and the rollout of networks.  He notes that telcos’ ARPUs (average revenue per user) “are in gentle decline.”

That certainly has been the case for the best part of a decade. But some of the operators who have deployed 4G aggressively are seeing an uptick in ARPU. NTT DoCoMo in Japan saw ARPU rise by 1% in the year ending March 3 to 4,420 yen (almost 42 U.S. dollars), while SK Telecom in South Korea reported a 1.3% increase in ARPU in 2015 to 36,582 won (about 31 U.S. dollars).

Can telcos charge more for more?

To some extent, Japan and South Korea are leading indicators for the broader mobile industry and it is conceivable that telcos will be able to charge “more for more”, as they deploy new technologies, such as 4G and 5G. Although it seems likely that competition will force telcos to continue to lower the retail price per gigabyte of traffic, their ARPU and total revenue can grow if traffic rises fast enough.

For Webb, the prevalence of free Wi-Fi is also a constraint on telcos’ top lines. He writes, “consumers can, and do, revert to using Wi-Fi when prices for cellular data traffic rise,” adding: “Many do not value data rates above 4G levels.”

Again, these points are partly true. Consumers will use free Wi-Fi if it is easy and fast. But in city centres, rail stations and airports, Wi-Fi hotspots can be heavily congested and they can interfere with each other. In these circumstances, a 4G network can provide a much better connection. Moreover, consumers are likely to attach greater value to high data rates as entertainment applications become more demanding with the growing availability of ultra high definition and virtual reality content.

Is connectivity a commodity?

What about enterprises? Will they pay more for connectivity? Webb acknowledges that IoT systems “will generate additional revenue, but this can already be captured with existing solutions such as Weightless or GPRS/NB-IoT.” Even if mobile operators captured all this new revenue, it would only equate to an ARPU increase of around 1.5% a year, he adds. Webb also suggests that new services will be deployed primarily by so-called over the top players who will also capture the resulting revenues.  

Again, this may be too sweeping an assumption. Some new industrial IoT applications may require rock solid connectivity with guaranteed quality of service and low latency. For example, live video surveillance using drones will need highly-reliable connectivity, as will a doctor using a video link to provide advice to an ambulance crew in the field. Remote controlled machinery, such as a tractor or a forklift truck, will also depend on a robust and responsive connection.

In other words, connectivity won’t necessarily be a commodity. Much depends on the stance of regulators, both with respect to how much autonomy machines are allowed and how much flexibility telcos will have. Where net neutrality rules permit, telcos will be able provide industrial IoT services bundled with appropriate connectivity or they could wholesale tailored connectivity to a service provider.  Either way, if 5G enables telcos to offer quality of service guarantees, then they should be able to charge a premium for the connectivity and boost revenues that way.

In summary, Webb is right to raise questions about whether 5G can generate enough revenues to pay for the roll out of new networks and services. The answers depend in part on the stance of regulators and whether they allow telcos to use their control of connectivity to garner a competitive edge. If the Industrial IoT delivers enough value to the economy, 5G networks will get built.

 

ABOUT AUTHOR

David Pringle
David Pringlehttp://industrialiot5g.com/
A highly experienced and accomplished business and technology journalist, David Pringle runs Pringle Media, which provides analytical, writing and editing services to organizations in the telecoms, media and technology sectors. A regular moderator of panel discussions at major industry conferences, David has worked on Mobile World Live television at the past six editions of the Mobile World Congress. Based in London, David also serves as an associate director at research and advisory firm STL Partners. Prior to founding Pringle Media in 2009, David worked at the GSMA, providing media relations support to the CEO, chairman and other senior executives in the mobile industry. Between 2000 and 2005, David was the European technology and telecommunications correspondent for The Wall Street Journal covering Vodafone, Nokia, Ericsson, British Telecom and other major multinationals. He has also served as deputy editor of Information Strategy, a pan-European title owned by The Economist Group.