Setting the scene for 5G

At this early stage, 5G is not as revolutionary as its predecessor 4G. Yet, who knows? Surely, a few years from now, we’ll wonder how we ever got along without 5G.

5G is set to have a hugely beneficial impact on India – and is on its way to becoming a reality.

India will have 500 million 5G subscribers by 2027, accounting for 39 percent of the total mobile subscriber base, says the Ericsson Mobility Report. By then, global 5G subscriber base is expected to touch 4.4 billion, accounting for half of the world’s population.

India will continue to remain a leader in data consumption. The country is a latecomer to 5G. Even in 2027, 4G is expected to remain the dominant technology. However, 4G subscriptions are forecast to drop from 790 million in 2021 to 710 million in 2027, an average decline of 2 percent. 4G base will fall from 68 percent in 2021 to 55 percent in 2027 as more and more subscribers migrate to 5G.

Total mobile data traffic in India has grown from 9.4EB (Exabyte) per month in 2020 to 12EB per month in 2021, and is projected to increase by more than four times to reach 49EB per month in 2027. This is driven by high growth in the number of smartphone users, including growth in rural areas, and an increase in average usage and 5G business potential industry revenues for service providers in India will be USD 17 billion by 2030.

The point is, will it? Operators see a marginally positive business case, and are skeptical if the increase in capital-expense-to-sales ratio will be as big. The biggest uncertainty for industry professionals lie around the strength of the business cases and the underlying economics, as well as other emerging commercial considerations. Confidence in the technology is high, but less clear is whether and how soon it can fuel new products and services that customers are willing to pay for. Consequently, at least at the outset, the majority sees enhanced mobile broadband and the Internet of Things (IoT), rather than fixed wireless access or mission-critical applications, as the most prevalent applications. These are not the revolutionary use cases lauded by 5G proponents, but they provide advancements that are still meaningful.

A McKinsey survey of 46 CTOs of large telcos around the globe, Cutting through the 5G hype, throws a lot of light on what we can expect.
Although IoT is stated as a 5G priority, the operators really see this latest wireless advance primarily as an opportunity to cement, gain, or regain network leadership. With competitive positioning as the number-one priority for 5G, the second priority is customer experience, and the third is capacity.

The momentum toward 5G still sits with CTOs. 5G-pilot strategies are in place as are their technology strategies. However, few have gotten the business case approved, and commercial planning is still in its very early stages. Data seems to indicate that the technology team is leading the business team. It is notable since it is usually the other way around, with a business case or financial return dictating the launch of any particular new service or technology. The reasoning behind this could be either that 5G is viewed as so important that it just has to move forward or that the working commercial teams – those below the CEO level – have not pushed for it yet.

The business case and economics of 5G remain unclear, with the operators still having questions around the financing of it. This element alone could possibly delay real full-scale deployments.

The business case is made more complex by the belief that 5G will usher in rising costs. The capital-expense-to-sales ratio is expected to go up. Given the densification needed in many of the networks to leverage the higher frequencies, as well as new spectrum acquisition and other potential spectrum-related costs (such as refarming), it is not a surprise that 5G may not actually reduce industry capital expense. On the operating side of the ledger, industry figures worry about site costs and maintenance costs. Many expect IT costs to increase. Overall, there is expected an increase in operating expenses.

Uncertainty in regulation could also be a key stumbling block. Design of frequency auctions and rollout obligations are often top of mind, as are regulations that influence new business models (such as those regarding privacy, security, and indemnity). 5G also introduces the prospect of additional regulatory hurdles, such as having to deal with cities and other local governments on small-cell rollouts.

Rollout at scale may take time. Operating models are likely to include less millimeter wave but more sharing and neutral hosts. 5G is such a significant technological transition that it has the potential to bring with it some equally significant shifts in the operating model. Deployment in the millimeter-wave spectrum in the short term may be slow, which will eventually help enable 5G’s full potential. Higher cost of density for millimeter wave is imminent, and that may be the biggest bottleneck for deployment.

Increased network sharing is expected. This is in line with the widely held assumption that 5G will push up costs for operators. Network sharing can be an attractive option to lower costs, especially in areas with either little opportunity to differentiate quality, or in areas with high rollout costs, such as rural regions.

Beyond network sharing, new business models like neutral hosts are expected to be adopted, though there is no alignment yet on where such third parties will be involved. This makes sense for three reasons. The first is financing. Neutral hosts offer a lever to balance out the increased investment 5G demands, similar to network and other infrastructure sharing. The second reason is operations. Crowded venues that experience high demand for connectivity often have limited space, or they face limitations due to physical appearance, both of which can make it impossible for multiple mobile-network operators to deploy equipment in the same location. The third reason is customer experience, including improved connectivity. The use of neutral hosts is more prevalent in crowded places, where people use a lot of data (an event in a stadium where people want to stream a lot of live video, for example). Shared infrastructure can ensure sufficient coverage and capacity to serve these high-volume, high-traffic areas.

While there has been a lot of talk about new network capabilities, from leveraging latency to enabling more quality guarantees, most operators still see investment happening in the network, rather than the enabling layers like OSS and BSS. Our experience suggests that many operators are underestimating the challenge if they want to leverage 5G for new business models. At the same time, if pilots and enhanced mobile broadband are the core focal points for pure 5G in the next few years, along with (to a lesser degree) fixed wireless access and enhancing IoT with 5G capability, investment in IT enablement of new business models can be delayed without much downside.

Significant implications for the core network are anticipated, which would need to be upgraded to allow operators to offer 5G services (for example, network slicing and quality guarantees) to customers. Adding millimeter wave to the frequency portfolio will also have substantial impact – both in network architecture (for example, densification by adding small-cell sites and overlay design through software virtualization to create additional layers of network abstraction) as well as from an operational process. However, there are differing views on millimeter wave.

Although commercially in its infancy, 5G technology is ready. Yet the fact that commercial models are not ready cannot be minimized; the business case is marginal, and the investments to enable new business models are not currently planned. Therefore, though we expect 5G to bring real benefits to the markets, when it comes to speed and capacity, until real new use cases and corresponding business models emerge, 5G will feel closer to more of the same. At this early stage, 5G is not as revolutionary as its predecessor 4G. But this does not mean that telcos are willing to buy into the most pessimistic view that 5G will be a major, costly bust. Instead, the industry will keep patiently waiting for the innovators that leverage all 5G can bring into exciting applications for both consumers and businesses.

Who knows? Surely a few years from now, when all the mid-band spectrum is built out, we will wonder how we ever got along without 5G. It may be just a question of how long investors – and everyone else, for that matter – can wait.