Industry Thought Leadership

5G Business Models and Investments

December, 2017
Elie Abdallah
Corporate Strategy Analyst

Alfa, managed by Orascom TMT

The fifth generation of the wireless network technologies will be the major advancement in the provisioning of mobile broadband services. Since the launch of the first generation of mobile communications in 1980, a new generation is being introduced to the ICT market each 10 years. The first commercial 4G mobile services was launched in 2009, nine years after the commercial launch of the first 3G network in Japan, and thus it is expected that 5G deployments will kick off around the year 2020. As opposed to 3G and 4G deployments where requirements were based on voice and higher data rates, 5G is expected to fulfill needs for network upgrade driven by innovative services and not only by demands for enhanced mobile networks. In other words, if there is no demand for innovative services, or if 5G failed to meet the industry’s expectations, 5G development is neither necessary nor promising. On this basis, if 5G was successful, it will most likely open the telecommunications market to new entrants that are expected to emerge in indoor small cell provisioning and content delivery, consequently disrupting this whole industry. In a world where everything is digital, smart and hyper-connected, the traditional telecom business ecosystem can no longer cope with this radical change, 5G will expand it to meet vertical sector-specific requirements. To survive this inevitable change, MNOs need to take into account four domains of change; standardization, regulatory, technology, and business.

According to early indications, 5G will not present a smooth, evolutionary improvement over the current standards, but will consist of a collection of different types of technologies that support diverse use cases. Standards bodies and related actors did not agree yet on clear goals and objectives for 5G standards, and it is not easy to predict which alliances will win in each area of dispute and how long it will take. Stakeholders in the telecommunication industry are hoping that various proposals will have crystallized into standards following Release 15 in 2018 and with discussions at WRC-19 in 2019, but they all agree that 5G standards will not see the light before year 2020.

The promotion of 5G investments requires a stable, consistent and accurate regulatory framework across all stakeholders. Regulatory bodies should clearly define who is allowed to enter the market through spectrum licensing and by creating conditions that directly influence the possible business opportunities. Moreover, since networking and processing resource-sharing strategies might be applied for delivering ultra-reliable and low latency communications (URLLC), regulations should secure confidentiality and privacy requirements between all key players in the 5G value chain.

5G will transition the mobile wireless technology from being a significant enabling technology, into a “General Purpose Technology” (GPT). GPT will drive innovation and productivity in nearly all sectors allowing device connectivity, transmission of information, smart transactions execution driven by artificial intelligence, real-time analytics and actionable insights.

The value chain associated with 5G technology will amount to $3.5 trillion between 2020 and 2035 and create more than 22 million jobs (HIS Markit, 2017). To take advantage of the business ecosystems’ opportunities, organizations should strive to develop an understanding of the entire system and reinvent themselves. The inter-connected nature of future devices fosters openness and collaboration across industries, which complicates building accurate business models. A business model defines how companies generates revenue and make a profit through the overall structures of process, customers, suppliers, channels, resources and capabilities. Multi-partnership, innovation and collaboration will drive innovative 5G business models, allowing them to capture and create value among different stakeholders. 5G will allow exploiting new viable opportunities around Business-to-Consumer (B2C), Business-to-Business (B2B) and Business-to-Governments (B2G) business models. These new opportunities and variations in technology will result in a transition from a market dominated by mobile network operators towards a market supplied by a heterogeneous set of providers with service offerings that respond to the versatile requirements arising from different verticals.

In Europe, the Commission’s 5G Action Plan expects 5G revenues for MNOs to reach €225 billion by 2025 (Tech4i2 et al, 2016), however, the business model to achieve these revenues is ambiguous. One of the major challenges in creating business models for 5G is the large number of unknown parameters yet in this ecosystem, such as distance ranges, penetration, capacity, affordability, cost and others. In contrast with previous mobile wireless generation having fewer complexities, where strategist and managers had clear expectations, better understanding and tested performance before rollout. Although mobile industry is considered a great success so far, there have been many failures in the past three decades mainly due to blindly trusting technologies and an attitude of “build it and they will come”, such as WAP, ISDN and Iridium. Therefore, financing 5G investment will be a challenge in the few years to come. In fact, future demand for superfast broadband is still questionable, as there comes a point where ever-fast broadband becomes unnecessary. Moreover, there are still no “killer apps” offered by 5G, the source of funding the required infrastructure is unknown, it is still unclear how much consumers are willing to spend when ARPU trends are decreasing and returns on 4G/LTE investments are not recovered yet.

Given the complexity and uncertainty previously described, is it not evident at this stage which business model is the most plausible, however, there are at least three possible models for the future 5G market. In the first model, mobile network operators along with equipment suppliers will keep on dominating the telecommunications market, thus 5G will be another type of mobile cellular technology. Some small players will have shares in the market, especially in the content provision and over-the-top services. A second more reasonable model is that new entrants to the 5G market will settle locality-based businesses and gateways to the internet, PSTN, 2G, 3G and LTE and compete with mobile network operators in their core business. In this case, a separation of network infrastructure ownership and service provision with application on top of “plain vanilla” services could emerge. A third business model can be driven by deep indoor coverage challenges, in this case, MNOs will rollout repeaters and access points around the buildings, however, third-parties and property owners will take care of femtocells and deep indoor access. This might also be used as an adjunct of the first or the second previously mentioned model.

MNOs are still taking a prudent and pragmatic view about the 5G journey, as they still have to recover the 4G/LTE network investments before jumping into another major technological generation. If more business ecosystems start to diffuse with many more players and use cases, or if any of the previously mentioned challenges drastically changed, then the 5G rollout may be viable in dense urban settings.

Innovative technologies such as 5G will call for unusual business models that are able to strategically adjust resources to demands and create value proposition opportunities within a rich ecosystem of service providers. It is crucial for MNOs to be agile and resilient since the forthcoming technologies will drastically increase the volatility, uncertainty, complexity and ambiguity (VUCA) of the telecommunications sector. Despite the conditions and situations of the future ICT markets, it is inevitable for enterprise to embark this journey seeking for superior profitability and growth while societies are looking forward to overcome climate change, water scarcity, limited natural resources and other major challenges using such technologies.