Telecommunications expert Paul Budde explores the viability of 5G deployment.
"Peak telecom" is described as the maximum point of expansion reached by the traditional telecommunications industry before the internet commoditised the industry to a utility pipe.
I had to think of this when I read the recent outcomes of the famous Ericsson Consumer Lab survey. The company used the result of the survey to counteract market criticism regarding the viability of the telco business models in the deployment of 5G.
It will come as no surprise that Ericsson, as a manufacturer of 5G gear, has given the report a positive spin. However, I remain sceptical about the short-term business models for the deployment of 5G. Once full deployment happens over the coming decade, I certainly can see long-term opportunities. These will revolve around content and apps as well as areas such as IoT in smart homes, cities and energy. However, the question is will this lead to new financial opportunities for the telcos? Peak telecom questions such an outcome.
What exactly do these broader 5G opportunities mean for the telecommunications operators — the companies who have to build the infrastructure? It is here that we can see that we have reached peak telecom. For several years now we have seen that growth in the telecom industry is rather stagnant. Profits are still being made but essentially generated by lowering costs. For example, new telecom access speeds are provided at no extra cost to the users. Basically, consumers are getting more for the same price.
There has continuously been the promise of new revenues that could be generated through a range of new telecoms development (internet, broadband, smartphones). The telcos have, however, largely failed to move into the content/app market where the new profits are occurring. Companies such as Amazon, Facebook, Google, Alibaba, Tencent and Netflix have been the main commercial beneficiaries of these developments.
The Ericsson report mentions that mobile access in congested areas and in megacities is becoming a problem and that 5G will assist here. I agree, but will customers pay extra for it?
It also mentions opportunities for 5G to be an alternative to fixed broadband and for it to become a key technology in fixed wireless networks. There certainly will be niche market opportunities here, but this is a highly price-sensitive market. The economics of mass fixed infrastructure favours it over mobile infrastructure. Any gains here will basically be a substitution of a fixed service they already provide, so the overall net gain for the industry will be neglectable.
The report indicates that 20% of smartphone users are prepared to pay a premium for 5G. The current commercial 5G service in South Korea is charging a meagre 10% premium. No doubt, in coming years, through competition even that premium will disappear.
The report indicates that consumers expect new innovation such as foldable phones, VR glasses, AI, 360-degree camera, robotics and so on. All true but it all depends how affordable these products and service will be and again who will develop these next "must-have" products? Here, also, the telcos will most likely be missing out.
I fully agree with the report’s assessment that we have to look at 5G over the longer period. As mentioned, there are good reasons to believe that once full deployment exists it will open up many new business opportunities.
However, will this promise be enough for telcos to make the huge upfront investments that are needed? This without a clear indication if they can extract any significant new revenues from 5G? The more likely scenario is that the digital giants are going to be the ones that will reap the real profits of those innovations.
I stick to my argument that the key reason for the telcos to move into 5G is because of network efficiencies which lead to lower costs. This is absolutely critical in this peak telecom market.
To end on a more positive note for the industry, there is the first mover advantage with short term premium price opportunities for those who can tap into the early adopters' market. There is always a group of users who simply do want to have the newest of the newest, whatever the price. The size of this market varies – depending on how "hot" the new product is seen by this market segment – and could be anywhere between 10% and 25%.
This is certainly attractive for the telcos as it allows them to rapidly recoup some of the initial investment. In relation to mobile products and services, this mainly relates to "must have" gadgets and, in particular, the smartphone. The current price (in Korea) of a 5G phone is approximately US$1,500 (AU$2,153), without any outstanding features.
The lack of attractive smartphones could be another negative for some of the early adopters. Time will tell.
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