Strategies for success in today’s rapidly evolving market
5G connectivity is poised to transform the way we live and work, integrating virtual reality and artificial intelligence more completely with sectors as diverse as consumer gaming, manufacturing and medicine. The GSMA estimates that 5G will benefit the global economy by more than $960 billion in 2030. The stage is thus set for mobile network operators (MNOs) to monetize their investment in 5G, which is critical, given their steep capital demands. Since the rollout of 2G mobile networks, the amount of capital that US telecom operators have invested in each iteration has grown dramatically. Investments in the 2G cycle totaled more than $100 billion and are forecast to grow to more than $275 billion by the time 5G build-outs are completed in the next three to five years, according to Reuters.
Both capital expenditures and operating expenses will likely be very high with the deployment of 5G standalone networks and their fully virtualized, cloud-native architectures. Against these large capital outlays, returns have been anemic across all generations, ranging from 1.5% to 4.5% of return on assets (ROA). (Figure 1)
It’s clear that telecommunications executives understand the need for transformation. PwC’s 26th Annual Global CEO Survey found that 46% of telco CEOs believe that if their companies continue on their current paths, their businesses would not be economically viable in 10 years. As 5G becomes an everyday reality for both investors and consumers, carriers are going to face increasing pressure on two fronts:
As capital markets and stakeholders begin to focus on investment returns in a high-inflation environment, there will be growing scrutiny on telcos and wireless carriers, especially in comparison to other capital-intensive investment opportunities. An exemplar cloud services provider (CSP) has demonstrated ROA of 17% to 20%+ over the past five years, which compares to the 2% to 3% ROA range of MNOs. The ROA of MNOs approximates that of regulated entities like utilities, which explains investor angst. (Figure 2)
Improving ROA is intrinsically tied to successfully managing the costs and revenues of 5G applications. Many operators face a growing clamor from application providers and up-stack players to create “metaverse-capable networks,” without much clarity on how application revenue will be shared with them. Thus, operators risk becoming trapped in a “give more, get less” scenario of providing pure-play connectivity, while up-stack companies monetize the 5G applications.
Operators are rolling out fixed wireless access (FWA) services to consumers with much fanfare, and there is increasing buzz about near future 5G applications, such as enhanced gaming or smart factories. At the same time, the associated network costs are currently unclear or undefined.
According to our analysis, FWA services could cost more than 22 times as much as mobile connectivity services. Immersive and augmented experiences — such as virtual-reality apps, mobile metaverse and gaming — could cost three to four times as much. Network costs related to the Internet of Things (IoT) are even more challenging to estimate and track, primarily because of the extremely wide range of connected devices and applications available.
Many IoT solutions — including asset monitoring, retail radio-frequency identification (RFID) and smart-meter reporting — require low data rates and have very low duty cycles. Alternatively, intelligent connected devices, such as tools to perform remote surgery or robots operating on factory floors, require extremely high bandwidth and ultra-low latency. Such IoT applications can be prohibitively expensive — costing up to 70 times as much as mobile connectivity services — from a network perspective. (Figure 3)
Carriers typically look at network costs as infrastructure capital outlays that are service agnostic. The missing link is the specific knowledge of the network cost of each service. Consider this analogy: What is the capital cost of a truck? compared to What is the trucking cost of transporting watermelons versus oranges? Additionally, it is true that all bits are not equal in terms of the network cost to serve, as each service comes with different service-level agreements. In this analysis, we used the typical consumer mobile connectivity plans as our baseline. Such plans don’t offer explicit latency and other quality-of-service (QoS) guarantees. The other services explored herein likely have higher or comparable QoS requirements, and therefore it is reasonable to examine the relative costs of the services based on the bits transported by the network, on average, for each service.
Are potential 5G services revenues commensurate with the associated costs? The answer is complex and it illustrates the critical importance of getting the 5G services mix and associated pricing right, in order to monetize 5G profitably.
Our analysis is based on an illustrative pricing plan. Baseline revenue potential — based on low/medium/high commercial mobile connectivity plans available in the United States — ranges from $4 to $5.67 per GB. Here’s how that compares to mobile connectivity plans (Figure 4):
IoT can be highly profitable when such plans service low-data-rate applications, such as IoT-based metering as well as retail and supply-chain management. But even in such use cases, low-power wide-area network (LPWAN), 5G private networks and WiFi6 offer competitive alternatives. At the high end, data-intensive IoT applications, such as smart cities apps and autonomous vehicles, can be hugely unprofitable, unless carriers find a way to monetize on a use-case-by-use-case scenario rather than one based simply on connectivity plans.
Fortunately, telecom operators currently possess infrastructure capabilities that outpace the needs of their subscribers, and few network operators have fully leveraged their existing bandwidth to achieve their full growth potential. To successfully monetize 5G and improve the ROA on 5G capital investments, MNOs and carriers should immediately enact three strategies:
Carriers have historically struggled with their total cost to serve even with pure connectivity services. They should develop the ability to forecast, plan and track network costs on future 5G services much more accurately. In addition, carriers should develop a well-reasoned and effective plan to communicate the size and nature of these costs to subscribers, regulators and up-stack application providers. This is essential to generate future pricing power and to combat up-stack player demands for “capable networks” without commensurate revenue sharing.
Carriers’ service and offer-management capabilities are not addressing the complexity of creating a profitable 5G service mix. Carriers should significantly improve this function by:
Carriers will need application programming interfaces (APIs) to help streamline user experience and bill accordingly — capabilities that don’t yet exist. Those APIs also will need to be consistent across carriers, a situation that argues for a consortium to standardize them to allow for apples-to-apples pricing comparisons. In fact, monetizing 5G more fully calls for greater collaboration among carriers and the many brands whose services rely on their networks. To help realize this growth, MNOs should work to develop stronger corporate partnerships.
Offering FWA makes sense only when significant excess capacity is available within the 5G infrastructure. FWA should be augmented by IoT connectivity, especially for use cases requiring lower data rate and latency requirements. Carriers should make use of this time lag to better plan and price future, higher bandwidth 5G services.
Carriers will be increasingly challenged to demonstrate better returns on invested capital for massive 5G capital outlays, while simultaneously meeting the demanding service-level agreements of future 5G applications. Network costs are likely higher — and revenue potential is likely lower — than carriers understand for these applications. Critical strategies for improving ROA and monetizing 5G successfully involve accurately valuing network features, quantifying network costs and communicating them to all stakeholders, as well as improving 5G offer management, pricing and service evolution.
From strategy to execution, learn how to navigate your network migration to 5G.