In my earlier post, I outlined a few myths about 5G to avoid the cascading technology trap. Here, I like to extend the discussion and share a few data points on the cost of 5G networks. Over the past few months, our team has analyzed vendors’ roadmaps and product features, assessed spectrum and its cost, and developed deployment scenarios and cost models for 5G. We used this information to optimize our financial models and to deepen our understanding of potential operator strategies in upgrading to 5G networks.
5G Capital Expenses
Taking South Korea as an example – a country of 51 million people with excellent fiber infrastructure that’s widely available to support the backbone of 5G services, the cost of 5G is set to exceed $8 Billion in capital investments for a single service provider. This excludes over $870 million for 100 MHz in 3.5 GHz that’s scheduled for auction in June*.
Deploying 5G in 3.5 GHz delivers on the throughput performance promise. Unfortunately, it will resemble Swiss cheese from a coverage perspective. Operators will need to plan the rollout over a time period to reach comparable mobile performance to current systems. Therefore, operators will have to pay more to deploy 5G networks than they paid for 4G networks to achieve the same footprint.
We can only evaluate investments in 5G in the context of new revenues it generates. A number of services could benefit from the lower latency and high throughput offered by 5G, but the question is whether the service providers will be able to monetize these services. Doing so uncovers a relatively high level of risk facing service providers with respect to 5G with direct impact on the supporting ecosystem.
To reduce the risk to service providers, the South Korean ICT ministry was active in getting the operators to agree to an infrastructure sharing model as reported recently. SK Telecom, KT, LG Uplus and SK Broadband will jointly build a 5G infrastructure with an estimated KRW1 trillion ($935 million) savings over the next ten years. Operators that are ahead of others in footprint density and subscriber base have legitimate concerns that weaker service providers would receive a higher proportion of the benefits. But for a government looking to optimize service at a national level, it makes sense to eliminate spending duplication for basic performance parameters such as coverage and data rate while maintaining competition at the service layer. It also serves to reduce risk for the service providers in the early years of 5G roll out as business models are validated.
The US Scenario
The US market hinges to a large degree around Verizon and AT&T as the dominant service providers with the highest subscriber base, revenues, and expenditures. Hence, the market forks along the fixed wireless access plans announced by Verizon and the mobile plans announced by AT&T. While the first is clear, there has not been clarity on the second path. In a blog post CTO Andre Fuetsch explains AT&T’s “5G Evolution” plan which is LTE-Advanced featuring 4×4 MIMO, 256 QAM modulation and 3-carrier aggregation in addition to using Licensed Assisted Access (LAA) where available. This technology is available and already deployed in different markets around the world. AT&T chose to brand it using 5G. This raises the question whether operators will do all they can to claim 5G without actually deploying it. Irrespective, the outcome serves to confuse the investment community, especially in adjacent ecosystems that are waiting for 5G. Examples of these ecosystems include large private enterprises and smart city projects that are in process of making technology decisions.
Apple’s iPhone support site states “4G can also indicate a UMTS connection on some GSM networks, including AT&T’s and T-Mobile’s high-speed network in the United States. For more information, contact your carrier.” Just as there was a race to claim 4G, we are in the midst of another race to 5G. However, there are many differences between 2009 when LTE was at the cusp of deployments and 2018. The business case was more clear then as data rates were exploding in a way that inefficient 3G networks could not handle. Verizon wanted to get off the CDMA technology and was ready to be the 4G market catalyst.
Today’s challenges are of a different nature and will require different solutions and approaches. Numbers tell us of the required investment to enable 5G. But we are yet to have a compelling estimate of 5G profitability: reducing this risk is one worthwhile exploring and investing in.
* The price set by the South Korean regulator exceeds norms for 3.5 GHz seen around the world!