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Don't Listen To The 5G Naysayers – Forbes

Don't Listen To The 5G Naysayers – Forbes

By Herbert Blum, Darryn Lowe and Alex Dahlke

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Every decade or so, a new generation of telecom network technology comes along that promises more speed, more capacity, better quality and new uses for customers. With each generation, network operators invest capital to upgrade their infrastructure, with the firm belief that doing so will lead to happier customers and reinvigorated revenues and profits. This formulation has been true ever since the early days of cell phone service in the 1980s; it has held up through 2G in the 1990s, 3G in the 2000s and 4G in the 2010s.

But this time around, something has changed. When it comes to the next generation, 5G, some telecom executives seem to have lost their faith in the power of technology. A survey of recent public statements by executives of the 19 largest mobile network operators worldwide shows that more than half (53%) see no near-term business case for 5G.

In a 5G network, wireless data can travel at speeds of greater than 1 gigabit per second, more than 10 times faster than most 4G networks. With 5G, more smart devices can work together simultaneously on the same network, bringing the Internet of Things to life. Also, latency will fall by a factor of 10, meaning, for example, that a self-driving car will be able to communicate with cloud-based data in real time.

In the face of such opportunities, why are so many executives so cautious, if not downright bearish, about 5G? We believe the industry has been influenced by misconceptions and flawed thinking. We see three common analytical fallacies.

Fallacy No. 1: There is no business case for 5G. When it comes to mobile service, the industry credo has long been faster is better. When network operators transitioned from 3G to 4G, for example, they knew that it would alleviate network congestion and that content-consuming smartphone customers would immediately experience dramatic improvements in video download speeds.

With 5G, the skeptics point out, there are no equivalent, sure-thing, near-term customer benefits. While 5G will be important to the successful rollout of two trailblazing technologies—namely, augmented reality/virtual reality and autonomous driving—both of these uses are still several years away from being market-ready.

But operators don’t need blockbuster new uses to develop a business case for investing in 5G. They can come up with a compelling rationale for 5G based on the improvements it will bring to existing uses. For example, 5G can alleviate the network congestion that often occurs when large numbers of users are concentrated in one place, such as a sporting event. In addition, mobile operators can take advantage of 5G’s 1-gigabit-per-second speed to challenge fixed-line providers with fiber-to-the-premises broadband Internet in some markets.

Fallacy No. 2: 5G requires a surge in capital investments. Several industry participants have argued that aggressive 5G deployment will require vast increases in capital spending. According to one recent forecast, a major European integrated operator adopting 5G would need to increase its capex-to-revenue ratio from 13% to 22%, even if the company rolled out 5G only to densely populated areas.

This view, however, is based on the mistaken assumption that operators will need to build a contiguous canopy of 5G cells. In reality, 5G-capable devices will seamlessly connect to 4G cells when they cannot get a 5G signal, enabling operators to “deaverage” their approach to cell building and focus on the creation of new cells in areas with the highest demand. Those believing in the need for a capital surge also neglect the spillover benefit that improving some parts of the network will have on the rest of it. As operators upgrade cells to 5G, some of the 4G usage will migrate to 5G, thus freeing up much-needed capacity on the 4G network.

Fallacy No. 3: 5G is all about bringing down unit costs. Some industry experts argue that the main point of 5G is that it will help operators spend less. Once the industry makes a full transition to 5G, according to this line of thinking, operators will become so efficient that they’ll be able to scale back on their investments. Some observers predict that operators will be able to slash their capex-to-revenue ratio from 15% to less than 10% within five years.

This looks like a good thing. Reducing capital intensity and increasing free cash flow are typically positive signs. But the idea that the main purpose of 5G is to increase efficiency is, we believe, actually the most pessimistic of the three fallacies. An operator adopting this approach has, in effect, conceded that it has run out of attractive investment opportunities.

Operators that fall under the sway of these three fallacies run the risk of becoming 5G also-rans. Those that wait for specific 5G uses to mature before making a commitment may find themselves disrupted by bolder competitors. Operators that hesitate because of the mistaken belief that 5G will require onerous investments may end up ceding market leadership to a rival with a more realistic understanding of 5G economics. And operators that invest in 5G only for the efficiencies it can bring are likely to miss out on innovative growth opportunities.

As was the case with earlier generations of network technologies, 5G will indeed unlock capital efficiencies. The most forward-looking operators will use those savings to invest in new revenue-generating 5G projects—thereby defying the 5G pessimists and fully embracing the promise of what this latest generation of network technology can deliver.

Read more: Why The 5G Pessimists Are Wrong

Herbert Blum leads Bain & Company’s Telecommunications practice in the Americas, and he is based in Toronto. Darryn Lowe and Alex Dahlke are partners with the Telecommunications practice. They are based, respectively, in Toronto and Frankfurt.

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