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Get Ready for the Great 5G Business Boom
Technology Briefing |
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TranscriptWhile artificial intelligence, service robotics, bio-reengineering, and the North American Energy Revolution are the highest-leverage manifestations of the Fifth Techno-Economic Revolution, these and all the other digital game-changers rest on the foundation of moving and processing more information quicker, at an ever-lower cost. That’s why the roll-out of 5G telecom will make such a huge difference. 5G represents the fifth generation of wireless Internet connectivity. And it will provide the infrastructure needed to carry previously prohibitive volumes of data, allowing for a smarter and more connected world. Whether we’re talking about driverless cars, flying commuter vehicles, or ubiquitous intelligence embedded in every appliance or consumer product, the key is highly-reliable, inexpensive, and super-fast data communication. 5G will provide the quantum leap in price-performance, which will make myriad game-changing business models and technologies possible. In previous issues, we’ve highlighted the broader implications of 5G and examined its capabilities. In this segment, we’ll focus on the development of the 5G telecom business with emphasis on the profit-making opportunities. So that raises the obvious question. “When and where will 5G be available and who will benefit?” In 2018, the commercial launch of 5G began in the United States, South Korea and Japan. In January 2018, AT&T announced its plans to be the first major American telecom provider to roll out 5G service. It selected 12 U.S. population centers to target by the end of the year, starting with two in Texas plus Atlanta. AT&T also revealed that the next targets for the roll-out would Charlotte and Raleigh in North Carolina and parts of Oklahoma. In order for users to take full advantage of 5G, AT&T also has plans to offer devices built specifically for the network. As they put it, “With faster speeds and ultra-low latency, 5G will ultimately deliver and enhance experiences including virtual reality, driverless cars, immersive 4K video, and more.” Home Wifi service will become obsolete as 5G gives you faster speeds with greater reliability, thus creating an "always online" scenario. No more trenches being excavated, no more overhanging network cables, no need for network switches and routers and other expensive on-premises infrastructure. This will mean no more waiting for the installer to arrive as no cables to the home or office will be needed. All that will be needed is a satellite, fiber, or a 5G tower connecting 5G "umbrellas" across the network. 5G has the additional advantage of not being subject to electrical interference. And you can send signals at more than 10 GB per second. Fiber will most likely still connect cities to a massive network. And 5G could even reduce the need for expensive satellites. 5G will also unleash a new era of applications involving
Long-term, the mobile telecom companies, including AT&T, Verizon, and T-Mobile/Sprint in the USA, will be big beneficiaries of 5G. The ISPs that operate under them will also benefit. Despite the initial capital expenditure, telecom providers will inevitably come to embrace 5G due to its lower energy consumption and lower maintenance costs. Experts seem to agree that this will accelerate the obsolescence of the large, traditional desktop PC. In its place will rise a new generation of "mobile" devices and those who manufacture them will have a huge market because 5G will offer high-quality connectivity almost everywhere. Laptops will become even more popular with a new generation of 5G communication chips. And we will need a huge number of those chips to satisfy the demand as nearly everything becomes wirelessly connected. Portable streaming smart TVs, next-generation cell phones, and portable network modems will all proliferate. There will also be a steady demand for massive data storage and cloud computing facilities on the network. And a new generation of solid-state drives will be needed for these facilities. In terms of 5G applications, some of the biggest will be security monitoring systems and medical devices, such as 5G-enabled prosthetics. Beyond that, a whole new range of apps will emerge, designed to serve us while on the move; outside, at home, in the car, and at the office. For example, an integrated set of home apps will run your house and all your devices, controlled from your 5G-connected smartphone or 5G-enabled tablet. Meanwhile, almost anything that runs on an electrical current will be 5G enabled. It will become more apparent what this new generation of developments will look like once we have 5G up-and-running and people understand 5G’s potential. The 5G future could have us living in cities where a closed-circuit 5G network would let us all use autonomous cars. How we shop also may change with the development of interactive 3D smart apps. 5G will enhance gaming, virtual reality, and augmented reality. High-speed data flow will further open-up the world of online commerce. All of this will further enhance Internet-connected software and hardware, like VR headsets. According to extensive analysis by McKinsey & Company, the biggest barrier lying between us and the enormous benefits we’ve been discussing is the huge capital investment the telecom operators must make in order for 5G to become a reality. Those companies know that 5G will create opportunities to capture enormous value from new “5G use cases” as well as the widespread adoption of the Internet of Things. At the same time, these companies are keenly aware that they’ll have to make big infrastructure investments up-front in order to exploit this technology. And, that’s not all. Even as they ramp up 5G, telecom operators will have to continue upgrading their 4G networks to cope with growing demand. For example, in an analysis of one European country, McKinsey found that network related capital expenditures will have to increase 60 percent from 2020 through 2025, roughly doubling the total “cost of ownership” during that period. This realization will have a big impact on when and where telecom operators will invest in 5g infrastructure. Many things on the road to 5G are uncertain. But as we’ve already discussed, the emergence of many new and innovative use-cases, which will drive demand, are pretty predictable. To understand how these will change infrastructure requirements, McKinsey grouped these use-cases into three categories:
When network upgrades are no longer sufficient to support the increased traffic, operators will need to build new macro sites or small cells. That point in time will vary by location, but McKinsey’s simulations show that most operators will need to embark on significant new build-out sometime between 2020 and 2025. That shift will be the primary driver behind network cost increases. How will infrastructure evolve across the dimensions discussed earlier? Consider spectrum. The race for spectrum will continue across high- and low-frequency bands. There is still spectrum coming to auction in low-frequency bands in many countries, but most countries will primarily use them for increasing 4G traffic over the short term. At this point, mobile players are still testing spectrum all the way from 3.5 gigahertz to 80 gigahertz for 5G. Most, however, are focusing on acquiring 3.5 gigahertz bands over the short-to-medium term, followed by the 26 gigahertz and 28 gigahertz bands. These bands will be the first up for auction in most countries of the world. The new spectrum will give operators greater bandwidth and, consequentially, increased “air capacity.” Consider the European Union, which is now releasing up to 400 megahertz of bandwidth on 3.5 gigahertz. Importantly, even where new spectrum is introduced, mobile telecom operators will need to increase their infrastructure investment significantly to overcome certain limitations. For example, high-frequency spectrum provides extra capacity, but comes with much greater propagation limitations. For instance, trials of 3.5 gigahertz spectrum indicate that its range falls to about 400 meters outdoors, compared to the much higher range seen with the current spectrum, and it has even lower indoor penetration. Meanwhile, the 26 gigahertz and higher spectrum frequencies will have even greater propagation limits. Furthermore, as new spectrum is introduced, mobile operators will need to improve radio interfaces and antennas to increase efficiency of new spectrum. As handset and traffic demand shifts out of legacy 2G and 3G, operators can increase capacity by so-called “re-farming of spectrum” from these bands to 4G and 5G. Announcements from operators indicate that most European telecommunications groups are planning to shut down their 3G networks around 2020. In the United States, operators will decommission 2G before 3G. Over the long term, the new spectrum may facilitate large-scale adoption of unlicensed access. Once that occurs, operators will face additional challenges related to controlling spectrum access. Importantly, operators will shift toward small-cell solutions to satisfy urban capacity demand. In rural and suburban areas, as well as along roadways, operators can handle increased traffic simply by densifying existing networks with macro sites. In many highly populated urban areas, by contrast, they’ll need to rely on small-cell solutions for two reasons: a higher concentration of traffic, as measured by traffic load per square kilometer, and the use of spectrum bands greater than 3 gigahertz. In one recent analysis of a European city, McKinsey found that sites with traffic density above 0.5 petabytes per square kilometer per year had a cell radius of less than 200 meters, necessitating small-cell solutions. Many other major cities or urban neighborhoods, including Kowloon, Manhattan, and Helsinki, have similar density, and others will be in that situation by about 2020. In fact, many major cities will be at 1 or even 2 petabytes per square kilometer per year by 2025. Fiber-only transmission will become essential. To improve transmission, mobile operators must undertake large-scale fiberization efforts. In addition to helping networks meet capacity and latency requirements for 5G, fiberization is essential to support small-cell deployment in urban areas. Core networks have been evolving from circuit switching and packet switching toward converged structures, such as IP multimedia subsystems. In addition to increased capacity and functionality, core networks have benefitted from broader IT advances, such as network functional virtualization and software defined networking. In addition to allowing networks to provide capacity at lower unit cost, these advances support reconfigurability and agility. The bottom line is that increased infrastructure costs become inevitable. The costs related to 5G, will differ over time and depend on local conditions unlike those for traditional 2G, 3G, and 4G networks. Telecom operators have at least two options. The first involves a “lean-in strategy” in which they prioritize 5G investments with the hope of accelerating commercial prospects. The second involves a more conservative approach in which they delay 5G investments as long as possible, while existing networks are upgraded. But, even if operators delay 5G investments, they will inevitably need to increase infrastructure spending to cope with growing traffic. According to McKinsey, there is no reason to believe that the historic increase in data volumes of 20 to 50 percent per year will change. In an analysis of one European country, McKinsey predicted that the total cost of ownership for the radio access network would increase significantly in the period from 2020 through 2025, compared to the 2018 level. For instance, in a scenario that assumes 25 percent annual data growth, total cost of ownership would rise by about 60 percent. McKinsey grouped the infrastructure costs for the current network footprint into four areas:
Mobile operators will need to develop strategies for 5G to cope with this expected growth in network cost. Standard measures will involve cost-saving efforts, but they will also need to explore more alternative approaches, such as network sharing (i.e., the joint building of new 5G networks) and new revenue models. Only nine years after the launch of 4G, we’re getting ready for the next generation. While each technology cycle brings greater opportunities to mobile operators, it also requires greater infrastructure investment. Given this trend, we offer the following forecasts for your consideration. First, 5G will be the fastest generation of cellular technology to be rolled out on a global scale. By the end of 2024, we expect 5G to reach more than 40 percent global population coverage with 1.5 billion subscriptions for enhanced mobile broadband. In North America, 5G subscriptions will account for 55 percent of mobile subscriptions. In South Korea and Japan, the corresponding forecast is more than 43 percent. In Western Europe, 5G will account for roughly 30 percent of mobile subscriptions. Second, by year-end 2024, wireless Internet of Things connections will total 4.1 billion, worldwide. North East Asia is expected to account for 2.7 billion of these. Diverse and evolving cellular IoT use-cases are prompting service providers to deploy both NB-IoT and Cat-M1 technology in their markets. Third, enabled by new technology, through 2024, mobile data traffic will grow by 30-to-40% per year, compounded. That’s fast; but it represents a slow-down versus the recent past. Specifically, mobile data traffic in Q3 2018 was up 79 percent, year-over-year; that’s the highest growth rate since 2013. Increased data-traffic-per-smartphone in China, South Korea and Japan was the biggest factor driving the global figure. With traffic growth per smartphone up around 140 percent between the end of 2017 and the end of 2018, the region has the second highest data-traffic-per-smartphone at 7.3 gigabytes per month. North America still has the highest data-traffic per-smartphone at 8.6 gigabytes per month, which is comparable to streaming HD video for over 12 hours monthly. Fourth, network sharing will be the dominant capital investment strategy in ‘the 5G world.” In “the 4G world” operators have been able to reduce the total cost of ownership by up to 30 percent while improving network quality through sharing a variety of both active and passive equipment. The cost savings potential for network sharing is even stronger with 5G, as greenfield deployment avoids the costs of network consolidation. For example, the cost of small cell deployment can be reduced by up to 50 percent if three players share the same network. And the rationale for sharing extends beyond cost, as it can eliminate many practical roadblocks of 5G deployment in urban areas, such as the potential for urban disruption and visual pollution from the installation of excessive equipment and fiber. Given these arguments for network sharing, telecom operators will need to have a strong commercial rationale to justify stand-alone deployment of 5G, rather than sharing a common 5G network. Fifth, as 5G takes over, the losers will be the cable providers, traditional network television, and traditional fixed phone networks. All will be left stranded by 5G, unless they become content providers on the new 5G network. And, Sixth, the winners will be the first-to-market 5G telecom operators, as well as the 5G transmitter manufacturers, the 5G modem manufacturers and manufacturers of 5G smartphones and phablets. AT&T, Verizon, and T-Mobile are likely to fight it out for the U.S. market. Qualcomm and Nokia appear to be very strong at this stage, but Huawei and Intel could end up as surprise winners. For data storage companies, app makers, and content providers, 5G will provide a major opportunity for growth. Facebook and Netflix will both be strong in apps and content, while Cisco appears well-positioned in data storage. More importantly, new 5G-relaed industries will include:
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