This is the first installment of a multipart series on the potential impact of 5G technology, the next-generation of wireless networks. Part 2 explores the potential impact on cable operators. Part 3 looks at how 5G might shape strategy for TV networks and advertisers. Part 4 addressed the growing skepticism in Europe over the 5G business case. Part 5 discusses 5G's potential impact in Asia.
The next generation of wireless technology, 5G, promises to transform the telecommunications industry. But delivering on that promise will not come cheaply or easily.
Major wireless carriers in the U.S. are already touting the myriad benefits of 5G, even as standards for the technology are still being set. The new 5G technology is expected to deliver speeds of multiple gigabits per second, 100x faster than 4G. Super low latency, meaning the amount of time between data leaving a source and arriving at its desired destination, will be in the single-millisecond range. By comparison, a 2016 report from the Federal Communications Commission on fixed broadband found cable and fiber services offered latencies between 12 milliseconds and 30 milliseconds. This combination of faster speeds and lower latency is expected to enable various new technologies and services, such as telemedicine, virtual reality and the internet of things.
U.S. wireless operators have begun laying the groundwork for a rollout that will require more spectrum, fiber and cell sites than any previous deployment.
AT&T, for instance, has said that by the end of 2017, it will offer 5G speeds in 20 major metro areas, while Verizon Communications Inc. started by offering 5G fixed wireless access to pilot customers in five markets during the first half of 2017. T-Mobile US Inc. has criticized this city-by-city approach, saying that AT&T and Verizon are "approaching 5G much like a series of hotspots in select cities — with 5G coverage that will completely disappear once customers step outside these limited 5G zones." Instead, T-Mobile said it will launch 5G service on a broader level starting in 2019, and the company set 2020 as a target for full nationwide 5G coverage. Sprint Corp. said it planned to provide commercial services and devices in late 2019.
"You've got two years of experimentation that's going to be going on right now," Kagan analyst Sharon Armbrust said in an interview, noting widespread deployment of 5G is not expected until 2019 or 2020. She described the U.S. as being in a "prime position" for 5G. "They've got the regulators, the operators and the software … doing everything possible to charge 5G faster," Armbrust said.
Several analysts believe competition in the U.S. wireless market is pushing operators to move forward on 5G at an aggressive pace. But they cautioned that this very same competition could complicate efforts to ensure a return on investment.
"The U.S. market is so fiercely competitive right now," said Dan Hays, principal of PwC consulting group Strategy&, in an interview. He added that some of the near-term promises of 5G speeds and rollouts "are probably a little bit more of one-upmanship than they are of real substance."
It's not surprising that building 5G networks will cost billions of dollars. AT&T, Verizon and T-Mobile have all spent heavily to acquire additional spectrum in recent months, ranging from the low-band spectrum purchased through the FCC's 600 MHz auction to the high-band millimeter wave spectrum from AT&T's purchase of FiberTower Corp. and Verizon's planned acquisition of Straight Path Communications Inc.
According to information from the wireless association CTIA, mobile networks have traditionally relied on low- and mid-band spectrum under 3 GHz. By contrast, 5G will require a wider range of spectrum, especially high-band frequencies. Of particular interest is high-band spectrum above 24 GHz, known as millimeter wave spectrum, which offers wide spectrum blocks 200 MHz or larger. These wide channels provide greater bandwidth for faster speeds.
The downside to high-band spectrum is that it does not travel as far. Thus, wireless operators will need to densify their networks, deploying hundreds of thousands of small cells, or cellular base stations and antennas, every few hundred meters. The increased speeds and increased connections associated with 5G will create an immense amount of backhaul traffic, exacerbating the need for fiber backhaul services.
Given these costs, Hays said the rollout of 5G will likely take longer than just a couple of years. "We actually expect that this cycle for the construction and build-out of 5G networks is going to be quite extended and potentially delayed by several years versus what we saw with 4G, because in an environment where the industry is cutting prices and struggling with profitability, really no one can afford to invest in 5G," he said.
Hays pointed to pricing trends in the wireless industry, which have been falling in recent years due to fierce competition between the four national operators. "How much more a month are you willing to pay for a 5G connection over your existing 4G connection?" he mused, speculating the answer for most consumers is zero. "How do you invest in an environment where nobody's going to pay for it?"
Mark Lowenstein, managing director of the consulting firm Mobile Ecosystem and a former Verizon Wireless executive, agreed that with the current level of competition between the four operators, financing a 5G rollout is a daunting prospect. "Given the amount of money it's going to take to build 5G networks … this country does not need four separate 5G networks. Even having four 4G networks has been a challenge," Lowenstein said in an interview.
Lowenstein noted that a wave of consolidation is expected in the telecommunications industry. In particular, the executives of T-Mobile and Sprint have both spoken publicly about the various benefits that would result from a merger between the two companies. Having three 5G networks might be more financially feasible than four, he said.
Moody's Senior Vice President Mark Stodden, however, warned that a major M&A transaction carries its own complications. "To the extent that the competition accelerates 5G, Sprint and T-Mobile could be left further behind." He explained that while T-Mobile's and Sprint's cash and focus would be spent on integrating, Verizon and AT&T would be pushing forward on 5G. In fact, Stodden said he believed a merger of Sprint and T-Mobile would cause AT&T and Verizon to accelerate their 5G investments.
And though Lowenstein suggested a combination of T-Mobile and Sprint might ease some of the competitive pressures driving prices down in the wireless market, Stodden is not so sure. Instead, he said the combined spectrum capacity of T-Mobile and Sprint could actually result in "intense price competition, because T-Mobile would have an incentive to remain a disruptor in order to drive higher utilization." In other words, the combined entity would try to lure more customers with lower prices and unlimited data offerings.
Kagan's Armbrust, though, said that because 5G is still in the trial and experimentation stage, "it could be very good timing" for the two companies to come together. In particular, T-Mobile and Sprint would need to figure out how to best quilt together T-Mobile's low- and mid-band spectrum holdings with Sprint's deep high-band spectrum assets. "Everyone is trying to do aggregation across different frequencies so they would be doing that for 5G and they would be doing it for the M&A merger as well."
While Armbrust sees the costs and hurdles that others noted for 5G, she said the wireless industry, government officials, software developers and others "all coming together at the same time" to solve those issues. As a result, the rollout of 5G in the U.S. "may not be in the order that we expect, but it will be miles ahead of other countries," she said.