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Accuracy Talks Straight #7 – Industry Insight

Ignacio Lliso

Alberto Valle

5G in Europe: a bumpy road ahead

In 2019, Europe proclaimed the advent of 5G, a new communication technology that would disrupt the way businesses and individuals interact with each other. Four years later, the deployment of the necessary infrastructure is far from complete, and companies at the forefront of its development appear to be taking things easy. Why? Because return on investment is unclear.

However, some experts see signs indicating that the current landscape is about to shift. New types of companies, born from new technologies such as augmented reality, autonomous devices or remote working, are demanding more data at faster rates and with new functionalities.    

This gives rise to some questions: what is the enabler that could accelerate 5G penetration? Who will benefit most from 5G? How will investors recover their investment?

1. Are we facing the true shifting point for 5G adoption?

Ericsson estimates a significant increase in 5G subscriptions from now until 2028, driven by the availability of devices from several vendors, the reduction of prices and the early deployment of 5G in China. This massive worldwide adoption will lead to:

(i) an increase in the number of users to five billion (80% of traffic as video);
(ii) a more balanced distribution of users across continents;
(iii) mobile traffic data increasing from 15 EB per month to 225 EB per month worldwide.

Figure 1 – 5G penetration rate by region

Figure 2 – Breakdown of 5G subscription by regions

Figure 3 – 5G mobile traffic data worldwide

This shift must be fuelled by the many advantages of 5G over 4G, which rely on the increased upload/download speed – up to 1 GB per second – its spectrum, capacity and latency.

Table 1 – Overview of 5G characteristics vs 3G and 4G

Another advantage lies in its energy efficiency; figures prove that 5G technology consumes only 10% of the power used by 4G.

Further advantages include (i) reduced interference, (ii) improved security and (iii) connection to newly developed products.

2. What is impeding the deployment of its infrastructure in Europe?

It is difficult to provide an accurate and up-to-date number of base stations currently in operation in Europe because the deployment of 5G networks is ongoing and varies significantly country to country.

Table 2 – 5G Band types and characteristics

Several external factors have impeded a robust deployment, factors that can be segmented into two categories.

Business factors:

• The unclear monetisation strategy for network developers, with no concrete business case providing a sufficient return.

• A weaker tech ecosystem pushing for an accelerated adoption of 5G to serve their needs (e.g. immersive technologies).

Challenging access to hardware, particularlysincethe US government blocked global chip supply to the blacklisted telecommunications giant Huawei.

• The slow replacement of old generation devices.

Political and administrative factors:

• The highly fragmented European market,with hundreds of operators – in the US or China, there are three large operators with the critical mass to invest.

• Higher European administrative and bureaucratic hurdles to network providers.

• A lack of process standardisation – operators struggle to find deployment synergies due to the high level of competition in each local market.

• A weaker political push versus Asia where technologies are leveraged to monitor and control populations.

3. What is Europe doing to overcome these challenges?

The deployment of 5G in the EU is developing heterogeneously across its members. By the end of 2020, 23 member states had activated commercial 5G services and met the goal of having at least one major city with 5G accessibility. Nevertheless, not all national 5G broadband plans include references to the EU’s 2025 and 2030 ambitions.

Figure 5 – 5G roll-out in Europe

The European Commission has estimated that 44% of all mobile connections in Europe will be under 5G in three years. This objective has led the Commission to put in place many initiatives to accelerate the roll-out of 5G in Europe, proactively searching for solutions and working to enhance deployment. These initiatives have contributed to the fact that by the end of 2021, the EU had installed more than 250k 5G base stations, covering 70% of its population. However, this coverage lacks much of the functionality and data transfer speed attributed to the new technology.

4. Is 5G a lucrative business?

The primary issue for operators is how to recover their investment. The way in which operators monetise their services is expected to change from their traditional business models; hence, monetisation strategies and 5G roll-out business cases will need to be revisited.

For example, the investment required to upgrade existing networks to 5G networks will amount to c. €5 billion in Spain alone, plus an additional €2 billion estimated by the Spanish government to drive the roll-out of 5G between 2021 and 2025. A total amount, therefore, of €7 billion.

Operators are aware of the inevitable increase in operating and capital expenditure. However, there is no clear path to making the investment profitable. For operating expenses, the collaboration of neutral infrastructure operators is crucial, as they represent (i) enablers of a traditional 5G deployment, (ii) the perfect partners for the scenario of large data consumption and ultra-high speed rates and (iii) an essential resource to make these investments less prohibitive for operators. For capital expenditure, operators are experimenting with different options to seek a return throughout the value chain, some of which take them far from their comfort zones. For example, Telefonica is studying the monetisation using APIs, which enables users to pay for different configurations of speed, latency and service quality,

In addition, network operators are looking for alternatives through partnerships with new technology providers to:
• better understand each other’s needs and capabilities;
• allow manufacturers to improve efficiency;
• avoid commoditisation and provide high value-added services around SaaS, PaaS or NaaS;
• better share earnings from these new services. 

5. Who might be the “winners” of a successful 5G deployment?

Figure 6 – 5G value chain and its main players

While network operators are struggling to find a way to monetise their investments, other players are poised to extract value from the deployment of 5G:

Tower/infrastructure providers – the construction of a large number of towers and base stations may be necessary in certain regions. However, the costs of dismantling obsolete infrastructure should also be considered.

OTTs and other service providers –suppliers of autonomous driving, smart cities, Industry 4.0, telehealth, smart farming or entertainment, for example.

Equipment providers – component and module suppliers, machinery and industrial automation companies and manufacturing companies for visual quality checks.

6. Conclusion

Tower constructors and network operators are heading towards a new era of communications, but the challenges they are facing are significant. The current low level of demand is impeding the adoption of this new technology, and some investors feel it does not justify the huge investment.

Meanwhile, technology costs have increased in what has become a global competition for hardware and chips. European players face fierce and imbalanced competition from Chinese and US operators that benefit from better equipment sourcing, more favourable administrative frameworks, higher economies of scale due to market consolidation and higher demand fostered by their dynamic tech ecosystems.

On the one hand, building infrastructure requires scale and long-term economic vision; on the other, technological disruption requires agility. Today, the European ecosystem has proved to be weak when faced with this paradox.

However, European institutions have started to realise the extent of this gap and have begun to show significant support for the technology. Nevertheless, this will not be enough for its deployment, and private operators must raise their game.

For 5G to become a reality in Europe, all stakeholders will have to collaborate, sharing their knowledge and future profits. This means designing, modelling and implementing major strategic alliances between European operators. This also means sharing investments and designing smart profit sharing with downstream tech ecosystem players benefitting from 5G expansion.

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