How operators can make 5G pay
Communications service providers will only gain a return on their infrastructure investments by adopting innovative business models.
The next generation of cellular mobile communications technology has arrived: Major U.S., European, and Asian operators have launched commercial 5G networks. 5G, which is set to succeed the current standard over the next few years, offers an exponential improvement in functionality over 4G. The results will be mobile networks that offer far higher capacity and reliability, much lower latency, reduced energy usage, and massive connectivity for devices. Research firm IDC projects that mobile service providers will collectively spend nearly US$57 billion on the rollout of 5G through 2022.
5G will provide a far superior experience for customers in the areas of video calling, video streaming, gaming, interactions with devices in the connected home, and more. And the unit cost per gigabyte of data traffic will fall sharply, yielding economics that will help operators maintain — and potentially increase — their margins on selling mobile broadband services.
But operators won’t be able to recoup their investments in 5G simply by cutting costs and charging consumers more for more and/or faster data. In fact, consumers continually expect to have more — more data, more connectivity, more functionality — while paying the same or less. Recent PwC research shows that just one-third of Internet users would pay more for 5G technology — 33 percent would do so for 5G in the home, while 31 percent would do so on mobile. Those consumers, on average, would be willing to pay an extra $5.06/month for 5G Internet service in the home and an extra $4.40/month for 5G Internet on mobile.
To achieve returns sufficient to justify their 5G investments, operators will need to look beyond existing business models and target the three families of use cases that are specifically enabled by 5G’s unprecedented capabilities (see “5G use cases”). One of the most compelling approaches will be for operators to shift from selling directly to business (B2B) or directly to consumers (B2C), and instead sell 5G services to other businesses, which will then sell them as part of their offering to their own customers. This model is widely termed business-to-business-to-X (B2B2X), in which X can be a consumer, another business, or a public agency. Under B2B2X, which encompasses both B2B2B and B2B2C, operators collaborate and share the rewards with B2B partners.
5G use cases
Extreme mobile broadband and fixed wireless access: Applications might include faster video streaming, interactive multiplayer gaming, virtual reality (VR) and augmented reality (AR) games and experiences, and connecting patients with remote healthcare services.
Critical real-time communication: Applications might include the operation of precision production lines, automated mining, enhanced responsiveness in autonomous cars, and medical applications such as remote surgery.
Massive machine-type communication: Applications might include industrial applications (e.g., predictive remote maintenance), management of smart grids, city applications (e.g., real-time traffic management), drones, and integrated services and devices in connected homes.
Why focus on B2B2X?
Under the classic model, commonly used for 4G services, the operator sells voice and data connectivity directly to end-users, who simultaneously contract separately with their chosen third parties to access services over that connection. For example, a user might buy a 10-gigabyte data plan from the operator and a separate subscription to a video-streaming service such as Netflix or Amazon Prime.
This pattern is now evolving: Some operators have started to partner with over-the-top (OTT) service providers to bundle their offerings with connectivity subscriptions, sometimes with an explicit charge and sometimes without (for example, by making certain streams unmetered against the customer’s data bundle). “With the improvements in network capabilities in the 5G era, customers can expect to enjoy more network services bundled with content provider services — including accelerated gaming — and the operator could offer its network service to the customer as part of that bundle,” said a senior executive at an Asian Internet player.
In the 5G world, in which the network technology allows a far greater range of functionality that can be monetized, telecom companies have many more opportunities to develop collaborations with a variety of businesses and public agencies. We see four main options for how operators could monetize this greater functionality.
Connectivity provider (operator-led B2B or B2C): The telecom company extrapolates the typical 4G pricing and bundling model by applying additional elements and innovation. This may involve adopting an “airline-type” approach, delivering a multitiered connectivity service to both B2C and B2B customers based on the level of package selected by the customer. An operator could offer different speeds, quality-of-service levels, and pricing levels to match each customer’s needs and budget. This tactic runs a risk of becoming overly complex for end-users, who may struggle to understand the value of a plan whose pricing is defined on the basis of technical functionality (such as latency and reliability) rather than simply speed and data allowance.
Solution enabler (third party–led B2B2X): A third party such as a cloud provider or video-streaming service incorporates 5G connectivity sourced from the operator as part of its own offering. The third party markets the bundled offering to its customers, receiving revenue through direct payment or another monetization model, while paying the telecom company for the network usage and variable functionality in the form of either a network charge or a revenue share. The third party effectively buys a “slice” of the operator’s 5G network capacity for its own use, and the interface between them is managed and enabled through application programming interfaces (APIs).
Solution creator (operator-led B2B2X): An operator creates new digital propositions by bundling third-party products and services with its core connectivity, and markets the bundled solution directly to its own customers. Under this model, a telecom company could offer its customers a data plan that comes complete with VR gaming, including a VR content subscription and a headset, at no extra cost. A number of operators already make commercial agreements with OTTs to buy their services wholesale and resell them to consumers — and they are looking at how this type of model could be enhanced to build in 5G functionality, allowing customers to pick and choose from a menu of OTT products and receive a discount depending on their selection.
Ecosystem enabler (collaborative B2B2X): Although similar to the solution enabler and solution creator models, in this instance the operator focuses on creating an ecosystem of innovators to target changing customer needs and wants. Under this model, the operator works with third parties to identify and tailor experiential products and services, which can be delivered to the marketplace quickly. A customer-focused ecosystem model allows directed collaboration, not just with the operator, but between third parties as well, and positions the operator as a key player in driving 5G innovation. For example, one ecosystem member may identify a high-potential use case, find a hardware maker to build a prototype, and test on the operator’s network. This model encourages the operator to participate more directly in the value creation process and the commercial innovation that goes with it.
The availability of these widely varying business and monetization models will enable operators to benefit from greater choice and flexibility in terms of their services and pricing, and will spread value around more evenly into different areas of the ecosystem. Across all the models, operators and their partners will tailor their service offerings to capitalize on emerging technology trends such as the Internet of Things, AI, edge computing, drones, robotics, smart cities, and Industry 4.0.
Selecting the optimal business model
To help operators and other participants in the quickly expanding 5G ecosystem identify the most suitable business model — connectivity provider, solution enabler, solution creator, or ecosystem enabler — for each specific use case, Strategy&, PwC’s strategy consulting business, has developed a matrix of five criteria for scoring potential use cases.
Third-party brand strength. When the operator’s third-party partner in a potential business model has a very strong brand in relation to the target use case, the third party has an advantage in owning the customer relationship. For example, game-streaming service Twitch would have stronger brand strength among the serious gamer customer segment for an enhanced 4K gaming service than a telecom operator.
Third-party market penetration. If the prospective third-party collaborator already has a high market penetration in the relevant sector, the situation also points to that third party owning the customer relationship. For example, a specialist engineering solutions provider with strong penetration among transit authorities would be better placed than an operator to roll out a dynamic traffic control system.
Alignment with the operator’s internal capabilities. If the use case is closely aligned with its existing capabilities, the telecom company has a greater ability to own the customer relationship and secure a higher proportion of revenue share. For instance, an operator’s existing strengths in distribution, service delivery, billing capabilities, and physical presence may mean it’s well placed to sell AR and VR experiences over 5G to consumers and businesses. This points to the solution creator option for the business model.
Operator brand relevance. The higher the relevance of the telecom operator’s brand to the use case, the greater the operator’s ability to own the customer relationship and claim a bigger share of revenues. And the lower the relevance, the less it makes sense to do so. For example, an industrial original equipment manufacturer (OEM) may have a stronger brand than a telecom operator for selling an automated, real-time controlled production solution to manufacturers. In this case, the telecom company should probably aim to partner with and support the OEM as a solution enabler, rather than expecting to take the lead itself.
Associated usage intensity or dependence on 5G. When a use case has a high intensity of 5G usage or is critically enabled by 5G, it may give the operator a greater ability to own the business model and take a bigger slice of the resulting revenue. For example, for VR headset distribution business models, operators are well placed to act as solution creators because of their physical retail presence, device financing capability, and their ability to optimize network slices for graphics-heavy gaming.
In some instances, it’s possible that multiple business models might work for a given use case. In that situation, operators’ capabilities and brand perception are likely to be the deciding factors.
The case for action
As 5G services are launched, the most immediate use cases in the short to medium term will likely be in fixed wireless access broadband and extreme mobile broadband — for example, for outside broadcast, as well as connected ambulances, manufacturing, and support of emergency services. But these will just be the start, as new experiences and applications enabled by 5G emerge. “5G will give rise to new business models, which will become clearer after a period of commercial and technological innovation,” said Vishal Dixit, director of strategy and wholesale at Vodafone UK. “To take a leading role in this evolution, operators need to gain experience in platforms and platform business models, add non-telecommunications sector knowledge to their DNA, and hire people from diverse backgrounds to build a more diverse, future-focused talent base.”
Recent PwC research shows that just one-third of Internet users would pay more for 5G technology — 33 percent would do so for 5G in the home, while 31 percent would do so on mobile.
To monetize 5G efficiently and effectively, we believe operators will need to ramp up and excel in the use of B2B2X business models applied to the right use cases. Having defined their way to play, operators should build or strengthen four key capabilities: the right 5G network, commercial innovation, vertical industry engagement, and a culture of mass collaboration. 5G is clearly not the answer on its own. For full monetization, 5G needs to be coupled with other technological capabilities such as edge computing, cloud computing, AI, and automation — and it will demand real insight generation, rather than just data collection and transmission from A to B.
Whatever way to play they choose for a 5G world, few operators looking to take these steps will have all the required capabilities readily available to them internally — they will likely need partners, including entrepreneurs with the ambition to invent new commercial models using 5G.
It is from this mutual dependency that the possibility for operators to fully monetize 5G will arise.
- Rolf Meakin advises clients in the telecom, media, and technology industries on strategy, transformation, capital allocation, and operating model change for Strategy&, PwC’s strategy consulting business. He leads PwC’s telecom industry global consulting practice. Based in London, he is a partner with PwC UK.
- Darren Shea advises executives in the telecommunications industry for PwC. Based in Dallas, he is a director with PwC US.
- Kirolous Zikry is a senior manager with PwC UK and is based in London.
- PwC China partner Stephen Wong also contributed to this article.