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Limited availability and adoption of compatible smartphones will stall 5G’s early momentum

Anticipation is building as mobile 5G networks will be widely deployed in the United States over the next couple of years. As the wireless market continues to shift to unlimited data plans, the capacity provided by 5G will enable operators to more cost-effectively offer these programs over the long term while better handling network congestion. Operators will also be able to capitalize on the cost efficiencies of mobile 5G by introducing new premium unlimited tiers, with incentives including higher data limits before speeds are throttled as well as increased data tiers for mobile hotspot coverage, both of which enhance plan value.

Chart showing initial mobile 5G timeline in the U.S. for AT&T, T-Mobile, Verizon and Sprint

Though operators are eager to realize the network efficiencies 5G will provide, they will not be able to reap these benefits until consumers migrate to 5G-compatible devices. Adoption of 5G smartphones will be hampered by lengthening device upgrade cycles in the U.S. as consumers are holding on to their devices for longer periods as features offered on new handsets are not deemed compelling enough to justify their rising price tags. Migration to 5G smartphones will also be slowed as certain flagship handsets, particularly the iPhone, will likely not offer 5G-capable models until 2020.

Perhaps the greatest hurdle to 5G smartphone adoption will be 5G itself, as the initial capabilities offered by the technology will not be a strong enough incentive for many customers to upgrade their devices. Although offering mobile 5G services will help to attract some subscribers craving faster speeds, the difference in user experience compared to LTE-Advanced will be minimal, at least initially. Early 5G smartphone customers will mostly benefit from reduced download times for large files such as high-definition video and advanced gaming applications, which will not be a significant enough incentive to encourage wide-scale purchases of 5G smartphones. Advanced consumer smartphone use cases requiring accelerated data speeds and ultra-low latency offered by 5G, such as augmented reality (AR)/virtual reality (VR), are still being developed and will not become commercially available until the early 2020s.

Graph showing postpaid upgrade rates for Sprint, T-Mobile, Verizon and AT&T for 2016, 2017 and estimated 2018

To foster 5G smartphone adoption, TBR expects U.S. operators will prolong the financing terms of their equipment installment plans — from two years to three years — to ease the cost of purchasing 5G smartphones as many devices will likely exceed a $1,000 price point. TBR also anticipates operators will become more reliant on device promotions, such as BOGO (buy one, get one) offers and significantly discounted handsets, to accelerate upgrade rates during the infancy of the 5G era. Though these promotions will pressure wireless margins in the short term, operators will justify these initiatives by the long-term network efficiencies they will ultimately realize from 5G smartphone adoption.

Chart showing announced 5G devices in the U.S. as of Dec. 5, 2018, for AT&T, Verizon, Sprint and T-Mobile

2018 5G Americas Analyst Forum

5G will provide network efficiencies for telcos as they anticipate next-generation use cases

Given the introduction of Verizon’s (NYSE: VZ) 5G Home fixed wireless service in October, as well as the upcoming launch of AT&T’s and T-Mobile’s mobile 5G networks by the end of 2018, the 5G era is edging closer to reality after years of industry speculation regarding the technology’s capabilities. Similar to prior network eras, such as the transition from 3G to LTE, the 5G era will be a gradual evolution of existing network capabilities and will not immediately yield its full benefits or dramatically alter the global wireless market during its inception.

A resounding theme at the 2018 5G Americas Analyst Forum was that the 5G era will essentially be “more of the same” initially. LTE will remain the predominant source of connectivity for most wireless subscribers in the Americas over the next several years until 5G coverage becomes nationwide and customers transition to 5G-capable devices. The accelerated speeds offered by LTE-Advanced services, as well as the cost savings offered by IoT network technologies such as Narrowband IoT (NB-IoT) and LTE-M, are currently more than sufficient to support the demands of most consumers and enterprises.

The wireless industry is anticipating 5G will foster IoT innovations in areas including connected car, healthcare, smart cities and augmented reality (AR)/virtual reality (VR). Though advanced IoT use cases that require the precision promised by 5G, such as remote surgery, are being explored, many of these services will not become commercially available until the mid-2020s at the earliest. Additionally, solutions like remote surgery and V2X automotive services will be burdened by significant regulatory challenges as ensuring 100% network reliability and ultra-low latency will be essential to prevent hazardous outcomes.

Although the end-user benefits of 5G will initially be limited, investments in 5G will ultimately be viable due to the network efficiencies operators will gain from the technology. 5G, which is expected to provide between four- and 10-times greater efficiency on a cost-per-gigabyte basis compared to LTE, will enable operators to more cost-effectively add network capacity to support the prevalence of unlimited data plans as well as continued connected device additions. Offering 5G services will also be essential for operators to remain competitive against their rivals as the marketing of accelerated 5G speeds will help to attract subscribers. Lastly, the deployment of 5G networks will prepare operators to support 5G-dependent use cases when they do come to fruition and spur customer demand.

 

 

Around 70 representatives from well-known operators and vendors attended the annual 5G Americas event to talk with more than 70 industry analysts about the state of wireless communications in North America and Latin America as well as discuss challenges and opportunities presented by the rapid development of the mobile ecosystem.

The event kicked off with a presentation from T-Mobile (Nasdaq: TMUS) CTO Neville Ray regarding 5G leadership in the Americas. He discussed topics including projected use cases, the importance of 5G to the U.S. economy, the Americas’ position in the global 5G market, and the different initial approaches U.S. operators are taking to 5G. A panel of network and technology executives from operators including AT&T (NYSE: T), Sprint (NYSE: S), T-Mobile, Telefonica (NYSE: TEF), Cable & Wireless and Shaw (NYSE: SJR) provided additional insights into 5G evolution and activity around 5G by each respective operator.

Day 2 began with panel sessions featuring leaders from top telecom vendors, including Ericsson (Nasdaq: ERIC), Cisco (Nasdaq: CSCO), Nokia (NYSE: NOK), Samsung, Intel (Nasdaq: INTC), Qualcomm (Nasdaq: QCOM) and Commscope (Nasdaq: COMM), to discuss areas such as 5G regulatory challenges, 5G network and technology deployments, and potential 5G go-to-market strategies and use cases. Following these panel sessions, the reminder of the event offered analysts the opportunity to participate in a choice of 34 roundtable discussions focused on key 5G topics, including Internet of Things (IoT), edge computing, artificial intelligence (AI), 5G network infrastructure and technologies, regulatory considerations, and 5G in the automotive industry. 

Telecom operators drill down on IoT opportunity in logistics

Despite the hype to the contrary, in commercial Internet of Things (IoT), not all verticals are created equal in terms of opportunity. There is near-term opportunity in some verticals, while opportunity in other verticals will take a few years to mature. The verticals with the longest and deepest histories of using IoT are oil and gas, utilities, manufacturing (including automotive), and logistics. Because these verticals have a long history of using primitive IoT, mostly in the form of telematics, customers in these areas are more familiar with what IoT can offer, how it can be applied to their businesses and where measurable ROI can be found. Unsurprisingly, segments that have most experience with IoT continue to generate the greatest amount of IoT-related revenue.

Telecom operators were early to advertise that they were leaders in the verticals mentioned above. However, now that the chips are down, TBR believes operators are focusing on real, mature IoT opportunity, leading to them drilling down on logistics. Logistics aligns well with telecom operators’ capabilities due to the mobile and distributed use cases. Verticals such as manufacturing provide less opportunity to telecom operators due to the more static and condensed nature of factories. Here are some examples of commercial logistical moves from leading operators:

  • In March 2017 Verizon announced the combination and rebranding of its Verizon Telematics, Fleetmatics and Telogis acquisitions into Verizon Connect. Verizon notes that the rebranding completes the integration of its connected vehicle division with its acquisitions of fleet and mobile workforce management companies Fleetmatics and Telogis. TBR believes the rebranding of Verizon’s telematics businesses into Verizon Connect was a smart move because focusing its IoT business around connecting mobile workforces differentiates Verizon, letting customers clearly know what they can use Verizon Connect for, highlighting its expertise and also making it more partner-friendly. Verizon Connect is now a module that can enhance a broad IoT platform such as Azure IoT.
  • In May 2018 AT&T entered into a partnership with operational technology (OT) behemoth Honeywell to develop IoT solutions for aircraft and freight deployments worldwide. AT&T delivers Honeywell worldwide connectivity, and Honeywell gives AT&T a larger door into industrial engagements.
  • In February AT&T launched two comprehensive solutions with Geotab’s fleet tracking platform, AT&T Fleet Management for Enterprise and AT&T Fleet Management for Government, to provide customers with a holistic view of their transportation assets to improve costs, productivity and safety.
  • TBR believes Telefonica, Vodafone and Orange are also competing for logistics engagements using well-populated landing pages touting their ability to provide logistics-based IoT solutions. Orange, for example, signed a three-year multimillion-euro agreement with Finland-based Cargotec in 4Q17 to codevelop an IoT-based cargo solution.

While vendors will compete for logistics business opportunities worldwide, TBR believes Verizon will try to consolidate and win share of the field service and trucking industries in North America; AT&T will focus on air and sea shipping or asset tracking worldwide and leverage its advantage in connected car gained through multiple contracts with leading automakers; and Telefonica, Vodafone and Orange will battle it out for EMEA and LATAM share.

 

Sprint Business is on an upward trajectory, but the T-Mobile merger is essential for long-term viability

The 2018 Sprint Business Analyst & Consultant Summit showcased the early success and growth potential of Sprint Business’ revamped go-to-market strategies. During the summit, a recurring theme was that Sprint Business is focused on turning its weaknesses into strengths, highlighting that the company’s awareness of its limitations versus larger enterprise operators, such as AT&T (NYSE: T), Verizon (NYSE: VZ) and CenturyLink (NYSE: CTL), will lead to improved performance. Sprint Business’ strategy to address its weaknesses is highlighted by initiatives including offering carrier-agnostic solutions to compensate for its smaller subscriber base, leveraging network-sharing agreements due to Sprint’s (NYSE: S) lack of last-mile wireline access, and more deeply integrating SoftBank’s assets to augment the carrier’s limited Internet of Things (IoT) portfolio.