INSIGHTS
Altman Solon is the largest global TMT consulting firm with expertise in telecommunications consulting. Below, Partner Soumen Ganguly and Director Abhi Mitra make the business case for 5G against growing skepticism from wireless carriers.
5G, once touted as essential to powering a new generation of connected devices, AR/VR products, and drones, is seemingly facing headwinds. Today, a somewhat pessimistic, simplistic narrative about 5G is unfolding. Our research shows that U.S. carriers have spent significant amounts of capital on 5G deployments since 2019: about $6 to $7 billion incrementally annually, compared to the average annual spend on 4G only. Naysayers posit that despite significant incremental spending, promised new use cases leveraging 5G’s higher bandwidth and lower latency haven’t scaled, nor have 5G-driven new revenue streams. They conclude that this lack of revenue upside from 5G drives carriers to reduce their 5G investments moving forward. In the US, according to our research, 2023 and 2024 wireless CapEx levels were down from the 2022 peak of $42 billion. With the promised new use cases and revenues not yet materializing, combined with reduced spend, this narrative sums up 5G as a bust for the wireless industry.
The 5G business case
We strongly disagree with this perspective. Understanding the true value of 5G for carriers requires a more nuanced and longer-term view that factors in the dynamics of demand versus supply, cost imperative versus revenue imperative, and the cyclical nature of network spending. Viewed through this lens, reductions in 5G spending are to be expected at this point in the investment cycle as coverage builds are nearly complete. Indeed, the early stages of the 5G business case were not predicated on the emergence of a wide swathe of new, revenue-generating use cases but on bringing the cost per gigabyte down. Holistically, the underlying 5G business case is sound; what's more, 5G penetration is laying the foundation for future wireless innovation.
The business case for 5G for carriers is a virtuous circle of growing demand, efficiently investing to meet that demand, reaping the benefits of improved network performance to drive new use cases, and further boosting demand. This causal view of wireless network investment is shown below:
The Virtuous 5G Cycle — Demand versus Supply
Demand: The key driver
"New uses cases, like AR/VR, are not required for projected growth through 2029"
Our assessment starts with the structural driver of all wireless network investment: keeping up with wireless demand and traffic growth. Wireless traffic is robust, and grew by approximately 29% annually between 2017-2023, today, the projected annual growth rate is at 22% through 2029. It's worth noting that new use cases, like AR/VR, are not required for the projected growth through 2029.
Incremental growth in video use cases, like higher definition and enhanced video formats, is enough to take today's 22GB per month per connection to 2029's projected 52GB per month. We’ve seen increases in video consumption over the last few years; recent polling reveals that 47% of 5G users have increased their time watching enhanced video formats since 2021. This forecast, which centers mobile video as the motor for 5G demand growth, shows that all it takes to increase data consumption is for users to get accustomed to enhanced formats. AR/VR products are not necessary.
Supply: Adding network capacity
To keep pace with increased traffic, carriers regularly add new network capacity. With every network generation (such as 3G, 4G, or 5G), carriers have three levers available to them: more spectrum, better spectral efficiency, or more densification.
For example, following 4G’s launch in the U.S. in 2010, carriers deployed new spectrum bands, more spectrally efficient versions of 4G, and denser sites for the better part of that decade. However, by 2019, carriers had started to run out of economical 4G capacity headroom. All available 4G spectrum had been deployed, and incremental 4G spectral efficiency had plateaued. Carriers were left with the most expensive option of 4G densification to continue growing capacity. At that point, deploying denser and denser 4G sites would cause carrier capital intensity to spike and margins to fall.
Supply: Investing in the “Next G” and meeting the cost imperative
"It may seem counterintuitive, but 5G saved carriers money compared to a 4G-only alternative."
To keep their capital intensity in check while maintaining margins, carriers needed a stepwise increase in spectral efficiency. Initial 5G investments delivered just this, resulting in lower cost per gigabyte as well as lower capital intensity levels, as opposed to continuing with 4G alone. The lower cost per gigabyte allowed carriers to maintain their margin levels. Since the initial buildouts of 5G in 2019, our research shows revenue per gigabyte and cost per gigabyte declining by 55%. These price declines are expected to continue thanks to efficiencies from 5G. Servicing these capacity needs today with 5G is much cheaper than doing so with 4G.
Cost per GB versus Revenue per GB1
$ per GB, 2017 – 2023E
Notes: 1) Cost per GB is calculated as Total Revenue – EBITDA from BAML GWM/Total Data Traffic from CTIA; Revenue per GB is calculated as Total Revenue from BAML GWM/Total Data Traffic from CTIA; 2) EBITDA Margin reported in BAML Wireless Matrix.
While aggregate CapEx levels did go up with 5G, they went up less than they would have if carriers attempted to meet the same demand growth with 4G. It may seem counterintuitive, but 5G saved carriers money compared to a 4G-only alternative. When modeling an illustrative 4G cell site in 2020, solving for 20% annual traffic growth through 2029 would require approximately 50% lower CapEx with 5G than staying with 4G only. This is mostly because a 4G-only use case would require two cell splits.
In short, the first part of the 5G investment case didn’t require futuristic new use cases driving topline revenue growth to make sense, but rather a reduction in the unit costs of delivering wireless gigabytes. This initial deployment of 5G coverage kicked off a broader 5G deployment.
Supply: Investing in the “Next G” and laying a foundation for innovation
"As 5G device penetration increases... innovation and new mobile use cases can take off."
Of course, the other element that 5G introduced (aside from improved spectral efficiency) was improved network performance in terms of both bandwidth and latency. As 5G device penetration increases and network performance improves, innovation and new mobile use cases can take off. While it's impossible to predict exactly what novel use case might take off (this includes drones, AR/VR, massive sensor management, among others), these innovations could further traffic growth above forecasted growth. 5G’s ability to enable a foundational set of AI capabilities will further fuel this innovation. In the short term, these will fuel the next phase of 5G investments as a capacity cycle. Over the longer term, the industry will kickstart the R&D for the following generation of wireless technology to bring costs down. This has already started for 6G, and so the cycle continues.
It’s cyclical!
Looking at 5G within a larger context of investment cycles in generational wireless network deployments is important. With the 5G coverage build largely complete, we’re currently in a spending trough, down from peak deployments in 2022-2023. However, continued demand growth, and past experiences from deployments (as shown below), indicate that capacity driven spending peaks follow soon after.
Generational Wireless Network Deployments
Coverage and capacity, 2000-2030
The business case for 5G remains sound
In summary, the rumors of 5G's demise have been greatly exaggerated. We’ve seen this story before. 5G is simply the best and cheapest solution to address growing mobile data demand. Wireless carriers should rest assured that the 5G business case is as solid as ever. Previous builds have shown that spending is cyclical, and growing mobile data demand will ensure that 5G is the most cost-effective solution until 6G comes around.
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