Operators' 5G investments show no clear signs of paying off
Over the past few years, big wireless network operators all over the globe have spent billions of dollars building speedy 5G networks. But so far most have little to show for their efforts.
And some analysts are beginning to worry that things are just going to get worse.
"Absent any new way of using our phones then the most data intensive usage is video, and there are only so many hours a day when anyone wants to watch video on a mobile device," wrote analyst William Webb, of Access Partnership, in a LinkedIn post. "Of course, radical new applications are always possible, but none are likely for mass adoption in the next few years."
Meaning, 4G is mostly good enough for today's mobile users.
Others agree. "New 5G mobile services have failed to materialize," wrote the financial analysts at LightShed Partners in a recent assessment of the US market.
A slowdown in usage
Perhaps the most worrying numbers come from Tefficient. For years, the analyst firm has tracked global mobile data traffic across 46 countries. Its latest findings show that mobile users in general aren't showing as much demand for mobile data as they have in the past.
"In our previous reports we could see that the pandemic drove the mobile data usage. But during the second half of 2021, the demand for more mobile data slowed," the firm wrote in its latest report. "And this trend continues into the first half of 2022."
But there's even more concerning news for global operators. Tefficient reported that most operators around the world haven't been able to increase their average revenues per user (ARPU) in recent months. Meaning, operators in general aren't earning any more revenues from whatever demand they've managed to generate.
"Only 9 of 21 markets could grow ARPU on the back of the data usage growth," Tefficient wrote. "That's no longer a majority of the markets and it thus represents a softening compared to the end of 2021."
Of course, one major new 5G dynamic is the rise of fixed wireless access (FWA) services. Such offerings promise to allow 5G providers to offer in-home Internet services in a challenge to fixed Internet providers. But the per-GB financial model underpinning FWA isn't nearly as compelling as the one for smartphones.
"If an FWA user generates 10x more traffic than a cellular [smartphone] user then it displaces 10 users all of who might pay as much as the FWA user," Webb, of Access Partnership, wrote. "Hence, as capacity starts to become constrained it will likely make more economic sense to drop the FWA subscribers and replace them with cellular subscribers. Adding more capacity for a few FWA subscribers is unlikely to be cost-effective in most locations."
One of the clearest examples of the 5G challenge comes from Verizon – a company that made a loud and early investment into the technology. In his weekly newsletter, analyst Jim Patterson of Patterson Advisory Group pointed out that Verizon has spent at least $60 billion on its 5G network and spectrum.
"That equates to about $650 per postpaid (phone + other) connection in capital. While $650 in post-tax profitability for net ten years seems like a small number, it represents a 12% increase in the average profit in every account starting today," he wrote. "Verizon has slightly less than 91.5 million wireless postpaid connections as of September 30 with 82% of these being handsets. If there's no value to handset owners, where will the incremental $650 per connection ($1,788 per account) come from?"
Verizon, for its part, has positioned 5G as a reason for customers to upgrade to its faster, premium service plans. Partly as a result, Verizon has managed to migrate roughly a third of its postpaid accounts to those premium plans since the end of 2019. "Yet we estimate postpaid phone ARPU is only up 2.4% over that 3-year period," wrote the analysts at LightShed.
Broadly, the LightShed analysts expect Verizon to generate 2.2% in wireless service revenue growth during 2022 – or less than half of what they expect from Verizon's rivals AT&T and T-Mobile.
"In the absence of organic growth or a failing plan, CEOs often turn to inorganic solutions," wrote the LightShed analysts. "It would need to be something transformational with sizable claimed synergy opportunities. We are not arguing that this is the best or right thing to do, but simply noting it's the predictable next step."
In order to prop up its position in the market and rekindle investor interest in its shares, the LightShed analysts speculated that Verizon might make a bid to acquire cable company Charter Communications. However, they noted that such a deal would likely face stiff opposition from the likes of Charter's shareholders and US government regulators.
For his part, Verizon's CEO said he's going to continue to pursue 5G opportunities in 2023. "The need for best-in-class 5G network is here and now. We will keep expanding our network and developing new uses with our incredible partners to deliver all that 5G has to offer," Verizon's Hans Vestberg wrote on LinkedIn this week.
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