5G Rush Has Tripped Up the Industry

Morris Lore Iain Morris, News Editor 6/11/2019

The first 5G services have lurched into markets in Asia, Europe and North America -- and turned out to be a bit naff.

In the UK, a recent BBC broadcast that used Huawei's 5G equipment suffered delays and signal disruption, according to press reports. Over in South Korea, drive tests have shown customers are receiving much slower speeds than the gigabit connections they were promised, says Rajeev Suri, the CEO of Nokia. "The experience isn't great with 5G right now," he told Light Reading at the Finnish vendor's London office this week. "Interoperability has not been there... The chipset being used is previous generation."

A demonstration of low-latency mobile gaming using 5G technology at this year's Mobile World Congress in Barcelona.

The situation is no better in the US, as Light Reading has reported. Dependence on very high spectrum bands meant Verizon's mobile 5G service in Chicago was unreliable when it ran into street obstructions, wrote Walter Piecyk, an analyst with BTIG, after his own drive test. Desperate to upgrade customers to pricier deals, AT&T mistakenly thought it could get away with slapping a 5G label on its 4G service. John Legere, T-Mobile's chief antagonist, had a good laugh about that on Twitter, even though T-Mobile had once pretended its 3G service was a 4G one (albeit in the pre-Legere era).

This all comes after 5G's big stakeholders cooked up a scheme two years ago to fast-track the technology as if it were a precocious youth. Standardization deadlines were brought forward, despite concerns aired by telco executives including Enrique Blanco, the chief technology officer of Spain's Telefónica. The naysayers were quickly silenced and the 5G "New Radio" standard was frozen at the end of 2017, sooner than anyone had originally expected.

Since then, reports of interoperability problems and standardization delays have dogged 5G. In November, Light Reading uncovered details of a network-to-device compatibility problem in 5G equipment. One major service provider was understood to be worried about incompatibility between Huawei's basestation gear and device chipsets. In January, Suri partly blamed 5G interoperability problems when he revised down sales guidance for the year. "The ecosystem of 5G around standards and chipsets and devices at scale -- and getting software to interoperate with all this -- is still evolving," he told reporters on a call.

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Light Reading.

This week, Suri played down concern during his conversation with Light Reading. "In the context of a 15-20-year cycle it is not a big deal," he said. But negative publicity will serve only to slow down consumer adoption. In the worst case, it could set the technology back further than the original standardization schedule. Nor will it do much for the reputations of 5G developers. The BBC was unlikely to be overjoyed with Huawei after its 5G broadcast flopped.

Technical problems are not the only concern. While chipmakers may be desperate to shift stock, consumers have recently seen little need to upgrade their smartphones. They may have even less interest if the first 5G services look disappointing. Most operators, too, are in no hurry to expand 5G networks. Capex-to-sales ratios are already at a record high in Europe, and service revenues are not increasing. "Unless we see that operators are able to turn the revenue curve, I don't think they will significantly increase capex," says Arun Bansal, the head of Europe and Latin America for Swedish equipment maker Ericsson.

Table 1: Europe Capex & Sales (€B)

	2013	2014	2015	2016	2017	2018
DT non-US capex	5.9	6.2	6.6	6.8	7.5	7.8
DT non-US revenues	41.6	40.	40.3	39.4	39.2	39.1
DT non-US capital intensity	14%	16%	16%	17%	19%	20%
Orange capex	5.6	5.6	6.5	7.0	7.2	7.4
Orange revenues	41.0	39.4	40.2	40.9	41.1	41.4
Orange capital intensity	14%	14%	16%	17%	17%	18%
Telefonica capex	8.2	8.2	8.0	8.6	8.2	7.3
Telefonica revenues	57.1	50.4	47.2	52.0	52.0	48.7
Telefonica capital intensity	14%	16%	17%	16%	16%	15%
Total capex	19.7	20.0	21.1	22.4	22.8	22.5
Total revenues	139.6	130.1	127.8	132.3	132.3	129.2
Total capital intensity	14%	15%	17%	17%	17%	17%
(Source: companies)

They might be willing to speed up deployment if arguments about 5G's efficiency were more compelling. In ideal circumstances, the 5G "cost per bit" is just one tenth that of 4G, the industry has grown used to hearing. But that gives a misleading impression of the impact on costs. Unless operators axe jobs or slash other overheads, opex will certainly not fall by a double-digit percentage with the rollout of 5G networks, just as the transition from 3G to the more spectrally efficient 4G did not in itself produce major cost savings. "Opex depends on multiple factors," says Bansal, when quizzed on the issue. "Some operators have fixed costs for putting antennas in a tower and some have fees per antenna."

Many telcos do not have the option of selling 5G services, simply because regulators have still not freed up 5G spectrum. Now into its 484th round, a 5G auction in Germany has dragged on for months, attracting €6.4 billion ($7.2 billion) in bids so far. France has still not held its own 5G auction. After splurging a ruinous €6.6 billion ($7.5 billion) on licenses last year, Italy's operators are likely to approach 5G at a crawl. And the availability of the warts-and-all technology means nothing if operators cannot launch services. Equipment contracts are just "paper documents," says Bansal. Vendors generate 5G revenues only when their customers do.

Mixed vendor fortunes
Given the earnings outlook for telcos, fast-tracking 5G could in retrospect seem like a ploy to enrich vendors. Telefónica's Blanco was not the only telco executive to air concern about the plan back in early 2017. Yves Bellego, the technical strategy director for France's Orange, agreed with Blanco that focusing attention on 5G New Radio specifications was risky. Yet all the world's major service providers eventually signed up to the plan. And the 12 vendors that put their names to a statement on 5G acceleration had mixed fortunes last year, when some telcos were gearing up for a service launch.

Of the 11 publicly listed companies, seven witnessed a decline in their share price, and only one -- Intel -- reported sales growth of more than 3%. In April this year, the semiconductor giant quit the 5G modem business hours after iPhone maker Apple settled a long-running dispute with Qualcomm, which Intel had hoped to challenge.

Table 2: Performance in 2018 of 5G Fast-Trackers

	Sales change (%)	Operating profit change (%)	Share price movement (%)
Ericsson	3.0%	N/A	30.3%
Fujitsu	-3.6%	-28.6%	-14.7%
Huawei	19.5%	30.0%	N/A
Intel	13.0%	25.0%	-0.2%
LG	0.0%	9.5%	-43.1%
MediaTek	-0.1%	64.8%	-21.3%
NEC	2.4%	-5.4%	7.4%
Nokia	-3.0%	N/A	28.7%
Qualcomm	2.0%	-72.0%	-12.9%
Samsung	1.7%	9.8%	-24.1%
Sony	1.0%	22.0%	4.8%
ZTE	-21.4%	N/A	-48.8%
(Source: companies, Yahoo Finance)

China’s Huawei, the privately-owned vendor on that list, managed double-digit percentage growth in sales and operating profit, but is now on the frontline of the trade war between the US and China. MediaTek, a silicon specialist with which Ericsson claims to have finished interoperability testing, reported zero growth in sales and watched its share price fall 21%.

None of this will halt the "race" to build 5G networks. Countries risk falling behind in the next technology revolution if they lack the high-speed networks that attract the Ubers and Googles of the future, say 5G's advocates. That largely explains why some US politicians are so worried that China is ahead, and that the world's biggest 5G vendor is Huawei. But amid technical problems, consumer wariness, spectrum constraints and a shortage of 5G service ideas, the eventual winners might not be the first ones out of the trap.

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— Iain Morris, International Editor, Light Reading