Telcos Need 5G Innovation, but Who will Pay?

Robert Clark
News Analysis
Robert Clark
11/11/2019

Ren Zhengfei doesn't think 5G is such a big deal.

The Huawei boss told one of his public seminars last week that he thinks the importance of the new standard has been exaggerated. His perspective from the eye of a geopolitical storm may be partisan, but he can't be the only telecom industry exec bemused by the intensity of sentiment over next-generation mobile.

For most of its development over the past decade, 5G has proceeded as unremarkably as the previous technologies, albeit with richer and broader functionality.

Then, two years ago, US officials discovered 5G and rebranded it as a security threat and a hefty advantage to China.

On the security aspect, for sure, the sheer ubiquity of 5G means the number of connections and therefore vulnerabilities are going to expand.

But is that actually new? Every business today is already a hostage to its information infrastructure -- not just Amazon, but Toyota, Citibank and Rio Tinto. They are all utterly dependent on their connectivity. 5G might mean more points of vulnerability, but the idea that this is a novel threat is nonsense.

As for China's advantage, Ren has a view on that, too: He says Huawei backed a winner when it plumped for Erdal Arikan's polar codes as a core 5G technology a decade ago while the US went for LDPC, a.k.a. the Gallagher codes.

In any case, Huawei's dominance in 5G technology has set off a debate about the competitiveness and level of Western and in particular US telecom innovation.

The US today has strong players like Qualcomm and Cisco, but it no longer has a telecom network vendor in the Huawei or Ericsson mold.

One reason is the attitudes of leaders and policy makers over the past two decades. Primarily, there have been two sets of related assumptions.

First: In a globalized economy with a high level of assumed trust, we no longer need national champions. In this mindset, concerns about threats to critical infrastructure could be ignored.

Second: Governments don't need to get involved in industry policy, especially with the US's apparently strong system of innovation.

The China approach, of course, is the opposite. It embraces industry policy and doesn't hesitate to intervene on behalf of its champions. The rigidity of the China system creates its own problems, however: Note how the Japanese IT industry with its own carefully approved winners has frozen in the past two decades.


Want to know more about 5G? Check out our dedicated 5G content channel here on
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But back to the US.

Lumina Networks CEO Andrew Coward has attracted some attention with a thoughtful blog post on the failings of the telco innovation ecosystem.

He notes the resemblance to the minicomputer market of the mid-90s, when the proprietary monopolies were starting to crumble just like those of telecom today.

So telcos are now choosing multiple vendors to avoid lock-in, but this creates a tangle of systems that is hard to orchestrate. The advent of 5G "multiplies the number of radio locations and associated equipment by a factor of ten, moving the management problem from 'challenging' to 'untenable'," Coward writes.

Where does the innovation come from? He notes that venture capitalists (VCs) are wary of the "long sales cycles and the conservative purchasing mentality of telcos." That's letting VCs off lightly. They are risk-averse and severely prone to FOMO (fear of missing out), hence the gallons of cash tipped into Uber and WeWork rather than firms with creative ideas that might drive economic activity.

Coward suggests it's up to telcos themselves to invest in innovation. Prior to deregulation, this is what they did. In return for its monopoly, AT&T gave us the transistor, the satellite, wireless, optical fiber and Unix.

"Telcos really need to place significant bets on the startups that can affect this outcome now and seize control of their own destiny," he writes. He goes on to say that by making these bets telcos can entice VCs to follow them into the market, coming to see 5G "as not a side bet, but a stake in their future network."

In their current financial environment, telcos are reluctant to part with their hard-earned cash, even for potential revenue-earning 5G capabilities. They have also learnt it is difficult for a telco based in a single market to compete effectively against competitors with a global outlook, footprint and funding sources.

So none of this easy. But with the advent of 5G, and its broad canvas of opportunities, telcos and their partners -- whether vendors, governments or even VCs -- are under growing pressure to create vehicles that can fund innovation and generate value. If they don't, they really could miss out.

Robert Clark, contributing editor, special to Light Reading

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vances
vances
11/14/2019 | 10:38:05 PM
3 VC Don'ts
Recently I listened to Andrew Coward share the advice VCs gave him:
  1. DO NOT do open source
  2. DO NOT rely on services revenue
  3. DO NOT cater to telcos

I laughed, and laughed, and maybe cried a bit. I founded SigScale four years ago on exactly those three legs. He's doing it, we're doing it, IBM is doing it. Maybe not many more yet but that will change.
deaclarke2019
deaclarke2019
11/13/2019 | 11:41:26 AM
Solving The Telecom Investment Conundrum
The heyday of telecom investment and R&D was the 1960's and 70's when national governments owned the telecom infrastructures and recognized them as strategic national assets that would drive innovation in the wider economy. They invested at levels commensurate with that vision. Then came privatization and Telco's became chained to the short termism of stock markets and investments declined because ROI was far beyond the time horizon of stock markets, and due to persistent regulatory uncertainty. And yet the global telecom infrastructure is the platform on which ALL innovations now rely to some extent, so what is the problem?

It's really simple: the money to be made off telecom infrastructures is orders of magnitude smaller than the OTT innovations that rely on them. An obvious solution is to increase the price to use telecoms infrastructure to a level that reflects their real value; then telecom operators might be incentivized to invest more. Of course nothing is that simple; regulators will make sure price increases are capped, and building out competitive telecom infrastructures where there are already three or more incumbents doesn't make economic sense.

An answer is for national governments to intervene more aggressively to incentivize investment in telecom infrastructures commensurate with their vision for the benefits to their national economies as they did in the 60's and 70's; otherwise, telecom infrastructure investment will continue to be incremental and constrain innovation in the broader economy. I expect this idea will be attacked but I'd ask antagonists to put forward alternative ideas.
Gabriel Brown
Gabriel Brown
11/12/2019 | 6:00:38 AM
Re: Operators as strategic investors
Kind of long to go into here and now, but while I think your view is valid and worthy of close attention, operators that invest in their mobile networks and provide good, reliable coverage and performance ultimately do better in the market. This has been the case since 1G
brooks7
brooks7
11/11/2019 | 1:34:50 PM
Re: Operators as strategic investors
@Gabriel,

I think the challenge here is where I am heading.  The reason that nobody wants to invest in innovation is that there is no need for the technology from a consumer standpoint.  I would argue that the vast majority of the population is perfectly happy with our combination of 4G + WiFi.  There may be some advantage for other markets (like Fixed Wireless Broadband) or for carrier operations, but I am completely confused why I should care as a consumer.  Do I get voice and data today?  Check.  If I want to consume LOTS of data, I am better off using WiFi so that I do not run up my bill.  I don't think that this is going to change with 5G.  All that will happen is that I run out of my data faster (or pay more for ongoing service).  That means that the big consumption will still want to move to WiFi.

So, back to you "more for the same money".  The point is why would anyone want to spend $B in CAPEX to not increase their revenue.  If I am AT&T or Verizon, I am thinking hard about whether I plow more commercial fiber or spend another nickle on wireless.

seven

PS - I was on a panel with Drew just after that post.  We went off and had coffee together and talked a lot about his views.  Was probably one of the best learning experiences in my life.
Gabriel Brown
Gabriel Brown
11/11/2019 | 12:13:41 PM
Re: Operators as strategic investors
 

I remember that post, I think. Certainly, I recall the point being made in general.

The only thing I want out of 5G is a lower cell phone bill.

Best way to get lower cell phones bills is more competition for a commodity product. 5G might delay that a while ;)

At base, for consumer 5G, operators are pursuing a "more product for more slightly more money" strategy. This is called "more for more" in the investor call jargon. So far it's working out as "more for the same money". There's obviously a chance it ends up "more for slightly less".

 
brooks7
brooks7
11/11/2019 | 12:01:11 PM
Re: Operators as strategic investors
 

Drew Lanza posted here about 15 years ago why he was no longer interested in telecom as a VC.  I think that post is very apt and should be considered true today.  I am not sure how to dig it up but it went something like this:  Telecom is entering a long term engineering (incremental improvement) phase. There are not VC-like returns in this phase so I will go elsewhere.

I thought he was right then and he is right now.  The only thing I want out of 5G is a lower cell phone bill.

seven

 
Gabriel Brown
Gabriel Brown
11/11/2019 | 10:33:29 AM
Operators as strategic investors
Good piece.

One might surmise Andrew Coward is looking to operators as strategic investors. Which is potentially a good route forward. Altiostar, with investment from Rakuten and Telefonica, comes to mind.