Networks & business models reshape competitive drivers in 5G

Image credit: Sergey Nivens |

With the advent of Industry 4.0, industries, enterprises and consumers alike can now realistically imagine a world where once-novel innovations will soon upend the conventional laws of businesses. We’re heading into an era of intelligence, control and automation that will catalyse the emergence of new breed of digital enterprise and consumer services and optimise the way we live, work and communicate.

While 5G will herald this transformation, its rate of disruption will be more profound for telco players – particularly communication service providers (CSPs) that now need to rethink their legacy business models and develop new economic models and partnerships to become a new digital value provider. This is an imperative for them to rebalance the equation of value creation and value capture.

However, this is easier said than done. CSPs have conventionally focussed largely on consumer segments and connectivity business, however 5G is a newer ball game that will connect humans and machines like never before and promises to bring profound change to the enterprise segment. This, therefore, demands CSPs to evaluate and time their market moves together with end-to-end technology transformation; enabling them to provide digital value services (in addition to more traditional connectivity services) to raise overall profitability.

Nokia has collaborated with Bell Labs Consulting to build techno-economic models that can quantify the potential outcomes and impacts of 5G for CSPs – namely through automation and end-to-end technology transformation. By using ‘economic game theory’, we assess the relative market position of CSPs, their capacity to offer digital value services and new commercial models to create avenues for profit shaping in a soon-to-be competitive and changing market landscape.

Reimagining strategic business value

The question at the top of the minds for CSPs is around the business case for 5G, total cost of ownership (TCO) and capital outlay programs, optimal architectural models to profitably build out the 5G network and ways to re-imagine business strategies, that can truly unleash the transformative power of 5G for enterprises and consumers.

Admittedly, the CSPs’ prime experience in catering for the consumer segment, providing network connectivity and services, makes it harder to move beyond and conceive how 5G can enable new markets models with enterprise and industrial mission-critical sectors. Especially, since the deployment of automated end-to-end, pre-integrated, highly reliable cloud networks at scale can be complex and challenging – it not only requires technology transformation, but a rethink of organizational, go-to market and commercial models. But to survive and thrive in tomorrow’s economy, CSPs need to look beyond their traditional paradigms and re-orientate to offset the challenges to come.

But what are the challenges? On one hand, traffic carried by CSPs have increased massively over the past decade and will continue to do so with greater use of smart devices, content rich immersive applications and high-resolution video streaming by everyday consumers. For enterprises, we will see an increased use of AR/VR applications, the massive adoption of the internet of things (IoT) and industrial automation. This will enable new services and foster new demand for data as connected systems communicate with cloud-based applications and systems for the purposes of monitoring, storage, data analysis and control. 

Figure 1: Global IP traffic growth and wireless data demand 2016-2025. Source: Who will capture the new value in the 5G Future X network era? whitepaper by Bell Labs Consulting

The problem now is that CSPs haven’t been able to cash in on these new developments – particularly with average revenues per user (ARPU) for voice is dropping and it hasn’t been offset by a coinciding increase in data-based ARPU. Where there has been revenue growth, it’s mostly been in the increased adoption of mobile smart phones.

Figure 2: Mobile voice and data ARPU trends in major markets. Source: Who will capture the new value in the 5G Future X network era? whitepaper by Nokia and Bell Labs Consulting

Another challenge for CSPs is the value shift from connectivity to content and services due to platform companies (i.e. companies that are ‘born digital’) that are now offering a variety of content-rich applications and value add services. This means that the traditional connectivity-leaning business model of CSPs is diminishing in value, creating an imbalance of value creation (which CSPs have done well to some degree) and value capture (which CSPs are unable to do well).

Figure 3: Return of capital (ROC) comparison between CSPs and Platform Companies. Source: Capital IQ; Bell Labs Consulting analysis

CSPs therefore need to intelligently invest in assets, enhancing their connectivity capacities without compromising return on capital (ROC) and move away from the vicious cycle of increased demand and declining profits – This can be achieved with serious efforts to refresh and rejuvenate operating models and value chains, leading to a realistic path to sustained profitability in an evolving market.

Figure 4: Profit evolution in a 3-player market. Source: Who will capture the new value in the 5G Future X network era? whitepaper by Bell Labs Consulting

Predicting market winners through game theory

With paradigms changing, new business models emerging and outdated regulations crumbling, it’s often hard to predict market evolution and future winners. The growth in advanced networking, virtualisation and cloud technologies, unlicensed and shared spectrums and new 5G architectures can open new doors for new players that can shift the competitive dynamics and disrupt the equation of how we create and capture value. Emerging enterprises with multi-business assets, platform companies and digital value players can now look to get into 5G space to cater for their own needs and innovate with unique business models at the back of edge cloud infrastructure and services, and even private networks.

To understand the impact better, we modelled a disruptive new entrant (aggressive challenger) in a given 3-player market (competing with CSPs that have different aggressiveness levels/5G plans) when it comes to i) Architectural options: deploying an end-to-end, pre-integrated automated Future X network, ii) New business models: offering digital value services and partnerships, iii) pace of transformation. Our aim was to find out how these choices effects and how competing entities degree of subscription to these dimensions shape future profits.

Applying game theory, in a hypothetical market competition scenario, the approach identifies the winning strategy based on the derived equilibrium market shares, price and profits in each period for each player. The new entrant is assumed to be a platform company with considerable digital assets and investments in various cross-sector digital businesses. The entrant is not saddled with a legacy network and adopts Nokia Bell Labs Future X Network concepts from the start. That is, it begins with a very efficient, agile and scalable network that is optimized for performance. The entrant’s network cost/GB, after the initial start-up cost, will be superior to that of incumbents’ who must deal with multi-generational networks, parallel platforms and the problems and issues of transformation. Furthermore, the entrant – by gradually enhancing control of the end-to-end value chain via new business models and leveraging network connectivity business to maximize the digital value capture across its eco-system – could emerge dominant (in terms of profitability and market share) by employing a pre-integrated solution with additional cost savings and deployment efficiencies.

This analysis is promising, because it shows the value of subscribing to a new recipe; existing market players can benefit from bold strategies to boost their own relative positions and promote economic growth.

Picking the right strategies that maximize new value creation

Overall, our findings pointed towards an important opportunity for CSPs to reshape future profits. However, conservative and risk-averse deployment choices, such as inaction and slow transformation, will lead to sub-optimal outcomes. That’s why it’s crucial to carefully define market strategies – in terms of network evolution, business models and ecosystem development (through partnerships and/or acquisitions) – relative to the competition.

Critical factors include how quickly and efficiently CSPs evolve to a new architecture with high levels of pre-integration, virtualisation and distributed cloud infrastructure, as well as dynamic end-to-end automation. A disposition to embrace new business models and abstraction of monetizable new 5G capability sets for partner businesses can also play a crucial role in value creation and value capture, which can directly determine the CSPs’ ultimate market position and long-term financial success.

Figure 5: Recipe for success: Who will capture the new value in the 5G Future X network era? whitepaper by Bell Labs Consulting *Gross profits only and does not include non-network related expenses such as SG&A, R&D, etc.

Written by Fuad Siddiqui, VP & Senior Partner, Bell Labs Consulting

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