In this six-part series on 5G network and digital innovation, I am discussing some of my observations and suggestions on how the wireless ecosystem can come together to address an unprecedented set of opportunities that will come before us in the next decade. In the first piece, I laid the basic thesis of why 5G is different and how operators should think about strategy and network economics. In the second part of this series, we will take a look at the cost element and role software will play in managing costs and expanding EBITDA.
The number of times 5G is mentioned in operator quarterly earnings calls is steadily increasing. As discussed in the last piece, the 5G cycle is happening in a very different industry dynamic. The return on investment for the sector has decreased and investors are going to demand more accountability. To manage expectations, CFOs will need to show more discipline as to how infrastructure projects and digital investments are planned and executed. We will see more questions around connecting the dots from investment to EBITDA. For example, it will become mandatory for the operators to explain to the investors how a $1 billion investment in small cells will yield x% of increase in EBITDA, or help lower churn by y%, or improve lifetime value of the customer by z%. The connection between how an investment translates into a core KPI outcome will become mandatory.
So, what does it take to reduce the costs? Fundamentally, one has to take a look at every element of the cost structure, end-to-end and reassess architectures, workloads, expected growth, optimization strategies under the critical lens of economics and performance.
One of the key capex items for the operators is the decision to put in another carrier or a cell site to relieve congestion, to densify the network. Typically, this decision is based on monitoring a combination of trigger points such as average user throughput, average users per transmission time interval (TTI) and physical resource block (PRB) utilization. Each operator has a different threshold for when they consider if additional capacity is needed. Sometimes, another spectrum carrier is needed, while in other cases the operator can decide to split the cells and increase reuse to relieve congestion.
Regardless of which strategy is chosen, there is a capex and/or associated opex cost. Historically, not much effort has been put into really understanding the art and science behind managing these trigger points. Some operators use PRB utilization as a key RAN KPI for capacity planning. However, taken alone it can lead to incorrect network sizing decisions, as there can be a huge variability in users/TTI and download throughput but very little change in PRB utilization; in many cases on lightly loaded sites, PRB utilization can be above 90% while user throughput remains high so no capacity augment is required. Unfortunately, in this scenario, if PRB utilization is the primary trigger for capacity growth, the “false positive” can trigger a capacity increase decision which isn’t required.
We have known for some time that video is the biggest capacity and congestion driver in mobile networks, and it will only get worse with HD/AR/VR streaming. Traffic is also encrypted, which gives operators less control over the traffic flows using traditional means. To get a sense of how fast the video traffic is likely to grow, one needs to just study trends in markets like Finland, which has minimal spectral constraints, India where video consumption is a cultural phenomenon, wireline consumption of 4K content to see where we will be in five years. Consumers are trained for “unlimited” data plans by the operators. It will be difficult to change the behavior. Of course, there will be some premium plans with higher quality of service, but consumers just like to consume without constraints of throttling, overages, or data caps.
Some operators have applied throttlers to manage video, but it is an ineffective way to manage congestion, as throttlers only yield capacity savings from cell sites which are not congested, and provide no capacity relief for heavily loaded sites. However, by using software techniques that take advantage of modern technologies such as AI, load-balancing and orchestration, cloud-native architecture, edge computing, etc., operators can provide better consumer experience while lowering the capex requirements and opex that follow. By using software instead of hardware to gain capacity, a medium sized operator could save millions of dollars each year in RAN expenditure for one average-sized city. The bigger the operator with bigger cities to cover, the higher the savings. Software is better at optimizing traffic flows against the constraints of the trigger points that lead to higher capex spending. The same principles will be true in the 5G era as well.
In some markets, the traffic growth is almost 200% year-over-year, with some operators even seeing almost a 300% jump, which is mostly driven by video. While throwing more cells sites at the problem might be an easy answer, it’s a very expensive one and in the 5G era the economics don’t support as easily this traditional approach to address growing traffic. Video traffic can be more effectively managed if we pay attention to the characteristics of how video streaming behaves. There are always early warning signals in the network that one must pay heed to.
In the past, investors and markets rewarded operators who managed the growth in subscribers better than their competition because each additional sub meant a new stream that would reliably yield revenues for a period of time. At other times, operators were rewarded for maximizing revenues. The next 10 years will be make or break for many operators as they will be judged on who manages the network economics the best.
There are a number of variables that go into the economics, revenues, and EBITDA equation. While the industry is figuring out new revenue areas from 5G, the management teams must be prudent about how they plan their capex/opex while maximizing EBITDA. They must articulate a compelling narrative that tells their story of investment and rewards. CEOs must lay out the vision and roadmap for the company in both quantitative and qualitative terms.
The 5G ecosystem will be very different from the previous four generations, and as such the degree of uncertainty will increase. To manage expectations, the technology and financial teams must work more closely together than they have in the past. The financial teams must have a clear understanding of how a dollar in network investment is related to the revenue and EBITDA output. One must develop a framework that clearly connects these dots. Operators who manage this profitability journey effectively by taking advantage of advanced software tools will be rewarded by the financial markets.
Chetan Sharma is CEO of Chetan Sharma Consulting, an 18-year young management consulting firm and is an advisor to CXOs and boards of companies in the wireless industry. Over his 25 years in the industry, he has worked with operators on all five continents and has the rare distinction of advising each of the top 9 global mobile operators. Chetan has written 14 books on various wireless topics and his research work has helped shape many strategic decisions and dialogue in the industry. He is curator of industry’s premier brainstorming summit Mobile Future Forward. More information at www.chetansharma.com. You can follow his musings at @chetansharma.
"Industry Voices" are opinion columns written by outside contributors--often industry experts or analysts--who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.