This morning we published our newsletter covering Mobile World Congress 2019. Drop us a line if you would like to subscribe. Below is our view on the State of the 5G standard.
The State of 5G
The big question to answer at MWC this year was the state of the 5G standard. There is an awful lot resting on this topic. There are many (!) of ways to view the current state of the standard right now, but a few things are very clear.
As we stated at the top of this note, the sober view is that the new standard will roll out pretty much just as all the standards do. Deployments start this year, over the next seven or eight years, the bulk of mobile subscribers will gradually move onto phones using the new standard. Mobile data rates will steadily improve. Your phone bill continue to go up. (Can you remember the last time it went down?) Some countries will move faster than others to 5G. Some companies will miss a product cycle and sink beneath the waves. Others will prosper on some combination of good execution and luck.
If you are not in the mobile industry, you can probably stop reading now. You will miss the fun in the details, but this is the hard reality.
However, if you are still reading this, we will start peeling away the layers and dig into the very messy internal dynamics of the mobile industry.
A Standards Primer
As always, we like to start with some background. 5G is the Fifth Generation of the mobile standard, which is officially known as 3GPP. That standard has been around for 20+ years, and has steadily delivered improvements in call quality and data rates. Never forget that it is a small miracle that we can all stand almost anywhere in the world and call someone anywhere else in the world, while playing a 3D game on that same “phone”.
This is possible because years ago all the mobile operators agreed to standardize the way that mobile phones communicate with the rest of the phone network and then later with the broader Internet. This common set of communication protocols and radio signaling is incredibly complicated and esoteric, but it works.
Each of the past generations has offered a major change in the way that the network handles these communications. The major difference in each generation rests in the portion of the standard that handles the way a mobile phone connects to the base station, or antenna. Since this is the truly wireless part of the standard we call this portion the ‘air interface’, it handles how radio signals transmit data over the air. Every subsequent generation has introduced improvements to the air interface. All this talk of ‘G’s really boils down to finding new ways to squeeze more capacity out of the radio spectrum. The advent of 2G brought the air interface from an analog signal to a digital signal which meant we could apply computers to the signals. 3G introduced CDMA-based protocols (don’t worry about what the acronyms spell out, it does not make things any clearer). 4G introduced OFDMA. Again, these are just new ways to manipulate the radio spectrum.
But then we ran into a little problem. Over the years, we have pretty much run out of fundamental ways to manipulate the air interface. Radio signals are now modulated by frequency, phase, amplitude, tone, time and space. There are no more fundamental levers to pull. Unlike all the prior standards, 5G does not have a single ‘tentpole’ being used to squeeze out more capacity from the radio spectrum. Instead it is 1,000 small tweaks. There are still lots of ways to improve mobile capabilities, but there are no more single big gains.
For consumers the progression of standards has meant faster data rates. However, for the operators the real significance of the standards is the improved ‘spectral efficiency’ they provide. The most important asset the carriers own is their radio spectrum, the portions of the radio channels they are allocated for deploying their systems. The more efficient the spectrum the more use they get out of it. This is by far the biggest driver of the advance of the standards.
Every new standard has a few component steps. First the standards body needs to finalize the specifications. Then the base station vendors need to have equipment for the network, and the handset makers need to have new devices which require a bunch of new chips. The introductions of every standard has had to undergo a bit of a rough patch in this regard, with one constituency lagging behind the others in early days, until eventually everything gets sorted out. This time will be no different.
Which Brings us to 5G
To understand the current state of 5G, we need to look across a number of different disciplines, each of which comes from separate multi-billion dollar industries. To further complicate things, we also need to break the standard into manageable pieces. There are a lot of requirements for complying with the 5G standard.
The components of the system are:
- Spectrum – do the carriers own the radio channels they need?
- RF Semis – The analog chips in phone which sit next to the antenna and process electric signals and convert them into 1’s and 0s
- Modems – These are the digital processors in a phone which decode the bits coming from the radio
- Handsets – Devices, especially smart phones
- RAN – The Radio Access Network, the base stations which are the first point of contact for signals from the phones
As we have been repeating, the 5G standard introduces a large number of small changes. To greatly simplify matters, we want to break this down into three buckets:
- The air interface in traditional spectrum – we will refer to this as “Sub-6” (as in radio frequencies below 6 GHz)
- The air interface in new spectrum bands – we will refer to this as millimeter wave or mm wave
- Changes to the core, wired telecom networks.
We have labeled these as ‘small’ changes, which we mean that in the sense that each of these has a small contribution to the overall network improvement, but each of these means big changes for the equipment required.
Let’s walk through each of the new areas of changes.
Sub 6 -The new, sub-6 air interface requires new basebands for phones. These are ready now with Qualcomm now sampling its second generation of chips, and internally-produced versions from Samsung (Exynos) and Huawei (HiSilicon) ready(ish) as well. Mediatek, which typically lags new standards will have chips this year, a noticeable improvement for them. Intel is behind here, and you bet we will come back to that. Phones also need RF chips (from companies like Skyworks and Qorvo), but for Sub-6 5G the RF components required are pretty similar to what we are using in already in 4G. On the base station front, to really take advantage of some important new features in 5G (aka beam forming), the operators will need to add some new equipment to their base station antennas (e.g. beam forming arrays). The standard will work without them, but it definitely works better with them, so expect the carriers to deploy them gradually over a few years.
Core Network – One of the biggest changes in 5G are new features to operate inside the carriers’ wired networks. Everything from the base station to the Internet. To greatly simplify this, the new standard moves the carrier networks towards a more flexible architecture that looks a lot more like the Internet than the traditional special-built telco networks of the past. It is always hard to quantify the progress the operators make on this front. It is not a simple matter of adding one more box. In many cases, the operators will need to do a complete overhaul of their core networks, and this will take a long time. Our guess is that almost no one is ready for this right now, but many carriers have been steadily chipping away at it for years. In theory, this should allow them to meaningfully reduce their operating costs. In practice, we expect it will be a few years before any external observers will be able to detect any differences here.
mm-Wave – The last bit of changes involve introducing a whole new set of radio frequencies. These are higher frequencies well above where the mobile networks have traditionally operated. They are interesting because they offer some very big improvements in speed, but these come at the expense of much shorter range. Here is where everyone gets a bit more speculative. We will delve into this in greater detail later, there are still a lot of questions marks and TBD labels here.
A crucial problem with mm-Wave is that radio signals in these bands do not travel as far as in traditional bands. Range here is measured in hundreds or even tens of meters as opposed to kilometers for 4G signals. This means for 5G mm-Wave to work, operators will need to deploy many small cells. This will not be easy. First, finding suitable sites will be expensive. Second, cities everywhere are already pushing back on towers and telco boxes, even small ones. Third, installation is labor- and time-intensive. Fourth, connecting these devices back to the core network (aka backhaul) is not easy and requires a lot of permission to dig up streets or use unproven wireless techniques. At the show, we found no one wanted to discuss these topics. The irony is that small cells were once a very hot topic in 4G. We wrote a long piece about this for MWC 2016. It turned out that the industry was not able to pull it off then. Maybe the motivation is much stronger this time around, but it remains unclear how wide these deployments will be. Which then raises the question of what speeds we can really expect from 5G any time soon.
The problem that everyone at MWC was solving for is “When will the carriers start deploying their 5G networks?” This is literally a $64 billion question. And at this point we start to encounter our first elements of cognitive dissonance.
If you read the public and press accounts of 5G, the operators are lock and loaded, ready to start deploying 5G right now. This was the clear marketing message at the show. The reality is much less confident.
In private conversations, it quickly becomes clear that the operators are very nervous about rolling out 5G. As should be clear from the above discussion, there is a lot of money at stake. We will walk through this economic analysis below. Our best guess is that the US carriers will start deploying this year as will the operators in China. Japan and South Korea will start a bit later this year, or maybe next. Everyone else is in a wait-and-see holding pattern. And there seem to be lots of caveats and hedging about how extensive the deployments in China and the US will actually be.
A closing note about China. This could be one of the bright sparks of 5G deployments. The government there has made 5G deployments something of a policy priority. True to historical pattern, this policy is not 100% clear. Most people agree that the Chinese operators will begin deploying “100’s of thousands” of 5G base stations this year. A big number but short of a nationwide network. And then there is the question of licensing. Typically, the operators do not get a license to turn on those networks for commercial purpose until they meet some (publicly) unspoken objective.
That being said, this is an important development. China’s 4G networks today are widespread but they are not operating to the full extent of the standard. They have not added a full range of capacities to the network (e.g. carrier aggregation of RF bands). As a result, mobile bandwidth in China lags what we find in other markets. If the operators here jump to 5G quickly, this will likely bring about a big jump in the data rates that consumers enjoy. So while 5G will likely mean little to most consumers, in China there is a chance that it could be very noticeable to users, spurring greater demand for 5G phones.
Always enjoy reading your perspectives. Keep em coming
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As I see it:
4G, 4.5G, 4.6G, 4.9G, 4.99G, 5G, 5.1G and so on.
It’s a continuum, not a Great Leap Forward.
Exactly, but that’s not how it’s being marketed.
Someone told me today – for those of us who have been following telecom for a long time, it’s clear that 5G is just one more step on the Business as Usual path. But for those normal people, the ones who don’t speak in acronyms, it is hitting their radar as something BIG and EXCITING.”
Seems like a bad move on the part of the various marketing departments, over-inflating expectations
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Missing in this very good analysis is a discussion of the economics. The reality is the 1-4G occurred as we went from 0 to 100% penetration. There are no new vast, scalable frontiers to tackle. And no, it’s not IoT.
Secondly, few really appreciate what gave the last G it’s big push; or really pull. Namely, the iPhone app-driven ecosystem that was fueled by equal access (yes, single handedly resurrected by Steve Jobs after being killed off in the early 2000s) to WiFi was the “demand pull-through” for 4G. Without that, a good 30-40% of our networks would still be 3G and we’d be talking 100% 4G in the mid 2020s.
“And no, it’s not IoT”
Agreed, 5G is incremental for IoT, it helps but it doesn’t vastly expand the market or change the underlying economics.
I think it’s safe to say that no one predicted how 3G/4G would bring about the mobile Internet the way it did. There has been industry speculation for over a decade about some bright shiny future. We eventually did get all those services but it took Apple to break the operators’ hold on how consumers actually accessed those services.
5G does not change any of that
As Ben Evans says, it’s just one more G
And the real consumer benefit doesn’t really come until mmWave, which is only $100 billion in capex away.
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