Despite offering large potential benefits, deploying viable 5G networks will be challenging. Paul Reynolds considers the competitive implications for network operators and how policy might be refined to ensure that consumers realize the potential benefits. He explains the risks of adopting merger control and spectrum policies that may fail to deliver given: (a) the massive investments needed to make 5G a reality; and (b) the significant uncertainty about consumers’ willingness to pay for the incremental services that 5G will eventually deliver.
Mobile services, including the ability to access the internet over mobile networks, have revolutionized our lives. 5G, the next generation of mobile technology, promises further disruptive change, including innovative information and communication services as well as the transformation of manufacturing, transport, commerce, and public services.
Despite the large potential benefits 5G offers, deploying viable 5G networks is challenging. Advanced 5G services depend on extensive and costly infrastructure upgrades. However, there is substantial uncertainty over whether operators will be able to fully recoup the cost of the investments required. 4G led to many European operators’ returns falling below their cost of capital, despite its substantial benefits to consumers and to players in the wider digital ecosystem.
European authorities could help support greater 5G investment, including by reviewing how they will approach future consolidation in the sector, and by adopting spectrum licensing approaches that improve predictability and limit the scope for regulatory opportunism.
5G’s expected benefits
5G technology can revolutionize our access to data. It allows for much greater capacity, faster speeds, and ultra-low latency (i.e. near-instantaneous responses) – performing at levels an order of magnitude greater than 4G (Table 1). 5G would substantially lower the unit cost of data. Ericsson expects the cost per gigabyte on 5G networks will be 10 times lower than it is on 4G networks. Gains in capacity and improved performance from previous deployments of new mobile technology led to a large increase in usage and sharply lower unit prices – Abdirahman et al. (2020) find that revenue per gigabyte in the UK fell by 96% between 2010 and 2017.
Table 1: Increased efficiency and quality from newer technology
What will 5G enable? In the initial years, the major use of 5G is likely to be in the provision of enhanced mobile broadband services. That includes relieving congestion on existing mobile services in urban areas and serving home broadband needs wirelessly. It is also expected to fuel demand for new services and products that take advantage of high-definition video and virtual and augmented reality. For example, augmented reality smart glasses, which overlay information on what the wearer sees, may come to replace smartphones.
Figure 1: 5G quality improvements and use cases
Looking forward, 5G is expected to be a key enabler of what has been called “the Fourth Industrial Revolution” (i.e., the integration of the Internet of Things – machine-to-machine communications – and computation, networking, and physical processes to support greater factory and process automation). In particular, 5G’s capacity can support large numbers of devices being connected and monitored with tailored quality of service (such as in smart automated factories and smart cities) as well as high resilience and ultra-low latency for ‘mission critical’ applications. One qualification is that where spectrum is shared by multiple users, there remains a risk of contention so that connectivity is not fully reliable. As such, 5G is unlikely to be the main or only form of connectivity relied on when there is a risk to life and when other forms of connectivity are available (e.g., for autonomous vehicles).
The benefits that these applications of 5G are expected to generate are vast. IHS Markit estimates that the 5G value chain will generate $3.8 trillion of gross output globally by 2035, including $128 billion in Germany, $115 billion in France, and $90 billion in the UK, albeit with issues in deployment needing to be overcome, including the high costs to operators. In addition, (as was the case with 4G) 5G may lead to innovations beyond those currently predicted.
5G’s investment needs
Users’ actual experience of 5G – and the benefits they will enjoy – will vary significantly depending on the investment in spectrum and network upgrades.
The term “5G” covers a wide range of services and service quality, not all of which provide the step change required to fully reap the benefits of 5G. Some initial services marketed by operators as “5G Evolution” are simply an advanced form of 4G. Nonetheless, the differences to 4G will grow as 5G is employed using different spectrum frequencies, as additional parts of networks are upgraded, and as innovation increasingly takes place at the service level.
In Europe, 5G deployments to date have primarily relied on mid-band spectrum within the 3.3-3.8 GHz range. Although such spectrum offers significant capacity, its frequencies are higher than the mid-band spectrum in use for 4G (e.g. 2.3 GHz and 2.6 GHz) leading to a shorter range and the need for more sites. A number of countries have also auctioned, or are preparing auctions for, the use of low-band spectrum for 5G (in the 700 MHz range). While there is much less of such low-band spectrum available for mobile services and hence limited capacity, it enables wide area coverage to be provided at relatively low cost as well as deep in-building coverage. The 700 MHz spectrum has similar properties to the low-band spectrum used for 4G (e.g. 800 MHz).
5G becomes very different to 4G when it is deployed using high-frequency (mmWave) spectrum such as 26 GHz. Such spectrum offers massive capacity to support high speeds and low latency. However, high-frequency spectrum has a very limited range and is vulnerable to interference from buildings, vegetation, and even rain, so it requires a dense network of small cells just to cover urban areas. Verizon in the US achieves average download speeds of 618.4 Mbps on its mmWave 5G network, but its limited coverage means that 5G users are only connected using mmWave for 0.7% of the time.
5G service quality also depends on whether operators upgrade the core network as well as the radio access network (RAN) and backhaul. While upgrades to equipment in the RAN and backhaul enable significant improvements in capacity and service quality, the shift to a 5G core network offers more fundamental change in being based on cloud computing and allowing software-based changes to tailor services to individual use cases. Such ‘network slicing’ enables a single network to provide dedicated virtual networks to different types of customers. It will mean that operators’ service offerings, particularly to enterprise customers, will become increasingly differentiated.
A further innovation is the introduction of edge computing in which some of the core network functions are shifted from a central location to be closer to end-users. Edge computing is critical to achieving ultra-low latency, which will be important for certain 5G uses.
Investment to further increase capacity and performance to run new 5G services is estimated to require around 2.6 times more capital expenditure over the period 2020 to 2027 than pre-5G levels.
Harald Gruber of the European Investment Bank found that planned 5G investment in Europe is not enough to even provide coverage of urban areas and transport routes with limited capacity. In particular, he estimated that there is a €254 billion gap between the investments required to meet the European Commission’s targets under the Digital Agenda for Europe and the European Gigabit Society and expected private investments.
One key factor holding back network investment is whether operators will be able to realize sufficient demand to recoup their investments. The experience of 4G is telling. 4G ushered in the ‘app economy’ benefitting a host of players in the wider digital ecosystem and delivering large gains in consumer surplus. However, average returns on invested capital for European mobile operators fell significantly over the last decade and are now below the cost of capital for a number of European operators. The experience of 4G together with the heightened uncertainty associated with the development and successful take-up of innovative services is leading to significant investor caution over the deployment of 5G in Europe.
5G’s competitive implications
5G is likely to significantly impact competition between mobile operators and competition within the wider ecosystem.
5G deployments in Europe are currently focused on more densely populated urban areas. To make the capacity and service quality required for advanced 5G services widely available, it will require significant additional investment in sites and backhaul to the sites. The ability to realize scale economies is likely to be particularly important. Both BEREC (the association of European communications regulators) and OFCOM have noted the need for increased network sharing to pool demand and realize efficiencies. Thus, one impact of the transition to 5G is likely to be fewer networks outside of the most densely populated areas.
While 5G is likely to lead to fewer networks, it will support greater services differentiation. In particular, 5G will enable both operators and service providers using the network to compete in delivering a wider range of services with differentiated quality of service than is the case with 4G. Increased network capacity is likely to give MVNOs greater bargaining power, particularly where they are able to target specific customer segments through specialized services and help increase overall demand for the host network. Google’s Project Fi in the US is an example of a new type of service provider that can offer good connections at relatively low prices by being an MVNO on two mobile networks as well as accessing an extensive network of Wi-Fi hotspots with customers automatically connected to which has the best connection.
Additionally, new players have acquired 5G spectrum with plans to operate as wholesale-only players such as Dense Air, which has plans to supply mobile and fixed operators and private enterprise and government networks with small cell coverage solutions in targeted areas. Such players can acquire spectrum at the expense of national networks and take demand away from those networks in local areas.
The faster speeds offered by 5G are likely to lead to increased competition between mobile broadband providers and companies offering fixed and fibre connections – in seven out of eight leading 5G countries in 2020, users experienced faster speeds on 5G than on WiFi. Many 5G operators have launched Home Broadband services. Such services are likely to be particularly successful where fibre is not available or in countries with relatively high-priced fibre services. However, the impact is uncertain; as more users migrate to 5G phones and as data demand continues to rise, the contended nature of 5G may lead to its speeds not being able to match fibre speeds, particularly in areas with high demand relative to capacity.
In relation to upstream competition between equipment suppliers, some operators and vendors are switching to a modular “Open RAN” model, in which multiple vendors can compete to supply different interoperable elements of the network rather than each network being reliant on a single supplier. This should make it easier for operators to switch suppliers. On the other hand, government restrictions on the use of Huawei have narrowed the choice of potential suppliers in Europe.
More generally, the greater scope for innovation at the services level provided by 5G is expected to result in greater competitive interactions with other players within the wider digital ecosystem. Some forms of cooperation and integration are likely to bring significant benefits, including by pooling “know-how”, technologies, and funding. However, there is also the risk that players that are dominant in one area may seek to leverage their market power to extract value from adjacent markets.
This latter point emphasizes the broader challenge. Realizing the benefits of 5G is likely to require and create changes to the competitive landscape. How authorities seek to regulate these changes will help determine what investment takes place and the scale of resulting benefits to users.
Refining policy to realize the benefits
How can authorities best protect competition while ensuring that operators have the incentive to undertake the investment required for advanced 5G services?
As noted above, European regulators have recognized that allowing increased network sharing is likely to be necessary to realize the scale economies required for extending 5G outside densely populated areas. While greater sharing is likely to be needed, operators may not always be able to reach sharing agreements particularly when they differ in their market positions, strategies, networks, and financial positions. Even where agreements are made, operators might only be able to agree to limited forms of sharing which do not deliver the same level of investment or efficiencies of a merger.
In such cases, operator mergers may be important to achieve greater 5G deployment. In relation to the Sprint/T-Mobile merger in the US and the VHA/TPG merger in Australia, the courts found that the mergers would enable the parties to better invest and deliver advanced services and increase competitive pressure on rival operators. Mergers need not imply higher prices, particularly where they facilitate greater investment in capacity, including increased rivalry in investment. Combining spectrum also lowers the incremental cost of capacity as each additional site leads to more capacity or equivalently fewer sites are needed to achieve a given increase in capacity.
Merger control will still need to balance the risks of under- and over-enforcement, but that balance point might shift. A somewhat more receptive approach to mergers in markets with prospective investment with uncertain returns reduces downside risks by increasing investors’ exit values if their investments turn out to be unsuccessful – counter-intuitively, this can support greater competition by encouraging weaker operators to invest more. However, an overly lenient merger policy could make exit more likely and lead to less investment.
Spectrum licensing approaches will also be key to realizing 5G’s potential. Authorities should ensure that spectrum is made available on a timely basis to industry and that spectrum is allocated efficiently to the players that can make the best use of it. Where there is a real risk of excessive concentration of spectrum, this can be best addressed through a cap on the overall share of spectrum able to be acquired by individual operators, rather than through reserving spectrum for entrants or smaller players where it may be poorly utilized.
Investment may also be deterred by the risk of a ‘hold-up’ problem where authorities later increase spectrum license fees or impose new conditions on existing licenses. The adoption of perpetual and tradeable licenses would help promote investment by overcoming the uncertainty created by licenses needing to be renewed periodically, which gives authorities the ability to charge in a way that captures returns on operators’ sunk investments. Rather than imposing new conditions on existing licenses, new public policy goals (such as extended coverage) could be achieved through public funding or by their inclusion when new spectrum is auctioned, so that the cost of the obligation can be taken into account in operators’ bids.
In conclusion, 5G has the potential to deliver substantial benefits including much faster mobile broadband and a host of new consumer and industry applications. Achieving widespread deployment of advanced 5G services may lead to fewer networks being viable than has been the case with earlier mobile technologies. However, 5G is likely to enable a much greater variety of services and provide an increasing role for other players to compete with mobile network operators. Realizing 5G’s potential needs authorities to provide the level of certainty required to encourage long-lived investments. That may require them to accept greater network consolidation and to ensure their spectrum licensing approaches promote efficient spectrum allocation.
 The views expressed in this article are the views of the author only and do not necessarily represent the views of Compass Lexecon, its management, its subsidiaries, its affiliates, its employees, or its clients. This article, in part, draws on research sponsored by Vodafone.
 Abdirahman, M., Coyle, D., Heys, R. & Stewart, W. (2020), “A Comparison of Deflators for Telecommunications Services Output”, Economie et Statistique, 517-518-519, p.115.
 IHS Markit, The 5G economy in a post-covid 19 era, November 2020.
 Opensignal, Quantifying the mmWave 5G experience in the US, 13 July 2021.
 GSMA, Realising 5G’s full potential: setting policies for success, 2020, p.3.
 Gruber, H., Very High Capacity and 5G Networks: From the EU Code to the EU Market, 24 June 2019. The targets are for 5G to cover all urban areas and transport paths by 2025.
 See, for instance, D. Coyle and D. Nguyen, “Free goods and economic welfare”, ESCoE Discussion Paper 2020-18, December 2020. Teece notes that in ecosystems of complementary products, a greater share of returns tend to go to the owners of the assets which have more bottleneck characteristics (Teece, D., “Profiting from innovation in the digital economy: standards, complementary assets and business models in the wireless world”, Tusher Centre for the Management of Intellectual Capital Working Paper Series No. 16, August 2016). P. Goodridge, J. Haskel and G. Wallis find significant spillover benefits from earlier telecoms investment to economy-wide total factor productivity growth (“The “C” in ICT: communications capital, spillovers and UK growth”, Imperial College Business School Discussion Paper 2014/10).
 HSBC European Telecoms, Call to return (on capital), 5 February 2021.
 Vodafone’s announcement of further spending on its network (particularly in 5G) in May 2021 was identified as causing an 8.9 per cent drop in its share price (The Times, “Investment plans spook shareholders at Vodafone”, 19 May 2021).
 BEREC, Report on Infrastructure Sharing, 2018, p.2 and Ofcom, Enabling 5G in the UK, para. 4.18.
 Opensignal, 5G download speed is now faster than WiFi in seven leading 5G countries, 6 May 2020.
 See State of New York et al v. Deutsche Telekom AG et al, No. 1:2019cv05434 – Document 409, p.161-163 and Vodafone Hutchison Australia Pty Limited v Australian Competition and Consumer Commission  FCA 117, paragraphs 792-898.
 The impact of merger policy on ex ante investment is assessed in Bisceglia, M., J. Padilla, J. Perkins and S. Piccolo, “Optimal exit policy with uncertain demand”, 2021 and J. Padilla, J. Perkins, S. Piccolo and P. Reynolds “Merger Control Z”, 2021.