Navigating the three horizons of 5G business building

Telcos clearly are excited—if levels of investment are a reliable gauge of enthusiasm—about the future that fifth-generation (5G) mobile networks will bring. And with good reason: 5G’s faster speeds, lower latency, and higher bandwidth have the potential not only to delight customers with seamless video streaming and lag-free video games but also to enable next-generation tools and platforms that draw on artificial intelligence, the Internet of Things, edge computing, and automation to transform how we live and work.

Enthusiasm alone, however, will not allow telcos to recoup their investments in 5G, let alone thrive in a rapidly evolving landscape. If telcos continue their current approach to 5G monetization, they are poised to regain just a fraction of the $600 billion-plus they are expected to invest in 5G infrastructure between 2022 and 2025 (Exhibit 1). In the United States alone, telcos spent roughly $100 billion to purchase 5G spectrum at auction in 2021.¹FCC Public Reporting System, Completed Auctions, accessed December 16, 2022. Despite these substantial infrastructure investments, the adoption and monetization of 5G are still in their infancy.

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Getting 5G right is not just about recouping investments; it requires capturing value from a new phase of innovation across industries. Operators have a choice: they can relegate themselves to a minor role as this transformation unfolds, or they can try to reposition themselves as 5G business builders that serve as critical partners to organizations seeking next-generation, 5G-enabled use cases, such as automated manufacturing and autonomous vehicles.

Telcos can make the most of the 5G opportunity by working their way across three distinct horizons of 5G business building: core connectivity, which presents an opportunity to capture between $10 billion and $20 billion by 2028; premium connectivity, with an estimated value pool as large as $30 billion to $50 billion by 2028; and platforms and solutions, where we believe the value potential is several times higher than in horizon 2 (Exhibit 2). As operators build businesses in each horizon, they will encounter new challenges, customers, and competitors. To adapt, they will need to shift their mindsets and business approaches.

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Currently, most operators are very early in their 5G journeys. Out of the 100 telcos with the most subscribers in the world, the largest number (42) are at a stage we call “pre-horizon,” meaning they have yet to offer customers 5G connectivity. Another 32 are focused on horizon 1, leaving horizons 2 and 3 in nascent states.²Note: 100 largest telcos are based on TeleGeography’s GlobalComm database. This provides a long runway for telcos that move quickly and strategically; they have a chance to take risks, fail fast, learn from their mistakes, and incubate new ideas. Operators’ business approach to monetization in each horizon can set them up for success (or failure) in later horizons.

In their pursuit of horizons 1, 2, and 3, the key to monetizing 5G is for telcos to reimagine their role, evolving from network providers to solution orchestrators. Companies that own each horizon stand to recapture much of the value that eluded them over the past decade, when tech players monetized the connectivity that telcos made possible.

Horizon 1: Core connectivity

In horizon 1, telcos continue to be the core connectivity providers but have an opportunity to monetize a superior product. In doing so, telcos can capture between $10 billion and $20 billion by 2028.³McKinsey analysis based on Analysys Mason Fixed Wireless Market Size data, accessed February 7, 2023. While the potential for individual telcos will vary by geography, market structure, and competitive intensity, success in horizon 1 could boost wireless revenue by as much as three percentage points.⁴McKinsey analysis based on Omdia private LTE and 5G market forecast, December 2022, and Omdia enterprise edge ICT market forecast, April 2022.

Here, we see two main avenues for monetization. Telcos can upsell 5G access to mobile wireless consumers, and they can launch new 5G-enabled products, the most promising of which is fixed wireless access (FWA).

What telcos have tried

Traditionally, telcos have treated new products and services as add-ons that can produce incremental revenue gains. This approach bundles new offerings with existing ones to stem churn, increase revenues, and meet the broader organization’s key performance indicators (KPIs). This traditional approach makes sense when applied to upselling 5G access to mobile wireless consumers.

Operators worldwide have begun bundling 5G-rich apps with service plans, including video streaming, music streaming, and cloud gaming services in premium 5G plans. By allowing customers to select differentiated speed tiers, some operators are reserving the top speeds and highest throughput for customers who value these features and are willing to pay for them. One European operator allows customers to choose from three different speed tiers, topping out at one gigabyte per second. By offering 5G boosters, telcos enable customers to temporarily increase network performance for activities such as important video calls or competitive mobile games; several Asian operators have grown revenues by allowing subscribers to purchase temporary connectivity boosts.

While the core mobile business still offers some opportunity to monetize 5G incrementally through strategies like these, the potential is limited. To unlock growth in horizon 1, operators must also adopt a less familiar approach to products and services that are enabled by 5G network access.

A new approach

Success factors for FWA

Fixed wireless access (FWA) is a fast-growing business for operators that offer it, and adoption has been steadily increasing (exhibit). FWA presents an opportunity for telcos to deepen their relationships with existing customers and to broaden their customer base. Half of one North American telco’s 5G FWA home internet customers are new to the company.

In addition to the broader success factors that are key to rolling out any new business in horizon 1—the core connectivity stage—three considerations are critical to success in introducing 5G FWA, specifically:

1. 5G network maturity. When customers sign up with a home or business internet provider, they expect a reliable connection. Because FWA customers must share the bandwidth that remains after mobile users’ demands are met, operators would be well-advised to ensure their 5G networks have the excess capacity required to satisfy FWA users. If operators introduce 5G FWA before their networks are sufficiently mature, home and business internet users may be disappointed—harming the business.
2. Phased rollout. Because network capacity differs from place to place, it makes sense for operators to pilot 5G FWA in geographical areas with higher capacity. They can work out any kinks in these areas before scaling up. Typically, operators start introducing 5G FWA in rural and suburban areas, where there are fewer competitors and signal transmission is stronger. Because customers in such areas may have previously had access to only one internet service provider (ISP), relied on satellite internet, or lacked internet access, they are more likely to welcome the opportunity to test-drive the service.
3. Clearly defined business strategy. Integrated telcos should consider the potential impact of 5G FWA on their existing ISP business, ensuring the two products complement each other and limiting loss in sales. FWA is particularly useful for establishing last-mile connections for customers in hard-to-reach areas, where placing fiber lines has been cost prohibitive. Enterprise customers present an additional opportunity, as FWA can be quickly introduced when new locations open.

With 5G still in its early days, the best example of a 5G product that can be separated from the core business is fixed wireless access (FWA), which provides homes and businesses with high-speed internet access using radio waves instead of cables or fiber. Multiple factors will determine whether an FWA rollout is successful (see sidebar, “Success factors for FWA”). But the biggest unlock will come from treating FWA—and other promising products or services that may emerge as 5G matures—as a separate business with plenty of room to stumble, learn, and grow. These new divisions will be more likely to succeed if they’re equipped with sufficient capital and people resources and given the freedom to explore new ideas, develop new ways of working, and adopt separate KPIs specific to their offerings.

This approach will be unfamiliar to most incumbent telcos. By learning how to stand up strong new businesses in horizon 1 (which includes a mix of B2B and B2C customers), they will establish a foundation for success in horizons 2 and 3, where the most value lies in B2B.

Hallmarks and capabilities of such separate businesses include the following:

• Dedicated product development, marketing, and sales teams to drive growth. These teams should be able to operate without concern for how FWA fits into the bigger picture of traditional telco offerings. They should have autonomy to strategize and make decisions without getting tangled in corporate red tape. Good companies, in telco and beyond, often use this approach to nurture new products and businesses.
• Unique performance metrics. KPIs should be designed to encourage teams to develop the right product and test it in the right markets. If the FWA business is beholden to the core mobile business’s broader KPIs around revenue, subscriber count, and quarterly targets, teams will have the incentive to rush FWA into the maximum number of homes and businesses as quickly as possible. This effort could backfire, disappointing customers in areas with overly congested networks.
• Freedom to develop new ways of working. Traditionally, operators fully develop products before releasing them. Separation from the core business gives telcos latitude to pilot working prototypes with select consumers and then refine the user experience before launching a widespread rollout. One North American telco, for example, tested 5G FWA in a few select markets to refine its offering before gradually expanding to additional markets on a path to introducing FWA nationwide.
• A broader lens on the potential market. In addition to selling FWA to existing customers, a new unit can target households with limited internet access. FWA, which can be less capital intensive than wired technology, can be introduced in areas previously unserved because of unfavorable economics. According to NCTA, the Internet and Television Association, as of 2021, approximately 12 percent of US households were still considered “underserved,” in that they had inadequate broadband service and speeds.⁵“Building broadband’s future: Connecting every American,” NCTA - The Internet & Television Association, accessed February 13, 2023; BNP Paribas Exane report, January 2022.

Horizon 2: Premium connectivity

In horizon 2, operators provide a higher-quality, more reliable network experience tailored to solving end users’ specific business needs. They do this by leveraging private networks, edge computing, and other technologies that 5G makes possible and developing a robust ecosystem of complementary partners. The value pool from horizon 2 could be as large as $30 billion to $50 billion by 2028, with successful telcos growing wireless revenue by up to five percentage points.⁶McKinsey analysis based on Omdia private LTE and 5G market forecast, December 2022, and Omdia Enterprise Edge ICT Market Forecast, April 2022.

Here, economic value is primarily derived from B2B relationships, with telcos’ role fundamentally shifting from selling pure connectivity to selling customized solutions. A company may be able to improve its asset and inventory tracking, for example, by running a computer vision solution on a private network to track products across its warehouses. Or it may be possible to improve the efficiency of a production line by uploading video footage and photos and analyzing them in real time to identify bottlenecks and predict maintenance needs.

As in horizon 1, creating stand-alone businesses is a critical first step. In addition, horizon 2 introduces five more success factors:

1. Educating an immature market. While businesses are largely aware of the advantages of 5G core connectivity, they have less understanding of the benefits 5G can bring in horizon 2. Operators must create a market for tailored network solutions by educating businesses on the value these solutions can create. Even enterprises with mature IT teams may not understand how changing certain aspects of a network architecture (hardware, transmission media, etcetera) can help them meet business goals.

   An Asian telco set up a showroom to educate manufacturing customers on next-generation smart-factory solutions. The operator demonstrated how robots using 3-D camera images can transport objects and how high-definition image transmission can improve quality control and diagnose equipment problems on production lines.

2. Consultative selling. To become a trusted partner for enterprises, operators must fundamentally shift their sales approach from product centric (selling phones and plans) to solution oriented (sitting down with customers to design solutions). This approach requires not only deep technical network expertise but also deep industry knowledge: What matters most? What are the critical pain points? Where is the industry moving in the next five to ten years? A new subbrand can make it easier for companies to position themselves as knowledge partners with expertise in leveraging technology to achieve business outcomes.

3. Targeting new customers and decision makers. Procurement heads have traditionally been telcos’ primary customer points of contact. However, for horizon 2 offerings, the points of contact will change. Chief information officers, business unit executives, and operations executives will be the key decision makers for such purchase decisions. These stakeholders have more authority, hold varied functional roles, and are more focused on business outcomes than on any specific technology. To meet their needs, telcos must reconsider the composition of their sales teams.

   Even identifying the new decision makers can be a challenge. Traditional salespeople must become lead generators, asking their contacts about greater business needs and passing leads to the technical sales team. Sales teams must also change their approach to reach stakeholders who may not clearly understand what an operator has to offer. Some may be outright skeptical, as operators are not typically known for strategic partnerships of this nature.

4. Establishing broad partnerships. Since customers of 5G integrated networks have varying technology preferences and expertise needs, operators must forge a vast network of partners. For example, an enterprise that uses a particular brand of servers may be unwilling to adopt private network solutions unless the telco has a partnership with the company that builds the servers. As telcos expand beyond their core business, they will inevitably be unable to deliver every aspect of a solution. Strategic partnerships with respected companies can fill telcos’ capability gaps while boosting credibility.

5. Competing against non-telco players. Operators face a range of new competitors in the network solution space, from hardware OEMs to systems integrators. This requires telcos to reimagine their competitive advantages and market themselves to counter each competitor’s chief assets. This would include developing sales scripts that address typical competitor-specific pushback and showcase how they can provide a superior holistic offering. For example, operators can highlight systems integrators’ lack of network operations experience and the limitations that network equipment vendors face because they do not have spectrum.

Enter the win room

All five success factors diverge markedly from telcos’ typical way of doing business. One way to introduce them effectively and quickly is to stand up what we call a “proof-of-concept win room.” This brings all stakeholders together around a single, clearly defined goal to quickly align on high-potential priorities and to launch and scale products ahead of schedule. This tactic is based on the concepts of private beta, borrowed from the tech industry, and agile war rooms, which some companies use to drive sales following a product launch.

Real customers are invited to participate in the win room as a private beta, subject to the same customer life cycle events as in a full-scale deployment. Through agile, iterative cycles, stakeholders identify pain points, which the company can address by adjusting its strategy to satisfy customers in real time. Teams using win rooms can simultaneously solve issues with products, pricing, partnerships, marketing and sales, and launch readiness.

One western telco credits a win room for a pair of successes. The company improved its time to market by more than 25 percent in seven months, and it created a pipeline of more than 100 actionable opportunities that helped accelerate momentum following product launch.

Case study: Horizon 2 business building

A leading telco recently launched wide-scale capabilities in horizon 2 when it introduced a suite of network solutions designed to help enterprises meet business goals through further digital transformation. Instead of selling prepackaged products, the telco works with customers to devise solutions that address their specific needs.

Thinking like a ‘ServCo’: How telcos can drive B2C growth

Read the article

The telco created a separate division for this endeavor, as well as a robust ecosystem of respected partners to enhance its capabilities and credibility. After showcasing its capabilities through partnerships with a few early customers, the telco is leveraging testimonials from those customers to drive growth.

The telco’s new division has its own go-to-market motion, as well as educational materials explaining how 5G integrated network solutions can affect different types of organizations by, for example, increasing productivity in manufacturing, improving reliability and capacity in logistics, or managing traffic flow in cities. By moving early and quickly, the telco has positioned itself to emerge as a leader in horizon 2 premium connectivity business solutions.

Horizon 3: Platforms and solutions

Horizon 3 is furthest from telcos’ core business and therefore requires the most capability building. It also has the potential to be the most lucrative, with a value pool that could be several times larger than the value at stake in horizon 2.

Whereas telcos in horizon 2 deliver private networks and edge computing to enable solutions built and supported by other players, telcos in horizon 3 must position themselves as providers of end-to-end solutions. Business development in horizon 3 is still in its infancy, with little in the way of flagship success cases or standardized approaches. Few robust 5G solutions are available on the market today, and off-the-shelf models won’t be a good fit for many customers.

Promising approaches

Although horizon 3 is not easy to navigate, we are seeing two high-potential approaches emerge: a vertical approach and a platform approach.

Vertical approach. Telcos can select an industry vertical in which end-to-end solutions have the greatest value potential. After successfully delivering to this industry vertical, they can leverage this success to expand into new verticals. For example, a telco might start with the manufacturing industry, enabling smart factory connectivity solutions before expanding into other verticals.

For an analogy, imagine an outdoor video camera company leveraging its success in its core product to take on the broader consumer home security vertical. The company may expand first into smart locks, then move in succession to connected alarm systems, smart outdoor lighting, indoor cameras, and an integrated neighborhood social app. The result is a one-stop shop that leads in consumer home security.

Platform approach. Instead of reselling, buying, or even building point solutions, operators might focus on building a 5G platform akin to the platforms that currently exist for mobile apps, communication services, and cloud-based software. An Asian telco has created a platform that allows enterprises to activate slices of its 5G network on demand and access partner-created tools. Its marketplace, which functions like an app store, offers solutions for smart warehouse management, training that applies virtual reality and augmented reality (VR/AR), equipment diagnostics and maintenance, and more.

Lessons from other industries

Companies’ experiences in related industries provide several lessons that may apply to success in horizon 3, particularly when it comes to the platform approach. Telcos planning for horizon 3 should investigate ideas such as the following:

Owning the ecosystem. To defend against homegrown solutions, it will be important for telcos to build a robust “moat” that contributes to customer loyalty. Ways to accomplish this include developing a suite of channel and technology partnerships, building infrastructure (including intellectual property and capabilities) that is difficult to replicate, and delivering proprietary data, analytics, and intelligence for high-priority use cases.

Monetizing APIs and other building blocks. As the platform is developed, operators might consider offering a proprietary suite of APIs and plug-and-play modules that customers can use to build end solutions quickly. These can be monetized as separate products.

Developing out-of-the-box enterprise solutions. Telcos that start with a platform approach can expand into verticals by bundling APIs to create out-of-the-box point solutions that meet the complex needs of enterprises in specific industries.

Driving upsell through user engagement. Telcos can inspire a committed followership among developers and platform users by organizing hackathons, offering free trials, and establishing teams of evangelist customers willing to help spread the word about the product or service.

Getting started

To identify the right problems to solve, position themselves as the solution, and empower enterprises across industries to innovate in this new frontier, telco leaders might embark on the horizon 3 journey by asking themselves several key questions:

• What should our overall strategy be in horizon 3? Does a vertical approach, a platform approach, or a combination of both make the most sense for the business?
• Is there a vertical in our geography that is large enough to make a vertical approach viable?
• If we pursue a platform approach, is there enough value to spread between the solution creator and our telco, which is providing the platform? How will the business grow?
• What are the capability gaps, across technology and talent, to deliver horizon 3 solutions? What is the best approach for closing these gaps? How well positioned are we to build our own solutions versus partnering with others to provide them?
• What should be our inorganic strategy for approaching horizon 3? Which M&A opportunities could we target to give us a jump start?

As 5G matures, significant value is at stake. Operators that strategically evolve from core connectivity to platforms and solutions, building new skills and capabilities along the way, will position themselves to recoup their substantial investments in 5G and maximize their share of a value pool that could easily exceed $100 billion over the next five years.

Telcos’ approach to building capabilities and businesses in horizons 1, 2, and 3 will determine whether they can capture this enormous opportunity. The sooner telcos embark on the 5G monetization journey, the sooner they can begin to capitalize on this new phase of innovation. As 5G technology transforms every industry, telcos have a choice: they can remain network providers, or they can reinvent themselves as outcome providers.