No doubt about it, next-generation 5G wireless networks are coming. But beyond faster download speeds to help users binge their favorite shows more seamlessly or stream videogames on the go, how exactly will the much-hyped 5G change the world?
Verizon Communications (ticker: VZ) has launched a contest to enlist entrepreneurs’ help in figuring it out. Announced last week, Verizon’s “Built on 5G Challenge” offers a $1 million prize to the team that produces the best new product or service using 5G.
“We’re calling on innovators to create truly transformative solutions that leverage 5G’s ultrafast speeds, massive bandwidth, and low latency,” said Verizon CTO Kyle Malady in the contest announcement. “We expect to see new uses cases that not only enhance existing technologies, but create experiences we couldn’t even fathom until now.”
The winners will be announced in October, with the second and third prize teams receiving $500,000 and $250,000, respectively. Entrants must be from a U.S. company with fewer than 200 employees.
The contest is a relatively small bit of corporate largess but it symbolizes a larger issue: both AT&T and Verizon need to find new incremental revenues to fully justify the high cost of 5G’s deployment. 5G networks require a much denser arrangement of antennas than earlier networks due to their use of higher-capacity but shorter-range spectrum bands.
“With an uncertain business case for mass adoption, the wireless companies face a difficult issue of how quickly and widespread should they deploy next generation wireless services in light of that uncertain use case, and therefore uncertainty about adoption,” wrote a team of analysts at New Street Research on Monday. “There are, of course, savings over time, in terms of increasing capacity for today’s use case (largely video) but incremental capital expenditures without some greater incremental revenues is a problematic formula.”
The New Street Research analysts point out that promoting faster data speeds from 5G won’t be enough to drive customer upgrades. That’s because cable companies like Comcast (CMCSA) already offer gigabit-speed connections to the majority of homes in areas where 5G networks make financial sense to deploy and can thus service those customers at a lower cost.
“We have no doubt that 5G has some benefits that current cable offering will not match, but just as VHS beat Betamax by virtue of ubiquity, not higher quality, cable’s ability to capitalize on new use cases more rapidly and cheaply may prove to be more important than currently understood,” they wrote.
That means that for 5G to really take off, it will require new use cases that are unique to 5G—and become as ingrained in users’ daily lives as their ride-hailing apps or mobile music streaming habits are today. Beyond enabling faster mobile access to data-intensive forms of entertainment like mobile gaming, 4K video streaming, and virtual reality, proponents foresee 5G networks eventually powering self-driving vehicles, remote medical procedures, and millions of internet of Things devices.
Speaking to Barron’s for a recent cover story, AT&T CEO Randall Stephenson noted how the success of the iPhone wouldn’t have been possible without 4G’s speed improvement over 3G.
“You don’t know exactly what innovation is going to take advantage of it, but the innovation will come,” Stephenson said. “Think of when we launched the iPhone. 3G is when it took off but four or five years later on 4G is when it just exploded. Absent 4G it wouldn’t happen. So think about all the business models that now exist because of that.”
But unlike in the early days of 4G—whose nationwide launch around 2011 induced a huge wave of consumers to upgrade to internet-enabled smartphones with more expensive data plans—almost nine in 10 Americans already have a smartphone today, with many of them on unlimited plans. That means the wireless operators can’t rely on just selling more of today’s 4G use cases on 5G.
Stephenson sees the potential advances being even bigger this time around.
“I am convinced that 5G is another one of those really seminal moments that innovation and technology is going to evolve at a scale that I think is actually going to be more significant than 4G,” Stephenson told Barron’s. “I don’t know yet what the iPhone will be on 5G.”
The top three prizewinning teams in Verizon’s 5G challenge also grant Verizon the right to invest in the companies’ next financing round. While Verizon’s or AT&T’s businesses both clearly grew from greater smartphone adoption and usage thanks to 4G’s data speed improvement over 3G, perhaps the biggest beneficiaries were companies in Silicon Valley. Could Uber, Snapchat (SNAP), or Facebook ’s (FB) Instagram and WhatsApp have become as successful as they are today on slower 3G networks? That equity stake is a smart way for Verizon to potentially capture a much larger share of the value created by the shift from 4G to 5G networks.
Verizon’s mobile 5G network is currently live in parts of Chicago and Minneapolis, with an additional 28 cities planned by the end of this year. The stock was up 0.3% on Monday morning ahead of its first-quarter earnings report on Tuesday morning.
AT&T plans for its 5G wireless service to reach 200 million customers in the U.S. by the end of 2020. Its stock rose 0.4% Monday morning, versus a flat S&P 500. It’s scheduled to release earnings on Wednesday before market open.
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