HSF: 5G - the future of mobility

By Aaaron White and David Coulling, Herbert Smith Freehills

5G will provide greater capacity for wireless networks, more reliability, faster speeds and will enable new services, such as mass internet of things (IoT). Operators such as China Mobile are conducting proof-of-concept system field trials this year, and plan to move to large-scale pre-commercial 5G trials in 2018. The first wave of commercial 5G services and applications is expected to be launched by operators globally as early as 2020.

There is significant public pressure for developed economies to be early adopters of 5G and become global leaders in digital connectivity. In the UK for example, this goal was outlined in the government’s 5G strategy which was published earlier this year. Furthermore, in October this year the UK's Department for Digital, Culture, Media and Sport launched a £25 million fund of matched-funds grants for testbeds and trials of 5G technology, and the Autumn Budget 2017 included £160 million of extra funding for new 5G infrastructure. Despite the availability of public funding, it is clear that operators will also need to invest significant amounts of capex and opex if this goal is to be achieved. This cost pressure comes at a time when operators' margins are being squeezed amid falling traditional revenues and high competition from traditional players and tech disruptors in their markets, while still being required to invest significant capex in rolling out 4G networks to meet demand and satisfy geographic coverage obligations. Operators will therefore have to develop new applications and services (particularly around B2B and B2B2C propositions) which can be served by 5G, and develop robust sales strategies to drive high take up rates which will generate substantial revenues.

WHAT CAN WE EXPECT FROM 5G?

5G will build on the ongoing evolution of 4G technology and will deliver significant technological improvements by way of enhanced mobile broadband, massive IoT and fixed wireless access.

Enhanced mobile broadband

5G is expected to provide significantly enhanced mobile broadband, including in areas where it has traditionally struggled, including at the boundary between cells, in high traffic areas such as shopping centres, and on trains. High speed, low latency, secure connectivity that is ubiquitous and highly reliable will offer a greatly improved mobile experience to citizens, and also provide the platform for new services and applications in markets such as virtual reality and augmented reality.

Massive IoT

5G will play a key role in supporting the massive rollout of intelligent IoT nodes, and will drive the development of IoT services and applications in vertical markets, including manufacturing, health, energy, automotive, and media and entertainment.

Fixed wireless access

5G mobile technology will also support the development of enhanced fixed wireless access services. Until now, fixed wireless access using current mobile network technology was unable to provide performance comparable to a fibre broadband connection. 5G mobile technologies will now enable it to deliver a level of service that is closer to existing broadband standards. 5G fixed wireless access has emerged, particularly in the US, as the likely first phase of commercial 5G services. Operators like AT&T and Verizon Wireless are using it as an opportunity to offer 5G services before the international 5G standards are finalised.

SPECTRUM

5G services and applications will require access to a range of spectrum bands (both licensed and unlicensed) with different features. With major operators seeking to launch commercial 5G services imminently, there is a risk that spectrum and 5G technology develop in a fragmented way across different countries. Operators, equipment vendors, policymakers and regulators will need to work closely together to avoid different proprietary 5G networks emerging, which would result in interoperability issues and stifle efforts to scale 5G cost-effectively.

Spectrum auctions

Governments are setting out their 5G strategies and regulatory authorities are publishing the plans for the auction of 5G spectrum. In the UK for example, Ofcom (the UK communications regulator) is proceeding with the auction of spectrum in the 3.4GHz band, which has been identified as usable for certain 5G services and applications from 2020. The Australian Communications and Media Authority (ACMA) also recently announced the launch of the auction process for frequencies in the 3.4 GHz band, although it has not yet set a firm date for the sale. Fair and competitive auctions will be critical if the mobile telecommunications industry is to successfully evolve towards 5G.

Spectrum sharing

In many jurisdictions, most, but not all, spectrum licences are tradable, which enables operators to share rights to use spectrum. Sharing of spectrum for 5G is likely to be required if operators are to scale 5G cost-effectively. We suspect that some regulatory authorities may even consider imposing licence conditions such as a requirement to share 5G spectrum, anti-hoarding measures or even coverage obligations.

COMMERCIAL AND REGULATORY CHALLENGES

While 5G will still require the use of macrocells, densification of the radio access network in the form of mass small cells will be critical to support very high bandwidth, low latency and high reliability requirements for 5G services and applications, particularly at high and very high frequencies. The antennae for these small cells will be mounted at street level, typically on the external walls of existing buildings, lamp posts and other street furniture.

Commercial challenges

The overarching commercial challenge, given the significant capital expenditure and operational expense associated with deploying, operating and maintaining 5G infrastructure, is how industry will be able to deploy 5G in a cost-effective manner.

There are limited suitable new sites to place the numerous antennae that will be required for 5G. Furthermore, certain countries, such as the UK, do not have the vast amounts of fibre in the ground required to deliver the capacity required by 5G networks. Mass small cell deployment will also bring significant mobile backhaul requirements. Each antenna (or group of antennas) will require a fibre link to backhaul traffic to the operator's existing mobile backhaul networks and other fixed telecommunications networks. This will require operators to access fibre from third parties by way of managed or unmanaged backhaul or dark fibre products, or work with local councils and other utility providers to rent space in their existing duct networks to deploy their own fibre. These small cells will also need to be located in close proximity to supporting civil infrastructure, such as power and cooling facilities.

Regulatory challenges

There are also regulatory issues associated with deploying mobile technology infrastructure. In the UK for example, local authority planning permissions and other permits and approval requirements present major barriers to site acquisition and development. The new Electronic Communications Code will go some way to supporting efficient infrastructure development, however the mobile industry is also calling for a more supportive planning regime that facilitates faster processes to review new site applications and a more cost-effective mobile infrastructure rollout. If the mobile communications industry is to evolve successfully to 5G, it will be critical that governments provide a transparent and predictable pro-investment and pro-innovation regulatory framework.

NEW OWNERSHIP AND COLLABORATION MODELS

These challenges may mean that multiple national or local 5G networks will not be technically, operationally or commercially feasible. Creative solutions on how best to build the collective 5G infrastructure will need to be explored, while maintaining adequate competition in the market at the service layer. This will require cross-industry collaboration by operators, infrastructure providers, financial investors, national government and local councils, businesses and communities.

Infrastructure sharing could alleviate some of the challenges associated with securing all the new sites and backhaul links required, by spreading the burden, as well as minimising the cost associated with deploying, operating and maintaining large numbers of small cells for each operator. For example, in specific locations, a single, shared small cell network that is designed, deployed and funded by a "neutral host" (such as an alliance or consortium of operators and infrastructure investors, or an independent infrastructure provider) may represent a more efficient and cost-effective option.

Other new collaboration models may include techniques where access to 5G infrastructure and backhaul is leased or assigned to users dynamically, based on parameters such as usage and location. Alternative network providers or "alt-nets" will also have an important role to play. Their networks, including Wi-Fi networks, will need to be integrated to provide the ubiquitous and high-speed, reliable and secure connectivity required in the 5G era.

LEGAL STRUCTURING OPTIONS

There are a range of possible legal structuring options for deploying 5G infrastructure, including a purely contractual approach and a corporate JV approach. Asset financing models, public concession agreements, managed service agreements and partnerships are also options.

Purely contractual approach

The members of a collaboration or alliance may co-operate by entering into an agreement governing the design, deployment and funding of each 5G infrastructure project. This could be particularly well-suited to the initial localised 5G deployment projects, allowing incremental roll outs and enabling members to decide if they could work together under a longer-term arrangement.

However, this type of approach has its challenges; it does not easily accommodate new members, or the exit of existing members, and may consequently become more complex as the 5G deployment becomes operational and starts to scale. Additionally, the cost-sharing mechanisms associated with the deployment of 5G infrastructure will be more complex under this approach than in a corporate JV scenario. A purely contractual approach also requires one of the alliance members to own the assets used in the deployment, which can be problematic where a competitor has control over the assets required for the delivery of services to an operator's retail customers.

Corporate JV approach

Alternatively, the parties may co-operate through a corporate JV to deploy 5G. The type of JV chosen will depend on the parties' objectives but it will commonly involve a corporate entity such as a company limited by shares. Advantages of this approach include (a) the ability to operate through numerous members, especially once the 5G infrastructure project becomes operational, (b) operating on an arm's length basis or according to information sharing restrictions imposed for tax or competition reasons may be easier, and (c) adding new members to the alliance and accommodating exits would be easier.

On the other hand, establishing a corporate JV can be more time-consuming and complex than a purely contractual collaboration or alliance. There are also often complexities relating to the parties' interests in, and contributions to, a corporate JV.

Practical considerations

Once the structure has been established, certain practical issues will require consideration, including:

• Project funding, both on establishment and on an ongoing basis, including the valuation mechanics and the resolution mechanism for disputes.
• The assets and resources contributed by each party including the tax treatment of any transfer of assets, the valuation of the assets and any necessary adjustments.
• Regulatory and competition issues associated with entering into a JV, as such arrangements may raise concerns around the potential for collusion, co-ordinated effects and information sharing. Merger clearances and ongoing monitoring may also be required.
• The governance arrangements for the day-to-day project management, including the board composition; the area of infrastructure deployment; site design; and key vendors for supplying power, transmission and radio equipment.
• Exit and unwinding arrangements, given that the life of the assets may endure beyond the term of the JV.

Contact the author:

Aaron White – aaron.white@hsf.com
David Coulling – david.coulling@hsf.com