The 5G investment opportunity; sizing the 5G millimetre wave

By Frank Rayal, Xona Partners

Frank Rayal is a Partner at Xona Partners. He advises technology companies and investors on technology trends and strategy, M&A planning and positioning, and strategic partnerships.

In the run towards 5G, millimetre waves emerged as the leading technology largely driven by the plans of a few service providers on both sides of the pacific. Competition between AT&T and Verizon to acquire 28 and 39 GHz frequencies resulted in unprecedented spectrum valuation. Announcements by operators in Korea and Japan on deployment timelines and trials of millimetre wave performance drove market expectations. Vendors raced to provide solutions while 3GPP accelerated standardisation plans to meet aggressive operator timelines. In such an environment, unrealistic claims arise that could obfuscate reality and cloud decision making. One such claim is that the millimetre wave will replace fibre, while another claim relates to the ubiquity of millimetre waves for mobile applications. In our techno-economic analysis of the technology, market structure and competitive dynamics, we believe that millimetre wave will remain a fibre extension solution for fixed access services that’s viable in limited markets.

To demystify the millimeter wave market for technology and financial investors we fall back on few fundamentals that govern technology lifecycle in a service operator environment. Here, I will address two topics: performance predictability and the financial business case.

Performance of millimetre waves

Performance predictability is fundamental to the operation of any service provider. It is the foundation on which processes are built to derive efficiency. So, when it comes to deploying wireless technologies on large scale, service providers look for the "cookie-cutter" approach. This is key to wide-scale deployments.

The service performance of millimetre waves has a high variance depending on the obstructions in the signal path. Performance oscillates between nil and extraordinary based on location and obstruction of the signal path. This puts the service providers in a quandary on how to deploy millimetre wave base stations as it has direct impact not only on the service quality, but on the roll out process. Performance will dictate the type of customer premise equipment, where and who installs it. This makes cell siting and network scalability critical challenges to address.

To compensate for the inherent coverage performance shortcomings of millimettr waves, system vendors incorporate advanced antenna systems, such as phased arrays, the cost of which could only be reduced through ASICs produced in high volumes. Hence, scalable, high volume deployments are critical to reducing equipment capex. The question is whether these technology enhancements would enhance performance and reduce its variance to acceptable levels. Service providers and vendors are in process of assessing both performance and deployment economics through market trials. Among the issues they are considering is how to provide fibre backhaul to every millimetre wave cell location and how to control site lease costs – two factors which, in addition to the type of customer premise equipment, are critical to the success of the business case. Results made available to date show that millimetre wave technology requires a line-of-site between transceivers which will stress the deployment model.

The financial business case

Focusing on the fixed access use case, the economics for millimetre wave access is highly dependent on the number of customers served by a cell site – they will amortize the capital and operational expenses. Alternatively, given a coverage area for millimetre wave systems, houses need to be sufficiently packed to make the business case positive. Our analysis for a typical suburban area in the United States results in a requirement for at least 32 subscribers per site for the business case to start becoming viable. Achieving sufficiently large coverage area would be challenging in many suburban morphologies due to trees, the layout and the density of houses. The option to increase the density of cell sites requires even lower capital and operational costs related fibre backhaul, pole leases, customer premises equipment and their installation, which in many case have to be done by professional installers.

Scalability and success of millimetre wave networks is largely predicated on the ability of the service provider to acquire the appropriate site location where capital and operational costs could be amortized over a large enough subscriber base. This would only be possible in limited markets where density and morphology will allow it.

While I addressed the fixed access case, the mobile case has additional challenges that are beyond the scope of this article. Suffice it to say that the operators in Korea and Japan are switching gears to consider fixed access after having focused on the mobile use case.

The performance characteristics of millimetre waves coupled with deployment economics lead me to conclude that it will remain a niche application in the foreseeable future. This enforces the notion that millimetre wave is a fibre extension technology as opposed to fibre replacement. Moreover, its applicability will be limited to select markets where morphology allows it. As a corollary, the evolution of millimetre wave technology will take longer time than current industry expectations.