Previously published on Linkedin

Groundhog Day is a 1993 American fantasy comedy film starring Bill Murray and Andie MacDowell. Bill plays Phil Connors, an arrogant Pittsburgh TV weatherman who, during an assignment covering the annual Groundhog Day event in Punxsutawney, Pennsylvania, finds himself in a time loop, repeating the same day again and again. After indulging in hedonism and committing suicide numerous times, he begins to re-examine his life and priorities. (Source:wikipedia.org)

Recently there are a lot of buzz about 5G, the next generation wireless network standard. 5G is promising higher speed, lower latency, and connecting billions of things as well as humans. They all sound great, albeit sound very much the same spiel for 3G and 4G LTE. Let’s have a look at the 5G timeline illustrated below:

If you look back, the cycles look surprisingly similar to the time loop of Groundhog Day movie. Both share the same small closed circle of the same characters. And the difference is: the cycle is awfully longer than one day and more like 10 years. If you simply replace the 5G by 4G LTE and subtract each year by 10 (2015 -> 2005), you get almost the 4G LTE timeline from 2005 to 2015. And if you change the starting point to 1995, you will get the 3G timeline.

All will be fine and neat, supposing the whole industry work in harmony to define standard and bring the best technology to consumers both quickly and cost effectively. However, there is a disturbing trend indicating that these seemingly perfect cycles are putting innovation in jeopardy.

The slow and steady death of Telecom innovation

When we work in the Silicon Valley community of startups and VCs, we noticed some repeating signals:

VCs do not want to invest in telecom startups, especially companies that sell to carriers

Sales cycles to carriers are slow, like 2–5 years

Partnering cycles are slow, like 1–3 years. Small startups often need to partner with big brother vendors or system integrators to sell to carriers.

Exits are long for investors, and the odds of profitable exits is low.

Exits are not big: the multiples are low compared to other industries.

Innovators are discouraged to work inside telecom industry.

All of these might be dismissed as touchy feely, so let’s have a look at the hard data on Venture Capital investment in telecom industry by PWC NVCA Moneytree report (see footnote 1 for the definition of Telecom sector in VC terms)

If you take out the DotCom boom & bust years and purely look between 2005 and 2014, you can see VC investment in Telecom has steadily declined from $2,030M in 2005 to $326M in 2014. Even more alarmingly, the percentage share of Telecom Industry in total VC investment had a even more drastic decline of from 8.7% in 2005 to 0.6% in 2014. VC investment is not the only yardstick for innovation, and you can also criticize that VCs could be shortsighted and herding in the same direction. But the track record of VC has proven that they are the major force behind birth of most new industry or industry transformation.

There are exceptions though. There were two unicorns with recent exist that are related to Telecom industry: skype and WhatsApp, although both are categorized as “Computer software and hardware” by PWC NVCA Moneytree Report. Whatsapp is especially a curious case: in the middle of one of the most conservative industries with formidable barriers to entry, a small company with 55 people created a $19B company that destroyed the most profitable business of mobile carriers: SMS or text messaging. Apple Facebook, Google Hangout, WeChat, Snapchat, and etc round up the rest. And global sms/text revenue falls from the height of $120B in 2013 to $96.7B in 2014. A bit of irony is that an ancient Telecom language Erlang, which was invented by Ericsson engineers 25 years ago, was used to design and scale Whatsapp (see Footnote 2).

The club for internal admiration

The main standardization body 3GPP (and now 5GPP for 5G) has increasingly become a small club for internal admiration, where the real decision makers are consisting of a dozen mega multinational carriers, a handful of mega equipment vendors, and then there is Qualcomm. No IT or web companies has so far succeeded in getting admitted to the club, let alone the smaller guys. Even the mighty Intel tried to disrupt by WiMAX, and eventually failed. (The story of WiMAX warrants its own dedicated treatise, postmortem analysis of the importance of business innovation compared to technology innovation.)

Small group of mega carriers: the first wave of cellular wireless introduction ushered in a new breed of carriers e.g. T-Mobile (Prev. Voicestream) in the US, 3 or Hutchinson 3G in Europe, and Softbank in Japan just to name a few. There are increasing number of competitive carriers during 3G, but recent consolidation rounds reduced the number of carriers again. And there is hardly any new entrants to challenge the incumbents. A dozen or less mega carriers are deciding the future of 5G. Even smaller group of mega vendors: from big 6 (Ericsson, Nortel, Nokia, Siemens, Alcatel, Lucent) down to big 3 soon: Ericsson, Nokia/ALu and Huawei. Most of the vendors are struggling financially, and have to prioritize operation efficiency over innovation. There are relatively new tier-2 vendors of ZTE and Samsung, but they are mostly mee-too vendors instead of bringing something new and fresh. The Telecom vendors have become the subservient to mega carriers. Qualcomm: Qualcomm was one of the true innovative startups that believed in a then futuristic technology (CDMA), toiled to make it work for consumers (remember the first HK deployment?), and built a great company out of its invention and mountain of patents. However, Qualcomm also symbolized the heavy IPR burden on the entire cellular industry: with experts estimate royalties of up to 15% of the sales price of a typical mobile handset you can buy today. Please note that Qualcom only charges a portion of it, while the mega vendors charge the rest. (see footnote 3)

Spectrum policy and regulation barriers

Spectrum policy for 5G is still primarily based on licensed spectrum augmented by unlicensed and shared license spectrum. The barriers to entry are still prohibitive. There seems to be a lack of real policy change which run the danger of repeating the same mistakes as 3G and 4G (see footnote 4). Compare these:

4G/5G AWS-3 auction in US ($41B), 2015

3G UMTS license auction in UK ($35B) and Germany ($33.75B) both in 2000

It seems the cozy duopoly between major carriers and government will continue into 5G era, and auctioning spectrum seems to be the fastest way to fix budget holes and indirectly tax consumers. With this kind of money at stake, even the giant Internet and WiFi industrial group has a hard time challenge the 3GPP club. You can find how the battles are lined up on each side by purely looking at the Evolve Coalition versus WiFiForward.

Evolve Coalition: CTIA, CCA, Alcatel-Lucent, AT&T, Qualcomm, T-Mobile, Verizon, AT&T

WiFiForward: Google, Comcast, Time Warner Cable, Microsoft, Broadcom, NCTA, Open Technology Institute New America, Public Knowledge

WiFi, the champion of unlicensed technology, is not perfect in any technical sense. I would even venture to say that an older or crappy WiFi access point or device will degrade a WiFi network much more than a well behaving LTE-U/LAA device. But due to its true open nature and low barrier to entry, it has blossomed into one of the most innovative ecosystem in wireless access. Compared to cellular technology, WiFi stays at least 5 years ahead to utilize ODFM and MIMO to achieve 1Gbps speed and sub millisecond latency in a commercial product that you can buy from many sources under $100. It is also a manifestation of simple and stupid network, originally coined by ex-AT&T engineer David Isenberg. WiFi technology followed the trajectory of Ethernet and has become an integral part of the Internet.

In contrast, spectrum license has the following impact on innovation:

Due to its high up-front cost, spectrum license puts a heavy financial burden and risk on nascent new technology takeoff.

Licensed spectrum slows down more than speeds up technology innovation.

There is more freedom of technology choice in unlicensed spectrum.

Licensed spectrum wastes natural resources due to its poor utilization ratio.

Now what?

There are enough painting of the potential problems in 5G as we know of the Groundhog Day time loop. In Part II of this mini-series, I will endeavor to look for solutions to snap out of the time loop.

Acknowledgment: Thanks to discussions with Jan Berglund, Azita Arvani, and Pertti Lukander.

Footnote 1: Definition of industry (PWC NVCA Moneytree reports)

“Telecommunications”: Companies focused on the transmission of voice and data including long distance providers, local exchange carriers, and wireless communications services and components. Also included are satellite and microwave communications services and equipment.

https://www.pwcmoneytree.com/Definitions/Definitions

Footnote 2: WhatsApp uses ancient Erlang language

http://www.fastcompany.com/3026758/inside-erlang-the-rare-programming-language-behind-whatsapps-success

Footnote 3: Royalty Rates And Licensing Strategies For Essential Patents On LTE (4G) Telecommunication Standards” By Eric Stasik

http://www.investorvillage.com/uploads/82827/files/LESI-Royalty-Rates.pdf

Footnote 4: “Story from inside the greatest 3G Auction on earth”

A cataclysmic event that drove Europe’s mobile system suppliers into recession, set Europe’s 3G networks back 5 years and made European governments a great deal of money.

http://www.gsmhistory.com/3g_auction/