Behind the Early Success Stories of 5G

Back in April 2019, South Korean carriers took the lead in launching 5G and achieved first-mover success. LG U+, for example, has achieved year-over-year growth in wireless service revenue for 13 consecutive quarters, reversing the downturn seen before 2018. Financial reports from the carrier reveal that its wireless service revenue increased by 14% in 2022 Q1 over 2019 Q1, shortly before 5G was commercially launched.

The Korean model is hard to replicate?

South Korea's 5G development model is often considered difficult to replicate for two main reasons.

• First, for network deployment, it appears that South Korean carriers have invested heavily in achieving quick nationwide coverage, regardless of the CAPEX spike. That is not how most carriers approach network deployment.
• Second, as South Korean carriers are part of a large conglomerate, they can operate in-house content platforms and invest substantially in original content. This is out of reach for many carriers.

Let us look at LG U+ as an example of a carrier that has adopted the “invest early” strategy:

• Early Launch: Back in the early days of LTE, LG U+ managed to launch LTE about 6 months earlier than KT, allowing it to attract the most LTE subscribers in the first few months and increase its overall market share.

Figure 1: LG U+ took early lead in LTE launch in Q3 2011(Source: LG U+ 2012Q3 Financial Reports)

• Early Execution: As shown in Figure 2, despite LG U+'s rather high wireless CAPEX intensity (20% - 30%) in the first four years of LTE, this number dropped to 14.3% if we look at the average intensity over the LTE period from 2011 to 2018 – a modest figure compared to the global average CAPEX intensity of about 16%. With this strategy, advance investment in the first four years of LTE led to seven years of continuous growth in wireless service revenues. Since 2019, 5G has driven a new round of wireless service revenue growth.

Figure 2: LG U+'s wireless CAPEX intensity and wireless service revenue over the last 10 years(Source: LG U+'s financial reports from 2010 to 2021)

Note: Wireless CAPEX intensity = Wireless CAPEX/Wireless Service Revenue

South Korea's rapid nationwide coverage also benefited from population distribution in the country. South Korea ranks 24th in the world in terms of population density, according to the World Bank, with a large proportion of the population living in Seoul Capital Area (nearly 50% of the population) and the six largest metropolitan cities. The concentrated, high-density population made it easy for carriers to quickly realize nationwide coverage.

Monetization of 5G

While massive network deployment is underway, three monetization approaches emerged that carriers can start right away:

• Traffic Monetization, as represented by Chinese carriers: 5G packages offer more data allowances at lower prices per GB for incremental ARPU. The underlying driver is the gap and room for growth between average 4G DOU (~ 10 GB) and 5G DOU (> 30 GB).
• Device Upgrade, as represented by US carriers: People on average replace their phones every 3.2 years, which means that about 30% of mobile phones are replaced each year. When users replace their phones, carriers can use the opportunity to encourage them to upgrade to a 5G package.
• Content and Service, as represented by South Korean carriers: South Korean carriers use 5G services and content as one of the main drivers for 5G user migration.

Carriers often apply multiple approaches from those mentioned above. For example, carriers in South Korea use device upgrades as well, while carriers in China also invest in content and services.

1. Traffic Monetization

In most 5G markets, 5G entails a significantly higher DOU than 4G (Figure 3). The increased traffic is what 5G carriers can immediately monetize.

Figure 3: 5G users consume double the data of 4G users(Source: OpenSignal, June 2021)

O2 Germany, operating in a market where the average monthly mobile data usage is rather low in Europe, use 5G as the opportunity to drive up and monetize traffic (see Figure 4).

• In February 2020, the carrier introduced 5G-ready packages with prices unchanged but data allowances doubled. It also introduced speed-tiered unlimited data plans.
• In October 2020, O2 Germany commercially launched 5G, with 5G-ready packages turned 5G.
• In August 2021, the carrier expanded 5G to FREE M packages.

Figure 4: O2 Germany's evolving packages that drive up data traffic

In Q3 2021, monthly DOU of O2 Germany's postpaid users reached 11 GB, highest in the market, indicating preliminary success of the carrier's aim to drive up traffic.

To better support user traffic growth in the 5G era, O2 Germany executed exceptionally “investments for growth” program, starting a virtuous cycle of traffic increase revenue increase accelerated network deployment.

Figure 5: Growth of O2 Germany's mobile service revenue, OIBDA, and CAPEX over the past three years(Source: O2 Germany's financial report in 2019, 2020, and 2021)

Note: OIBDA (Operating Income Before Depreciation & Amortization) and CAPEX are both overall figures.

2. Device Upgrade

In November 2021, the CEO of T-Mobile US hailed the 5G smartphone as the first 5G killer app^[1], underpinned by US carriers’ dominance in smartphone distribution and the window of opportunity to tie users to higher-end 5G packages using smartphone subsidies.

AT&T, for example, offered a US$1,000 subsidy (the price of the iPhone 13 Pro) to replace many old handset models on the condition that users subscribe to its premium unlimited plan. The replace & upgrade program was largely driven by the iPhone 12's halo effect and user intention surveys.

In the US market, carriers are the main distribution channel for smartphones, with Apple occupying more than 60% of the smartphone market. Apple's first 5G phone, the iPhone 12, has powered the 5G ‘supercycle’. In addition, new mobile phones represent the primary driving force for US Internet users to upgrade to 5G (Figure 6). Ten percent of mobile phone users replace their phones within 12 months, and 24% do within 18 months. They represent the key target early adopters for 5G migration.

Figure 6: Top reasons of US users to upgrade to 5G(Source: YouGov, June 2021)

This wave of device upgrade has led to a rapid increase in 5G users for the three major US carriers. By the end of 2021, the total number of 5G users in the US exceeded 50 million^[2]. Today, smartphone subsidization remains a common practice in many markets where carriers act as one of the major smartphone sales channels. However, it is important to note that while subsidization can be tempting, the true foundation remains the 5G network experience. This is why US carriers are striving to fill gaps by bidding for C-band and investing in C-band networks^[3].

3. Content and Services

5G offerings need to be tangible to encourage 5G user migration, and this is why 5G content and services are needed. In addition, 5G content and services help ARPU as data traffic price decreases every year.

Against the backdrop of South Korea's strategy to become major exporter of popular culture^[4], South Korean carriers have been investing heavily in and innovating content and services since the time of 4G. While running their own video platforms, they have also invested significantly in content acquisition and production. LG U+'s mobile video strategy in the 4G era, for example, was considered a great success.

US carriers used to be as ambitious in this area. AT&T acquired Time Warner and Verizon acquired AOL and Yahoo, forming Verizon Media. However, they changed course and have now fully embraced OTT services.

Figure 7: Vertical integration and OTT cooperation of US carriers

Clearly, own-and-run is not the only approach for carriers. Even South Korean carriers are also actively working with third-party service providers in 5G. LG U+'s cloud gaming and AR for kids’ services are based on GeForce Now from Nvidia and Bookful from Inception^[5], respectively.

Figure 8: LG U+ works with Inception/Bookful on AR for Kids services

Carriers can also adopt the white label partnership model. For example, Sunrise from Switzerland works with a partner that provides game content and cloud gaming platform (including software and hardware servers), while Sunrise itself focuses on marketing and operating. There exist a number of roads to Rome for launching 5G services: carriers can choose either the OTT partnership model (“EASY”) or content production model (“HARD”). Their specific choices depend on a few factors including the local market (e.g., OTT service uptake), organization and expertise (e.g., content teams), among others.

Figure 9: Different service introduction models for carriers

Key Takeaways for Operators

More than three years after the first commercial launch of 5G, leading carriers in East Asia, the Middle East, and Europe have crossed the chasm and built a considerable 5G user base (~20% 5G user penetration). Carriers' business performance indicators show that the growth of 5G users has increased ARPU, mobile service revenues, and EBITDA margins. With the accelerating global uptake of 5G, carriers can start recruiting 5G users by providing more data allowances, higher speeds and more offerings (5G content and services) without waiting for so-called 5G killer applications, so as to achieve the first wave of organic growth.

The early success stories of leading 5G carriers worldwide provide two implications for 5G business success. First, 5G network experience remains the foundation. 5G premium or upgrades would not be possible or sustainable without convincing network speeds and coverage. Second, 5G content and services are key. Carriers should choose appropriate pathways that range from low-threshold models like third-party partnerships to higher-threshold models like involvement in content production.