Fixed Wireless is the largest near-term 5G use case for wireless operators but it is No Silver Bullet to Growth

Abhay Kumar,
Principal, A.T. Kearney.

Verizon announced the launch of 5G Home Internet Service in four US markets on 1-October 2018. Other major operators are expected to launch their offerings in early 2019. Fixed wireless broadband is being promoted as the largest near-term opportunity for telecom operators to monetize 5G. This is more so because as with LTE, the more obvious near-term 5G use case – mobile broadband, will be hard to monetize. While there may be sufficient reason for wireless carriers to be bullish about FWA and adopt aggressive marketing tactics to promote their upcoming service launch, it will not be a silver bullet to revenue growth. Let’s look at the reasons why we believe so.

Key challenges – spectrum and a fragmented market

The US wireless market is highly fragmented, and deployment of fixed wireless will be geo-specific in accordance with each carrier’s core infrastructure i.e. fiber footprint. Most operators will be using mmWave spectrum band in the first pass. While the high bands offer an advantage with high capacity for handling data traffic, they also present some challenges.

Majority of the dense urban areas are already most efficiently covered by fiber, even though there are gaps wherein specific neighborhoods or buildings in cities don’t have fiber. On the other hand, rural areas are not sufficiently dense for mmWave i.e. the broadband speed delivered goes down rapidly as greater distances need to be covered, especially if there are obstacles in the form of trees (see chart below). Hence, the “5G experience” will vary by geography and by carrier. Only some urban low-rise and suburban zones fit the “sweet spot” for initial high-band FWA services. One can already see carriers focusing on dense suburban markets for their initial launches.

Limited market

The total addressable market for FWA is a small fraction of mobile broadband today, at $60-70 service ARPU and using the Verizon estimate of ~30M addressable households. We estimate 2x growth over 3 years for residences at Gigabit speeds with 5M customers ($8B revenues by 2021). Moreover, fierce competition is expected from cable operators who are already in the race to protect their territory / customers and are rapidly deploying fiber to grow their geographical presence. Competition will be even more heightened amongst the wireless carriers to grab a share of the FWA pie.

What will make customers switch from incumbents?

MNOs need to differentiate their offering to make customers switch from incumbent cable operators – performance and pricing will be key determinants of success. Let’s examine the three important success factors.

A) Performance & speed – This will be the primary driver as regions with limited competition and infrastructure in suburban and rural areas get speeds of 6 / 12 / <40 Mbps. An increase to average speed of 200-300 Mbps will be a step change for consumers who need more data for their daily consumption. Incumbent cable operators with legacy fiber networks require significant investment to increase capacity. MNOs can take advantage of their faster time to market with 5G to pip them with a better offering.

B) Pricing – Lower price could be a strong supporting driver. Bear in mind that incumbent cable operators can play the price war game with their sunk cost of infrastructure, to the extent MNOs can reduce price as allowed by their business case or even lower to protect their base. Economics of FWA will be critical for MNOs. It is still unclear whether self-install solutions will be feasible or not for wireless operators in the first pass or later. If not, then requiring an installation visit will severely undermine the economics for MNOs thereby making it more challenging to win on price. However, aggressive pricing can be used selectively by MNOs for market-specific gains. Current trends suggest that MNOs are testing the waters with prices in the same ballpark as the incumbents E.g., Existing fixed line broadband products for 200 Mbps are priced at $40-50. Verizon’s 5G Home offers an average speed of 300 Mbps, which is comparable to the speeds offered by Verizon Fios and is priced at $50 for existing customers. It will be interesting to see at what price points other MNOs offer residential broadband in the coming months.

C) Choice – Incumbents offer bundled voice, data, TV to consumers. Disaggregation and choice will drive consumers towards an MNO offering. Voice is already on mobile, cable is increasingly being replaced by vMVPDs (e.g., Hulu, Netflix), thereby it will likely be easier for consumers to extend services with MNOs for data / internet requirements, if performance and pricing is competitive

In summary, market positioning and economics will be critical factors to determine how the opportunity plays out in the next 4-5 years. How will the competition between the Big 4 (or Big 3?) carriers and cable operators play out? What will be the other challenges for MNOs in monetizing FWA?