Analyst Angle: Maintaining Cellular Growth Until Large-scale 5G IoT Adoption in the Mid 2020s

The notion of "peak smartphone" is widely discussed of late, including by the Economist. Revenues are flattening with longer replacement cycles, saturating markets, resistance to Apple's price increases, decreasing prices among Android's fiercely competitive OEMs and allegedly diminishing technical improvements in successive new device models. 5G holds massive growth potential, but much of that is in industrial and IoT markets that will take at least several years to establish themselves and grow to levels that will have substantial impact on overall device and service revenues.

So where is demand growth going to come from while large up-front 5G investments in networks and devices are made in the interim until the mid 2020s? Ongoing technology development and standardization has created enormously innovative and powerful communications platforms in LTE Advanced Pro and 5G including networks, modems and RF components. These are ripe to be employed, but we still await the new consumer-oriented "killer apps" and broader device capabilities that can quickly drive massive additional demand and revenue growth in mobile broadband.

Several times serendipitous cellular

The cellular industry has benefitted from several distinct growth waves from technology innovation, improving economics and new market development. Connecting tens or hundreds of billions of things as well as billions of people will sustain high growth levels from the middle of next decade. Until then, however, continuing growth in 4G and 5G connecting people, with enhanced mobile broadband (eMBB) including fixed-wireless access (FWA), will continue to be paramount until Internet of Things (IoT) services in massive machine-type communications (mMTC) and ultra-reliable low-latency communications (URLLC) are developed, deployed in large scale and have had the time to grow to significance in comparison to where most revenues are currently generated. For example, self-driving vehicles could both communicate enormous amounts of data and also require very high network performance, but large revenues from these are many years away.

The cellular industry has been fortunate: as each new growth wave has subsided with market saturation, cellular has reinvented itself to satisfy new needs with significant market expansions. In the 1980s, the mobile phone market was limited by devices being predominantly car phones or bulky bag phones. In the 1990s, digital technologies enabled small handsets with long battery lives that could be used anywhere, and text messaging began to supplement voice communications. In the early 2000s, low-cost devices became widely affordable, even in low-income nations. Services became ubiquitous and cheap enough to significantly displace landline calling everywhere. Following a slow and disappointing start for mobile data, except for text messaging, in that period, mobile broadband capabilities exceeding 1 Mbps with device processing and display capabilities to match in the latter 2000s saw the rise of smartphones, with worldwide predominance for these in handset purchases by 2013.

Market growth has continued, but at ever-reducing rates as smartphone sales have become predominantly replacements - in developing as well as in developed nations. Consumers are typically slowing the rate they replace their handsets from once every couple of years to three years. Sales volumes of iPhones were estimated to have fallen 20 percent year-on-year in November 2018. There is increasing consumer reluctance to pay ever-higher prices for new models where increased performance might not be perceivable or significantly employed by most users. For example, Apple has attempted to maintain revenue growth through higher prices as unit volumes fall, but with disappointing results. Worldwide average wholesale prices, including all kinds of mobile phones, rose from a low point of around $130 in 2009 to around $190 in 2015 with no discernible trend thereafter. Average prices rose while smartphones were most significantly substituting for featurephones. Increasing technical capabilities since 2015 have been insufficient to lift average prices much due to diminishing return effects and intensifying competition including the rise of challengers such as Xioami, ViVo, OPPO and OnePlus.

New killer apps and disruptors

Increasing video consumption, including high definition and faster frame rates on large displays will continue to fuel strong growth in mobile data. This is a fairly safe bet and at least some 5G is required to accommodate that. But which new applications and business models can really transform the nature of demand to 2025? 5G investments in networks and devices are based on assumptions that network traffic will continue to grow substantially. For example, Ericsson forecasts global network traffic will grow by a factor of five over the six years to yearend 2024. There are personal-product candidates for the generation of new and exceptionally high traffic growth, such as with virtual reality (VR) headsets, but it is very difficult to predict reliably what will attract large and sustained increases demand. How many people still play augmented reality (AR) Pokémon Go regularly? 3D TV seemed to offer great promise for our big screens in our living rooms, but ongoing usage has been low, despite many TVs and DVD players being shipped with 3D capabilities. The Consumer Electronics Show in Las Vegas earlier this month boasted a wide array of hopeful technologies including voice-enabled agents using Artificial Intelligence (AI) and various kinds of wearable devices. But neither of these categories are strong demand drivers for 5G services in the short term. If streaming 8K video - down or up -becomes a must have for the majority, that will probably provide more than enough demand growth for new devices and network traffic to meet 5G business plan objectives. But what if most folk remain happy with plain old HD?

Stop-gap to full 5G

5G holds great transformation potential as a general-purpose technology (GPT), following introduction of previous GPTs including the steam engine, mains electricity, the internal combustion engine and the microprocessor. But the needed investments in major 5G network deployments are predicated on substantial demand growth for eMBB because mMMC and URLLC are unlikely to account for a large proportion of revenues before the mid 2020s.

Innovative radio and core network technology developments in 5G, together with new spectrum can accommodate massive demand growth with ever-increasing service performance. However, it is also up to other ecosystem players to dream up new applications, services and business models to exploit that potential. While industrial and IoT applications in general may take several years to be developed and scale-up to large revenues, to-consumer markets currently account for the vast majority of cellular revenues, will continue to do so for at least the next five years, and so growth of these is fundamental to establishing 5G infrastructure, for wider benefit in due course. Consumer-oriented companies including Apple, Facebook, Google, Netflix and Uber, among others are lauded for being great innovators. Now is their opportunity to capitalize on 5G with its extensive new and powerful network and device platforms. Enormous capacity and performance will be sitting there waiting for them.

There will be a flood a 5G device and service launches in 2019, but it seems unlikely there will be a 5G iPhone before September 2020, because of Apple's annual third-quarter launch cadence, and its inability or unwillingness to prepare for a 2019 launch. Apple's key innovations in smartphones were the large display, multi-touch control and its App Store. Those were introduced a decade ago. More recent introductions by Apple and others have been less dramatic and less differentiated improvements in devices, while these have facilitated innovative disruptors such as Netflix and Uber. What ground-breaking new device, applications and service capabilities based on 5G will transform the smartphone and personal device marketplace in the next few years remains to be seen.