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Vertical co-investment model for 5G: the China Unicom example

Rupert Wood Research Director

Research Directors Rupert Wood and Tom Rebbeck discuss the investment by internet and industrial firms into China Unicom, and explore what this could mean for 5G.

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Podcast transcript

Introduction: Hello, my name is Tom Rebbeck and I'm Research Director here at Analysys Mason. I'm with another of our Research Directors, Rupert Wood.

Tom: Rupert you recently published a very interesting article on the investment by internet and industrial firms into China Unicom and you explored what this could mean for 5G.

Before we talk about China Unicom, let's discuss how you see the state of 5G. You see a problem with 5G investment – in the piece you wrote that "privately few operators see a clear positive case for 5G" – could you explain more about this?

Rupert: 5G seems sort of inevitable but also tremendously risky for operators. This is reflected in operators' ambivalence: they know that being publicly negative sends out the wrong signals to the financial community but privately they are unconvinced of the need yet. 5G is clearly going to be very costly and there is as yet no particularly clear and compelling business case.

On the one hand it's increasingly difficult to monetise consumer data, very little connection between traffic volume growth and revenue growth, and there's no particularly obvious demand for mobile gigabit access.
So we hear a lot about other special use cases involving third parties taking functional and logical slices of network resources and 5G network to sell on to other parties, but the business models are often unclear and we have as yet a rather limited sense of scale of the opportunity. Operators appear to be bearing all of the risk of 5G investment.

Tom: Do you think 5G is a bubble building up?

Rupert: To get all Marxist for a minute it looks like a crisis of overproduction where the supply side (that is the vendors) are compelled to produce ever more and ever more efficiently (ever lower unit costs for transport, ever higher capacity, and more efficient service agility), without properly gauging willingness by ultimate end-users to pay.

This tends to spawn over-extended supply chains, rather over-elaborate business models – we saw this in the telecoms crash of 2001 very clearly, and I think even the banking crisis of 2008 shared these characteristics.
So we may see more direct or indirect vendor-financing artificially to create a market for 5G. As if the problem was under consumption rather than over production. And alongside all of this, we see a massive ramp up of marketing and what I might describe as advocacy research.

Tom: So let's move on to China Unicom - you see the restructuring of the Chinese operator China Unicom as a way forward. Could you briefly explain what has happened?

Rupert: To put it into context Unicom is the smallest of the three main Chinese operators, they are all huge, but it's the smallest of the three. It's been losing market share in mobile and FTTH to its main rivals China Mobile and China Telecom and it's slashed its capex budget by over 65% since 2015, admittedly from very high levels. Last month a consortium of businesses, of 14 businesses, added new equity giving them a 35% stake in the operator. These 14 companies include giant Internet businesses like Baidu, Tencent and Alibaba, some of which are already have MVNOs on the Unicom network, but it also includes players from other industry verticals, datacentre businesses, transport, a ride-hailing business and financial institutions among others.

Tom: What's in it for them? Why are these high-growth internet companies and fast growing technology companies? Why are they investing in China Unicom which is at best a low-growth business?

Rupert: On the one hand, this could be interpreted simply as a reform of state owned enterprises to create a more vibrant demand-driven business after years of a very supply driven industry and maybe there is a bit of arm twisting going on for these companies to invest. I think there is more to it than that. I think it is about internet companies, about industry verticals having much greater direct influence over the shaping of the future mobile networks especially 5G networks. And they have said this. The proceeds raised by the new equity would China Unicom has said, be used "to enhance 4G capability, conduct 5G technical network trials and related business functions, build pre-commercial trial networks, and invest in innovative businesses", so it's basically all about future mobile and more direct control by some of the beneficiaries in the future mobile network.

Tom: Do you think this type of co-investment model could allay the fears around a 5G bubble?

Rupert: Of course it doesn't guarantee 5G will be a roaring success as opposed to a damp squib, but it is one of a number of important ways to de-risk investment in 5G from the operator's perspective. This is critical in a time of uncertain demand signals that expensive investment should be derisked as far as possible. I think it's derisking for two reasons.

First, it's a consortium model and that has good precedent in telecoms– we've seen that in the submarine cable business and we now sometimes see it in FTTH investment.

Second, and this is where it is perhaps a little bit different from those cable or FTTH example is potential users and beneficiaries are co-investors. That simplifies the supply chain, it becomes less complex, it's not B2B2x or B2B2B2x or whatever, it's more direct than that. In this model these Internet businesses and verticals are not just waiting for an operator to shoulder the risk and then coming in renting slices of network resources. If 5G networks are to prove genuinely commercially useful to verticals, then those verticals should be 'putting their money where their mouth is'. It's a stamp of confidence.

Tom: Will we see more of this model elsewhere in the world?

Rupert: Yes , I think so. Investment in standalone mobile operators – who are more exposed than fixed-line mobile integrated businesses as 5G approaches - may be where it is most likely to happen in the future. If we don't see it, if verticals don't invest in the physical 5G network, then we should be much more sceptical about the real value of 5G to those verticals.

Tom: Great, thank you Rupert. We will put a link to the original article in the notes for this podcast, or you can find it on the Analysys Mason website if you search for China Unicom.


 

Article: China Unicom restructuring paves the way for industrial co-investment in 5G