The telecommunications equipment market is coming off a 5G high that had leading operators throwing hundreds-of-billions-of-dollars to get 5G installed as quickly as possible, but those initial 5G investments are now drying up.  That leads to this question. What will drive the next round of investments into 5G-Advanced technology and will that be enough to maintain market momentum until 6G technology arrives by the end of the decade?

This spending “pause” is not a new phenomenon in the telecommunications market. Each “G” iteration starts with a flurry of new equipment bought and installed in order for operators to support marketing efforts and to flash a new generational number on a customer’s phone. "I have 5G! See, the phone has a 5G on it!" That rush is followed by a spending slowdown as new technology advances ramp.

And conveniently, these technology iterations have all happened on a decade scale: 2G was the 1990s; 3G was the 2000s; 4G was the 2010s; and now 5G is the 2020s. These decades start out with the first 2-3 years full of new technology spending and deployment. That then hits a wall after those initial deployments only to then spike when mid-decade technology advances become available. The market then finally finds a killer application that can take advantage of those new-found capabilities toward the three-quarter mark of that decade only to have the next “G” hype cycle start ramping up to distract from that potential.

“Hey, I have some great use cases for the current ‘G’ but what is this that I am hearing about the next ‘G’ and if it’s so great why should I invest in this awesome use case if it’s going to be running on an outdated network?”

Indeed.

Today we are sitting in that spending trough (of disillusionment?) where the initial 5G deployments and spending that started around 2020 have stopped and the mid-decade spend on 5G-Advanced has yet to begin.

Analysts note that the technology advances baked into 5G-Advanced, which will technically start with the 3GPP Release 18 specification, will result in a smarter network that can support broader use cases. This includes artificial intelligence (AI), machine learning (ML), improved massive multiple-input/multiple-output (MIMO) antenna technology, better signaling to support complex traffic management and device handover.

Those are all fun acronyms, which will surely help the weekly telecom tech bingo game, but that doesn’t mean the ecosystem will actually come up with those revenue-generating use cases.

“Although these standardized improvements are expected to improve performance and reduce costs, operators and vendors need to consider which emerging use cases will be central to their new revenue opportunities over the coming years,” Stephen Burton, research analyst at Analysys Mason, wrote in a recent report. “Network-wide performance gains will address emerging use cases from a bandwidth, latency and reliability perspective, but it is vital that operators and vendors also consider 5G-Advanced capabilities that further support use cases or address new customers.”

5G and following the money

The role 5G Advanced will play for customers and operators is the multi-billion-dollar question and one that so far is tough to answer.

Yes, operators have spent untold billions on spectrum and equipment to power 5G networks, but, for the most part, those services remain nothing more than a faster iteration of 4G LTE. Sure, there is opportunity and use cases in those initial 5G deployments that can be powered by higher network speeds, but services that might drive actual spending remain rare.

Operators have been touting those opportunities, with much focused on the lucrative enterprise market. The biggest angle there has been in the potential of network slicing technology that will allow an operator to support highly valued service-level agreements (SLAs).

The downside is that operators and vendors have shown a lack of outside-the-box thinking when it comes to developing truly revolutionary new services, or at least a lack of follow through.

The broader ecosystem is slowly starting to fill in some of that gap. Apple’s Vision Pro extended reality (XR) platform could be a step in that direction as a fully formed Vision Pro ecosystem could drive 5G-based network slicing use cases.

But return-on-investment (ROI)-level opportunities for operators that have made those multi-billion-dollar investments have yet to crystalize, with most of any revenue surge eaten by the broader ecosystem.

“Thus far, the 5G era has been playing out very similarly to the 4G era, when [communication service providers] invested hundreds of billions of dollars in spectrum and network infrastructure and realized paltry ROI as the majority of the new value from those investments went to over-the-top players, most notably hyperscalers,” Chris Antlitz, principal analyst at Technology Business Research, wrote in a research note.

Operators and vendors react as expected

And operators have responded to this paltry ROI the only way they know how: by slashing their near-term capex plans in hopes of placating suspicious investors.

This suspicion was apparent from a recent exchange between Goldman Sachs’ Brett Feldman with Verizon CEO Hans Vestberg during that investment firm’s recent Communacopia + Technology Conference. Vestberg had just explained that Verizon would be spending around $4 billion less in capex in 2024 compared to this year, which Feldman countered with:

“And you've said this before, you expect capital intensity to be lower for a long period of time. The pushback we get from investors is that never actually happens. Telcos always find a reason to spend money. Why do you have so much confidence that the capital intensity will remain low and as a result the cash generation will improve?”

Vestberg’s response was basically: trust me, and here’s some more money.

“It’s just the bump we needed in order to keep the best network in the world and in the U.S,” Vestberg said of the recent heavy capex spending. “That bump is over now and my commitment is clear, our management’s commitment is clear. That’s why we increased the dividend this morning again because I think the board feels confident that that’s the way we’re going.”

Telecom equipment vendors are on the other end of that game, but are playing the situation as cool as possible, though hoping for a quicker turnaround.

“We expect a gradual recovery toward late in 2023, and then improve in 2024,” Ericsson CEO Börje Ekholm told investors during the vendor’s most recent earnings call.

Nokia CEO Pekka Lundmark went further during his company’s most recent earnings call, noting that operators will need to continue to invest in their networks in order to meet growing data demand from consumers.

“Operators -- if they want to stay in the business -- will have to continue to invest,” Lundmark said. “And this is the reason why we believe that this slowdown in investments in some parts of the world, especially in North America, has to be primarily a question of timing because if one particular operator would not continue to invest, their competitors would.”

And that new near-term investment is being targeted at 5G-Advanced, which will cure all the 5G world’s ailments.

Maybe.

Technology Business Research’s Antlitz noted that those expectations might be optimistic.

“Vendors dependent on CSPs are holding out hope that 5G-Advanced will drive a new wave of capex spend growth starting in 2024 and, finally, enable CSPs to generate new revenues,” Antlitz wrote. “However, delays in standards creation and increased complexity are causing many CSPs to push out deployment timelines or take a wait-and-see approach before implementing new technologies. This is currently reflected by most CSPs globally sticking with the 5G non-standalone (NSA) variant of 5G versus migrating to SA, which uses a 5G core.”

The slow adoption of 5G SA cores was reflected by a recent Dell’Oro Group report that found only one new 5G SA core was launched during the second quarter, pushing the worldwide total to 44 total 5G SA cores launched by mid-year. This move to 5G SA is important as it’s what will unshackle 5G from legacy 4G LTE network cores and allow for all of that promised 5G-Advance goodness.

But, with network investments shrinking it’s hard to imagine robust advances happening in the near term.

Maybe Nokia’s Lundmark is right and operators will be forced to invest more in their networks sooner rather than later. But that will require some new use case to be developed that forces their hand. And more importantly, that will require operators to come up with use cases that actually generate revenue for their own operations and not just services running on top.

That will require operators to make smart decisions on how they invest their future capex to bolster and smartify their networks. After all, a smart network is useless unless there is actually something that can use and build on that intelligence.