Ensuring the price is right in the 5G revolution
As the latest generation of wireless technology takes the world by storm, its broad adoption by new industries requires clear price differentiation in the aggregate royalty level
5G mobile technology is currently being launched in networks across the world, bringing improved performance and a breadth of new capabilities. Besides benefiting the existing smartphone use case, it will boost new use cases – from remote vehicle operation to factory automation and smart farming – and create opportunities for new industry verticals to form. However, if 5G is to be successfully adopted, there is more to consider than new technical solutions and market requirements; how it is priced will be a crucial factor for all stakeholders.
The latest iteration of wireless technology was first conceptualised around 2011 when new foreseen usage areas of a 5G wireless network were initially identified. The technical solutions needed to meet these requirements were achieved by mobilising the world’s top communications engineers in an open innovation effort under the leadership of the 3rd Generation Partnership Project (3GPP) – resulting in the first specification in late 2017.
New market applications that arise will likely use different parts of the technology platform and derive different economic efficiencies from it. Crucially, they will also face different realities when it comes to end consumers’ willingness to pay.
Balancing the need for 5G innovators to obtain a return on investment with enabling the fast adoption of the technology is a tremendous challenge, regularly referred to as the FRAND debate. Industry and policy makers have been paying increasing attention to the conundrum over the past decade. In 2017 the European Commission released a communication paper, “Setting out the EU approach to Standard Essential Patents”, addressing what needed to be done to achieve the successful and fast adoption of the upcoming 5G roll-out, encouraging discussion among different sectors after first pointing out that what can be considered fair and reasonable may differ from industry to industry. This article explores why price differentiation in the aggregate royalty level for 5G SEPs not only makes commercial sense, but is also necessary to ensure the efficient and broad adoption of 5G in all sectors.
Figure 1. Enhancement of key capabilities from IMT-Advanced to IMT-2020
Wireless technology standards have many stakeholders with different objectives. On the macro level, the most common aim is to maintain an open innovation ecosystem that can continue to develop and grow over time to satisfy all of the individual stakeholders’ long-term needs, while providing new and better services to consumers.
The primary stakeholders are:
- regulators, which represent the owners of the natural resource (ie, the spectrum);
- the telecoms industry (ie, wireless carriers, product developers and intermediate component developers), which develop and offer products and services directly using the technology;
- over-the-top application developers and service providers, which rely on the products and services of the telecom industry for their business; and
- new Internet of Things (IoT)/industry verticals, which have the opportunity to improve efficiency or even create new markets with 5G technology.
Background on wireless standards technology
5G is the latest in a series of wireless standards specifications to have been developed by 3GPP. These specifications are globally available, as the project was set up so that specifications receive formal approval from standards developing organisations around the world to become ratified standards.
All significant companies in today’s telecoms industry participate in 3GPP and have provided FRAND commitments for each new generation to date (ie, 2G, 3G, 4G and 5G). Their involvement provides for a unique situation with good predictability for the costs of the IP rights associated with developing compliant products. Further, these investments are future-proof, as the technology will continuously grow to meet new requirements as these become known and are fed into 3GPP.
3GPP has developed its wireless technology over the past 30-plus years in a backwards-compatible manner, starting at the European Telecommunications Standards Institute (ETSI), where global system for mobile communication (GSM) standard development began in 1987. While today this is the global choice for wireless communication over licensed spectrum, this has not always been the case; in the 1990s there was fierce competition between different technology options. However, with the development of 4G long-term evolution (LTE) between 2005 and 2008, the industry eventually focused its efforts on one global standard.
5G benefits from previous 3GPP technology generations through efficient multi-mode operation in devices, which makes it backwards compatible for consumers on a network level. For example, a smartphone developed for 5G will also have 2G, 3G and 4G functionality, meaning that it can use any of those previous generations to connect to a network, depending on which service is available; it can then switch between them at any point in time.
This compatibility means that new 5G technology can be rolled out more affordably, starting in more densely populated areas – where there will be an immediate positive impact of improved performance and new services – before gradually building out network coverage so that it becomes ubiquitous over time.
5G and new industry verticals
As described previously, 5G was first conceptualised in 2011 and led to the definition of three driving use cases:
- Enhanced Mobile Broadband (eMBB);
- Ultra-Reliable Low Latency Communications (URLLC); and
- Massive Machine Type Communications (mMTC).
These were complementary in nature and therefore placed different requirements on the 5G technology platform, as it was being developed within 3GPP.
Consequently, the end result of the 5G technology development in 3GPP is not based on one specific radio-access technology. Instead, 5G is a portfolio of access and connectivity solutions addressing the demands and requirements of mobile communication beyond 2020.
A variety of new features, performance improvements and access solutions were needed, as described in the ITU-R report “IMT Vision – Framework and overall objectives of the future development of IMT for 2020 and beyond” and the 3GPP report “Service requirements for the 5G system”. These reports study and define a large number of use cases in terms of their requirements on a 5G network.
In particular, Figure 1 of the ITU-R report features a requirement spec for 5G (also called IMT 2020) compared to 4G (3GPP release 10 or IMT Advanced). This illustrates that 5G will provide for performance improvements with a factor of 1.5 to 100, depending on the specific requirement area. It defines two requirements with regard to data rate: peak data rate and user experienced data rate. The peak value is the system capability, while the user experienced is what the network actually delivers to end users, independent of location and at any mobility speed. The use cases discussed here address the user experienced data rate.
The smartphone will remain the mainstream application (eMBB). Similar to 4G and earlier generations, wide area coverage and high system capacity in metropolitan areas are essential for this (ie, providing high data rates and low latency for a large number of simultaneous users).
For a smartphone user, the user experienced data rates will be 100Mbps area-wide and up to 1Gbps indoors and close to hotspots with a latency of 20ms or lower end to end (e2e). On the other hand, augmented reality and virtual reality headset applications would require a latency of as little as 7ms for the visual part, at a data rate of up to 250Mbps. URLLC has multiple sub-categories, with the most extreme requirements falling below 1ms latency e2e at a 10e-9 block-error rate.
Automotive is one of the most important use cases of 5G. It can be divided into multiple variations, such as remote vehicle operation (10ms to 30ms latency e2e) or platooning (below 3ms latency e2e). The development of mMTC or the IoT will necessitate the deployment of massive amounts of connected measurement devices across a diverse area – sometimes underground. This in turn will require at least +15dB coverage and maintenance-free operation; in addition, such devices will require power-saving mechanisms to enable up to 10 years’ operation on a single AA battery. At the same time, the IoT will have very relaxed requirements with regard to latency and bandwidth in most applications.
In addition to bandwidth and latency, several other aspects (eg, 3D positioning accuracy and security) were vital requirements to be fulfilled in the development of 5G.
As can be seen, 5G will help new industry verticals to emerge, each with different performance requirements. This in turn can be translated into how much value the technology provides, implying that the technical value will differ depending on the use case.
Successful standards – ensuring development and adoption
The development of standards relies on technology companies being willing to contribute their proprietary technologies for use in the standard. When contributed technologies are adopted into specifications under development, this is carried out by consensus-based decision-making and by reviewing the technical merit of proposals.
All participating companies regularly convene and select the technologies among the available contributions that technically best meet the requirements of the standard under development. In this way, the best of the proposed technologies are adopted in order that the resulting system specification should best meet market requirements and ensure that it is competitive.
When there are alternative standardised solutions available, stakeholders rely on the market, selecting their standard for the best return on their investments.
For a standard to become successful and stay relevant, it must secure support from both implementers of the standard and technology owners that contribute to further development. A successful IP policy is one that can strike this balance – encouraging investment in the development of the standard while ensuring that the speed of adoption is as high as feasibly possible. When successful, this leads to competition and economy of scale, providing all the intended consumer benefits.
A favourable business case and predictable costs are significant factors in any investment decision to enter a new market with a product that uses a standard. The economies of scale that products based on 3GPP standards can offer are exceptional, leading to a highly competitive cost base, even when IP costs for all SEPs are included. 3GPP standard development thus contributes to a more positive business case – with even wider adoption of the technology as a result.
Compared to any ecosystem, it can be argued that 3GPP provides better predictability when it comes to the cost of IP rights. The most crucial factor here is that all important players in the IT industry are members of 3GPP or ETSI and have provided a FRAND commitment for the 3GPP developed standards, including 5G. Having a coherent FRAND commitment from all key innovators provides predictability for all implementers.
3GPP can be compared to other ecosystems eg, WiFi developed by IEEE, where a significant number of innovative IEEE members have publicly stated that they will not make their patents available on the terms set out in IEEE’s IP policy, which was updated in 2015. Hence, companies that own only a fraction of the patented technology necessary to practise WiFi have committed their intellectual property. A lack of commitment creates a more uncertain situation regarding future IP costs for WiFi products, as well as regarding the future development of the standard.
Pricing 5G technology for different uses
As discussed earlier, 5G is a new paradigm compared to earlier standard generations, which focused mainly on the smartphone use case. In the future, different use cases will utilise and derive value from different parts of the 5G technology. In addition, the efficiency gains of 5G in different use cases will vary, as will the value that the consumer experiences (ie, the consumers’ willingness to pay).
Willingness to pay for basic human needs (eg, communication, safety or increased personal convenience) tends to be high due to the perceived value received, while there is far more price sensitivity over other cases that are viewed as good to have but not essential (eg, vending machine refills and automated irrigation sensors). Each use case can be viewed as a separate industry vertical or sector of the overall 5G market with its own prerequisites, resulting in a need to price differentiate the associated royalties, rather than having one fixed price.
The need for price differentiation between use cases to enable the broader adoption of 5G technology is supported by economic theory. According to economists, price differentiation by a monopoly owner of a technology can be positive provided that the overall market is efficient (ie, when it leads to higher total output). This market situation, which shows why price differentiation could be necessary to open up specific new industry verticals, is described in the paper “Price discrimination and patent policy” by Hausman and MacKie-Mason. A particular example is where DuPont was able open up new markets for its Kevlar technology by reducing the price depending on use. These were markets in which it would otherwise have been impossible to introduce the Kevlar technology.
The paper explains how the use of a particular technology could be blocked when the marginal cost associated with uniform-pricing (fixed-price) output exceeds the reservation price in the new markets that could benefit from that technology. In other words, the pricing of Kevlar in its original use case would have been prohibitive in the new, more elastic or price-sensitive market. The result would be a lower total output of the technology, unless price differentiation was introduced.
Applying this to the 5G technology market, remote vehicle operation could be an example of a market that derives very high value and, relatively speaking, is less sensitive to price in order for it to take off. On the other hand, the market for IoT functionality in connected irrigation sensors in agriculture will be much more price sensitive and may never get off the ground if licensees have to pay the FRAND price that is equivalent to the remote vehicle operation use case.
It remains to be seen if and how this ambitious attitude to price differention will be applied. However, it is clear that taking the right approach to 5G royalties will benefit implementers and innovators alike.
5G is the result of many years of R&D among the world’s top communications engineers and promises a new era of connectivity in a range of emerging industry verticals. However, it also poses significant challenges when it comes to determining the price of IP rights.
- Different use cases will utilise 5G technology to a varying degree and may have different efficiency gains from 5G connectivity; there will be a significant variation in consumers’ willingness to pay for connectivity.
- A coherent FRAND policy from all innovators in the space will help to provide predictability for implementers.
- To ensure efficient and broad adoption of 5G in all sectors that can benefit from it, price differentiation is needed in the aggregate royalty level for 5G SEPs. This will benefit all stakeholders and, ultimately, consumers.