Unheralded Shift from Hardware to Software Can Unlock Value and Spark New Services – Carriers Should Act Now, Says L.E.K. Consulting

BOSTON, MA (April 29, 2020) – Wireless carriers are touting the arrival of next-generation 5G networks. But they are hesitant to seize the major opportunity that 5G represents, according to global management consulting firm L.E.K. Consulting.

Carriers appear to be waiting for a business case to justify investment. They would be better served seizing the moment and, ahead of demand, building new services made possible by 5G’s breakthrough shift of network functions from hardware to software, the report says.

“Network Function Virtualization,” or NFV, is an underlying architecture evolution that promises to slash costs and generate revolutionary new offerings, just as cloud computing paved the way for Uber, Lyft and Amazon Web Services.

The technology will support a range of new services – including some that are hard to anticipate.

Those are among the major conclusions in 5G Unlocks Opportunity for Carriers — But Will They Take Advantage? It argues that traditional business-case planning may not apply, since customers can’t foresee the scope of future 5G services. “Just as ridesharing and web services were almost impossible to anticipate before the advent of cloud computing, so too, network customers don’t yet know what 5G can fully bring them,” says Harsha Madannavar, L.E.K. Managing Director. “Carriers are waiting for customers to tell them what they want – but they risk missing their moment because what customers will eventually pay for is not yet on the horizon.”

“Carriers should instead take inspiration from that voice in the cornfield in the movie Field of Dreams – if you build it, the customers will come,” Madannavar says.

NFV, an “undocumented feature,” will reshape wireless the way the cloud reshaped IT

The report says carriers stay too focused on basic features when they promote 5G, talking mainly about higher speed, greater bandwidth and lower latency that will support streaming, videoconferencing, Internet of things (IoT) applications and other multimedia services. “These features are extremely important,” Madannavar says. “The lower latency and increased capacity of 5G is a fundamental upgrade to remove all choke points we are facing with telework, streaming, gaming and all other forms of data consumption.”

“But the biggest change is the one that’s least discussed – the large-scale transfer of network functions from expensive, proprietary hardware to software that can run on low-cost, generic ‘boxes,’” Madannavar continues. “It’s in effect an underappreciated feature.”

The situation is similar to what happened in the information technology industry starting in 2005, he says. Computing power then depended on costly hardware, and the largest players were IBM, EMC and HP. But a rapid shift to high-speed networks and software-driven “virtual servers” upended the landscape. Computing power could be rented inexpensively from remote locations. Amazon, Microsoft and Google rose to greater prominence by offering massive data processing capacity as a “web service” at sharply lower cost. Startups like Lyft, Uber and Airbnb were able to use that computing capacity to build businesses that no one saw coming.

Carriers wait for the “killer app” – but it won’t emerge until they make the leap to 5G

Wireless networks are likely to follow the same pattern, the report says. Incumbent network hardware suppliers like Nokia and Ericsson will be threatened by lower-cost, software-based rivals, and new startups will be able to build businesses using 5G features including high speed, high capacity, enhanced security and new levels of personalization. “Shifting functions to software makes it much easier and more economical to create customized services,” Madannavar says.

The challenge is something of a catch-22, the report points out, with carriers not wanting to invest until they predict demand. “The problem is that no one can really anticipate what kinds of businesses will emerge, any more than people in 2005 could predict ridesharing. Carriers talk about 5G as an alternative to broadband cable, but more revolutionary things might emerge – advanced business models involving connected devices in the IoT, coordination of robots on a factory floor, remote surgery and other forms of telemedicine, gaming, new retail experiences and  new forms of remote work and distance learning,” Madannavar says.

“If history is any guide, the killer app will emerge,” he says. “The real risk is waiting to lay the foundation until that app arrives.”

The report points out that there may be more pressure for U.S. carriers to take action as carriers are moving faster in places like Australia and New Zealand. “In other overseas markets, carriers with a principal subscriber base can shift all their customers over, and they are beginning to do that. Among the risks to U.S. carriers is that of being left behind,” says Madannavar.

But the risk is balanced by opportunity. “The rapid global uptake of 5G means that carriers could easily serve the global enterprise markets, with ongoing cost reduction as the user base expands. But they have to be willing to take the leap of faith. It’s worth remembering that 3G and 4G took years to realize their potential,” says Madannavar. “5G will be the same. It’s critical that carriers seize the moment. Build the capacity now. Business models will emerge, and customers will follow.”

About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public-sector organizations, private equity firms, and emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,600 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.