From our February 17, 2019 newsletter
Let’s get to it. This year, we’re focusing in on two subjects: Future Japan, and 5G and security.
First, Future Japan. Here we will introduce companies exemplifying the road ahead for Japan, after the 2020 Tokyo Olympics, after decades as asset-centered, asset-exporting economy. If you were to think of one company synonymous with Japan Inc now, that would probably be Toyota. Future Japan? It may be Recruit. It may be FANUC. It may be Fujifilm/Cellular Dynamics. It may be a startup like Spacemarket. It could even be Airbnb, as Japan focuses more and more on hospitality, tourism and asset sharing. (Airbnb is right in the center of that Venn diagram.) Future Japan, potentially, looks like a hybrid of Germany (manufacturing and suppliers; medicine), France (food and culture; nuclear), and the UK (idiosyncratic, historical, select sectors of excellence).
Future economy doesn’t mean new. Recruit is close to 60 years old. But as a firm in the recruiting (full time and temp) business that’s investing in AI and infrastructure, it embodies a human capital centered company investing into an era of a shrinking workforce. Nippon Life is another – not only is its customer base shrinking, but so too is its actuary base. This should be noteworthy for other human capital firms in other mature economies. Japan won’t be alone in managing an aging population – South Korea, and China, among others, are facing or will face similar challenges.
5G and security? These days, a “5G security” Google alert will produce a lot of geopolitical coverage – namely, whether Huawei represents a genuine cybersecurity risk. Note that Huawei is the #1 wireless infrastructure provider in the world. This is not a startup. Blocking Huawei from future 5G deployments is not a trivial act. Especially since 5G networks generally won’t exist in isolation – rather, they co-exist with earlier generations during a decades-long migration process. (Imagine apartment dwellers slowly being moved upstairs, but the landlord needing to keep the lower floors neat and functional and revenue-creating, and some lower floor dwellers saying they’ve got rent control and like their current apartment just fine, thank you. A parking meter with a 2G/3G modem counts as one of those lower floor dwellers.) So, an incumbent Huawei customer, of 4G infrastructure, that chooses to not adopt Huawei for 5G will lose some operational efficiencies, and may even have to rethink how its 4G network interoperates with other generations. How important this is…is not really an economic question.
But, it’s likely that Ericsson and Nokia, and perhaps Samsung, will be beneficiaries of Huawei’s straits. (The network infrastructure market has quietly become a highly concentrated market. I pointed this out to a Haas economist, whose eyes boggled and marveled how this had escaped notice. There’s virtue in being quietly valuable and not competing with your customers. One of my students asked why Ericsson, featured in a case we discussed, didn’t launch mobile service themselves. The answer – they have hundreds, if not thousands, of mobile operators they can serve, so why compete with their customers?)
I’ve written about receiving grant funding to assess the security implications of 5G networks, from the UC-Berkeley Center for Long-Term Cybersecurity. At the time I wasn’t thinking about geopolitics *at all*. Rather, there are some features in the specification that leapt out as me as potentially opening new risk surfaces, such as network slicing. Also, I suspected 5G would lead to more heterogeneous service models, more akin to those in IT for the enterprise. And that heterogeneity could lead to added risk. Here’s a capture from my recent class on network operators. The lower left (“definite differences”) is what I know to be true; the lower right (“potential differences”) is what I think may come true.
Let’s go back in the wayback machine for a moment.
4G rollout began in earnest in 2010. (Sprint got off to an early start in 2008 with Wimax. But, an undercapitalized, struggling Sprint was not in a position to capitalize on first mover advantage. Nor was the Wimax ecosystem as developed as that for traditional cellular. So, we’ll take 2010 as our general 4G launchpoint.) Verizon went on the air in December 2010. DoCoMo did in Japan that same month. Teliasonera launched in Sweden in 2009 and Finland in 2010.
I remember raising a glass in December 2010 with two nervous Verizon employees, one of whom was in a network role, at a certain venture fund’s holiday party. It was the night before launch. The launch date was just the commercial launch date – the network was “on” already. Still, they were, rightfully, full of jitters. What would happen when consumers started using it? (“Here, have some holiday champagne? What better day to be hungover?”)
With the benefit of hindsight we can see Verizon did several things *right* with the launch. They rolled their own CDN, rather than using, say, Akamai’s. They invested into the venture ecosystem by partnering closely with several venture firms that in turn invested into technology spheres of interest (network technologies and batteries among them). They started with low(er) band (700 MHz) and laddered on higher bands (AWS) to gap-fill urban areas later. (I don’t know if that was a strategic plan or opportunistic / reactive.) Perhaps most importantly, they got out there first, visibly, which really catapulted the firm forward vis-à-vis domestic competitors. My own image of Verizon to that point was the firm that was pushing de-featured flipphones (no Bluetooth!) that played MIDI ring tones. Yawn. That image was transformed. And it was in a network-centric way that was consistent with VZ’s brand positioning to date.
Here’s some throwback marketing. There’s honor and profit in running a reliable, fat, pipe.
That was a real ad.
This isn’t to cheerlead for Verizon. But rather to say network transitions present an opportunity for network operators to recast themselves.
To consumers, what 4G did was to make smartphones better. Recall the first iPhone, in 2007, was a 2G EDGE phone on AT&T, due to concern about lack of robust 3G coverage. (Seriously.) Smartphones were already on the uptake by the time 2010 came around, and, well, they got better. The chief differentiator, when I got my first 4G phone (an HTC Android phone), was that file downloads took less time, and I experienced much less latency. No fireworks, but I could see and feel a difference.
So, let’s apply that logic to 5G. If 5G, now on the air on a limited basis, gets *real* in 2020, what is the 2017 or 2018 service or device launch that will get dramatically better?
I see video calling around me every day and it’s not hard to think that would get better. In terms of content, mobile gaming could get console-level fun. Verizon’s recent edtech challenge may provide some hints. But, I would argue there’s more ambiguity this time around. Chatham-house rule conversations with operators – and fiber operators – support that. The question I asked above – what’s the current service that gets dramatically better with 5G? – generally gets some head-scratching in response.
But – that may because of greater heterogeneity in service models. And for that reason, operators seem focused on building reference cases, as the Verizon challenge above illustrates. A European operator shared a manufacturing use case. In the US, we see it in how Verizon and AT&T are test-marketing 5G. Verizon is positioning it as a home broadband substitute – essentially, fixed wireless to home CPE, which is (perhaps ironically) similar to Clearwire’s Wimax home broadband service before being rolled up into Sprint. Focusing on fixed wireless reduces the number of variables that need tweaking. Mobility, handoff and roaming aren’t issues. Home coverage (in-building propagation) is. And making sure that content *feels* better, somehow, even if displayed on a fixed PC or TV. So getting access to lightpoles and street furniture, and lining up content providers, become operational priorities. Still, this is the time-honored (W)ISP business.
Meanwhile, AT&T has launched mobile service, in a way – with a 5G mobile hotspot. It’s here I’ll point out AT&T’s CORD initiative and say that I hope they tie this to 5G rollout. Pushing data centers – 1000s, i.e., one for every legacy central office, not several or maybe 8 or 10 nationwide- close to the user could enable a variety of latency-sensitive services, certainly video/VR among them, or perhaps city infrastructures. I won’t say cars. I’m not a believer. Cars are national or global creatures and 5G rollout is too nascent. (VERY local fleets – maybe.) But a smart (heh) city could harness local 5G in meaningful ways. And AT&T’s CORD strategy seems very aligned with this. Could a city have a more credible wireless network supplier than the former Ma Bell, with the access to the required real estate and light poles? The benefits of incumbency are large.
Back to the enterprise IT analogy. The enterprise IT market has relatively consolidated equipment suppliers sold through a host of VARs. (Hey, it’s the channel! Still with us after all these years.) Let’s apply this to 5G for a moment. A national or even regional 5G network, operated by a telco, resold by a VAR to businesses or government, with varying tiers of service and heterogeneous security needs and models. Can a wholesale network operator push all that segmentation onto VARs? In this model, the telco is a wholesale access provider. In traditional enterprise, this model is mature and established. Thus, I wonder if wholesale 5G to the building or enterprise is another chance for traditional enterprise equipment and security providers to propagate themselves.