56 Business The EconomistAugust 24th 2019
T
he globaltelecoms boom that reached its zenith almost two
decades ago was made for satire. It united two of the most in-
toxicating technologies of all time, the mobile phone and the in-
ternet. It generated the biggest wave of value-destroying takeovers
the world had ever seen. Its apex, the £22.5bn ($35bn) sale of third-
generation (3g) wireless spectrum in Britain in 2000, was such a
humdinger that the boffins who devised it described it, with a Py-
thonesque flourish, as the most successful auction since the Prae-
torian Guard sold the Roman Empire to Didius Julianus in 193ad.
Vodafone, a British mobile operator active across Europe, epi-
tomised the madness of the time. Its £112bn hostile takeover
launched in 1999 of Mannesmann, a German rival, was a gripping
epic that went on for months—partly against the backdrop of the
Savoy Grill, a posh London eatery where both sides mercilessly
skewered each other. Vodafone bid almost £6bn over 150 rounds
for its British 3glicence, more than any other firm. Then came the
telecoms bust of 2001, almost as abrupt as the end of Didius Julia-
nus, whose reign lasted all of nine weeks. It still haunts Vodafone
today. The company’s return on assets, in lofty double digits until
2000, has been negligible or negative every year since but one.
Vodafone’s protracted dark ages stem from a problem common
throughout Europe. Telecoms firms have built the networks over
which social media, emails, cat videos and other marvels of com-
munication flow, but the sums customers pay to use them has
shrunk relentlessly. Understandably, that makes the companies
wary of splashing out fortunes on the next mobile lottery, building
fifth-generation (5g) wireless networks. Yet they face a prisoner’s
dilemma. If none of them takes part, they could all avoid a huge
bill. If only one does, it will clean up. If all of them do, they all suf-
fer. Once again Vodafone is in the thick of the action. This time its
strategy gives an inkling of how to avoid the worst of the pitfalls.
To put the promise and perils of 5ginto perspective, go back a
few generations—to 2g, which turned the world into an intercon-
nected talking shop. That technology generated huge profits for
mobile pioneers like Vodafone. It could not, however, support
enough data to enable video calls, photo-sharing and other mobile
internet use that customers wanted. That gave rise to 3g.
As Ferry Grijpink of McKinsey, a consultancy, puts it, the tele-coms firms were on the right track with their bets on 3g. But they
got two things wrong: the timing, and their ability to make money
from it. It took Canada’s BlackBerry, and Apple, maker of the
iPhone, to bring mobile internet browsing to the masses. Instead
of benefiting companies like Vodafone that built the networks, Ap-
ple reaped most of the rewards, as did search engines like Google
and social networks such as Facebook. During the current decade,
4 g(and lte) have provided enhanced versions of 3g, with much
faster data speeds and loading times. But in rich countries fierce
competition between telecoms firms has caused them to offer big-
ger, often unlimited data plans at low cost, hammering profitabili-
ty. This is especially true in Europe, where Mr Grijpink counts 26
big mobile operators, covering a similar-sized territory as Ameri-
ca’s four big providers (soon to become three). Average monthly
revenue per customer has fallen from $35 in 2006 to around $20.
There are patterns in this potted history. In his book, “The 5g
Myth”, William Webb, a consultant, writes that a new generation of
mobile connectivity has emerged every decade. As a rough guide,
he says each one provides a tenfold increase in data speeds, say
from two kilobits a second with 2g, to two megabits a second with
3 gto 20 megabits a second with early 4g. And telecoms folklore
has it that the even numbers (2gand 4g) do better than odd ones.
The hype is that the arrival of 5gwill break the pattern. It is
coming less than a decade after 4gwas widely adopted. It promises
to bring a 50-fold improvement in data speeds (say, one gigabit a
second). And the hope is that it will be revolutionary, bringing
benefits such as immersive gaming, augmented-reality glasses,
factories of the future and even remote surgery. Already, the global
industry is spending nearly $160bn a year upgrading towards 5g,
and 22 5gnetworks are up and running.
Still, scepticism is in order. People are not clamouring for faster
data, because 4ggives them enough already. After studying the in-
ternet usage of reporters at the Wall Street Journal, academics
found that they use only a fraction of their available bandwidth,
even while watching several videos at once. Much of the industrial
logic of faster connectivity, such as greater use of sensors in fac-
tories, can be supplied by 4gnetworks. No device exists that makes
a compelling business case for 5g. Mr Webb invokes the aerospace
industry to warn of the perils of betting on ever-faster speeds. “5g
could end up being like Concorde—a superb feat of engineering
but of limited value to all but a small minority.”Awaiting renaissance
5 ghas already come at a cost to Vodafone. This year it slashed its
dividend, partly to pay for a pricey spectrum auction in Germany.
But like many of its peers, it sees 5gas a way to revitalise revenue
growth. It says the new technology will support many more de-
vices at home and at work than 4gdoes, will lower the cost to Voda-
fone of handling a lot of data, and improve the reliability of com-
munications in everything from cars to hospitals. Its newish boss,
Nick Read, is hoping to form a closer relationship with customers,
who increasingly see wireless connectivity as a commodity, by of-
fering tailor-made 5gservices. He is also lobbying governments to
spur investment (rather than competition) to avoid a 3g-style fias-
co. He is cutting his own infrastructure costs by striking network-
sharing deals with mobile operators in Britain, Spain and Italy.
Those are good ideas that may ease the 5gstrain. But until the
equivalent of a “killer app” comes along to bring the benefits of 5g
to billions, it is not clear who will make much money from it. It is
up to the telecoms firms to show that they can defy history. 7Schumpeter Vodafone’s search for the G-spot
Why telecoms firms view 5gwith trepidation