5G co-construction and sharing: the simple "saving money" mentality is not advisable

On June 6, after China issued 5G commercial licenses, Lu Chuncong, deputy director of the Information and Communications Administration of the Ministry of Industry and Information Technology, said in an interview with reporters: "5G is high-tech, high-investment, high-return, and has a significant spillover effect. Every unit of investment will drive 6 units of economic output." Speaking on behalf of the communications industry's competent authority, Director Lu likened 5G to a "treasure pot of the digital economy" and was full of confidence in the investment-driving effect of 5G.

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Such a wonderful 5G money prospect was one of the original intentions of the government to issue 5G commercial licenses in advance. However, for communication operators, who are the main investors in 5G, the beautiful prospect means a heavy investment burden at present.

Zhang Yunyong, president of China Unicom Research Institute, once publicly stated that compared with 4G networks, 5G base stations have greater power and higher energy consumption, which greatly increases construction and maintenance costs. At the same time, the high frequency of 5G makes the sites more dense and the site selection of new sites difficult. The large bandwidth of 5G also places great demand on the transmission network, which will make the overall investment in 5G more than four times that of 4G.

For China Unicom, which has just achieved a V-shaped reversal of cash flow and net profit through mixed-ownership reform and cost-cutting, the ensuing 5G investment may mean that hard times will come again. Therefore, on June 6, the day it obtained the 5G commercial license, China Unicom publicly stated that it would "accelerate the pace of 5G commercialization and promote the joint construction and sharing of 5G networks."

At the interim results conference on August 14, China Unicom Chairman Wang Xiaochu disclosed that China Unicom is negotiating with China Mobile and China Telecom on 5G network cooperation respectively, saying that "China Unicom will definitely participate in the cooperation with one or more of them" and proposed two modes of cooperation: frequency sharing with China Telecom and roaming between China Mobile networks. "To compare the two models, we will adopt whichever model is more beneficial to China Unicom."

It was not until September 9 that China Unicom took the lead in issuing the "Announcement on Cooperation with China Telecom in 5G Network Co-construction and Sharing", and finally confirmed that it would cooperate with China Telecom to build a 5G access network across the country.

1. Co-construction and sharing will weaken the driving effect of 5G investment

The two operators will share the different 5G frequencies allocated by the government to build an access network. China Unicom’s announcement believes that "it will help reduce the cost of 5G network construction and operation and maintenance, and efficiently achieve 5G network coverage", and China Telecom’s announcement believes that "it will help efficiently build 5G networks, reduce network construction and operation and maintenance costs, and improve network benefits and asset operation efficiency."

It can be seen that the main appeal of the two operators' cooperation in co-construction and sharing is to reduce the investment in 5G network construction and operation. Wang Xiaochu, chairman of China Unicom, said at the mid-term performance release conference that co-construction and sharing can save each operator 200 billion yuan in capital expenditure. Ke Ruiwen, chairman of China Telecom, also believes that if the two sides co-construct and share, capital expenditure will be saved, but he did not disclose how much money will be saved, only saying that the number will be "substantial."

It is understandable for listed companies that need to assess their return on assets to save investment costs through co-construction and sharing during the period of performance pain, but it is a bit disappointing for leading communications companies that are entrusted with the important task of driving economic growth and enabling the development of the digital economy. After China Unicom and China Telecom announced the co-construction and sharing, the market generally predicted that the scale of 5G base station construction of the two operators would be greatly reduced, and the performance of main equipment manufacturers including Huawei and ZTE, as well as supporting facilities suppliers such as China Tower, would inevitably be affected.

Especially for Huawei, which has been blocked by the US government in the overseas 5G market, the demand in the domestic 5G market has been compressed due to the joint construction and sharing of China Unicom and China Telecom, which is like adding rain to the leaking roof. In an interview with the Associated Press on August 20, Ren Zhengfei bluntly stated that due to the impact of the US government ban on component replacement, Huawei's 5G base station production capacity dropped sharply to 5,000 in August and September, but it is still confident that it will increase to 600,000 base stations per year in 2019 and return to 1.5 million base stations per year in 2020.

However, after the domestic 5G network construction was reduced from three networks to two networks, Huawei's recovered production capacity and the industrial chain behind it, including R&D, production and parts procurement covering hundreds of companies, will undoubtedly face severe demand tests.

The "5G Industry Economic Contribution" report released by the China Academy of Information and Communications Technology predicted that my country's operators' investment in 5G network equipment will exceed 220 billion yuan in 2020. It is estimated that the scale of information consumption driven by 5G commercial use will exceed 8 trillion yuan from 2020 to 2025, directly driving the total economic output to 10.6 trillion yuan, and indirectly driving the total economic output to about 24.8 trillion yuan. 5G will directly create more than 3 million jobs.

As China Unicom and China Telecom have significantly reduced 5G investment through joint construction and sharing, the report of the China Academy of Information and Communications Technology will probably have to be torn down and rewritten? In particular, the prediction that 5G will create new jobs may be slapped in the face.

According to the cooperation agreement, the 5G networks in 17 provinces in the south and 8 provinces in the north will be independently invested, built and operated by China Telecom and China Unicom respectively, which means that the other operators in these provinces will have no new generation networks to invest in, build and maintain after entering the 5G era, which will inevitably generate a large number of redundant staff in their network development, network construction, network maintenance and other business departments. In order to save investment, after the 5G network investment is compressed, the layoff of redundant staff will be put on the agenda by the operators.

Affected by this, employees in a series of industrial chains, such as main equipment manufacturers, supporting equipment manufacturers, and outsourcing service providers, who serve local operators without 5G network construction tasks, will also have to face the harsh reality of re-selecting jobs. Therefore, after the market cake of 5G commercial use has shrunk due to co-construction and sharing, the overall employment situation in the communications industry needs more attention.

(II) Co-construction and sharing will slow down the progress of 5G network construction

Although China Unicom and China Telecom both believed in the cooperation announcement released on September 9 that joint construction and sharing would help to efficiently build 5G networks and quickly achieve 5G coverage, as it is an industry first, the technical challenges it faces cannot be ignored.

The announcement by both parties clearly stated that "5G network co-construction and sharing adopts access network sharing, core network construction is done by each party, and 5G frequency resources are shared." These three sentences may seem simple, but each one represents a series of technical challenges that need to be discussed and verified in detail.

First, let's look at the access network. It is relatively simple to build a new 5G base station for sharing, but because China Unicom and China Telecom currently choose to build a network based on the NSA non-independent networking architecture, the shared 5G base station needs to be anchored with the 4G base stations of both parties, so the allocation and scheduling of frequency resources are more complicated. In addition, if the differences between the new 5G base station manufacturers and the original 4G base station manufacturers of both parties are involved, the original 4G network needs to be adjusted, and the engineering difficulty can be imagined.

The second is the core network. The core networks are built separately, based on the current NSA architecture, and the shared 5G base stations are connected to the existing 4G core networks of both parties at the same time. However, the goal of both parties is to commercialize SA on a large scale in 2020. Therefore, in the process of network evolution, they must each build a new 5G core network. Therefore, for a considerable period of time, the shared 5G base stations have to connect to four core networks at the same time, which greatly increases the complexity from the perspective of product support capabilities, engineering construction, and later maintenance.

Then there is frequency resource sharing. In terms of 5G frequency division, China Unicom and China Telecom each get 100M bandwidth on the mainstream 3.5G band of 5G, while China Mobile gets 160M bandwidth on the 2.6G band. Although China Mobile's 2.6G band industry chain support is not as mature as 3.5G, China Mobile's technology and financial strength are expected to narrow the gap in a short period of time. Then the 100M bandwidth of Unicom and Telecom is at a disadvantage compared to the 160M bandwidth of Mobile. Therefore, from a competitive perspective, it is a very good choice for both parties to jointly build a 5G network in the form of 200M carrier sharing.

However, whether it is the 5G tests organized by the Ministry of Industry and Information Technology or the 5G pilot construction undertaken by China Unicom and China Telecom, they are all based on their respective 100M bandwidth standards. China Unicom also announced that by August it had completed the construction of 17,000 5G base stations. These built base stations are all devices that only support 100M bandwidth.

Therefore, at this point in time, the two parties have decided to jointly build the 5G network in the form of 200M carrier sharing, which means that the entire industry chain, including base stations and antenna supporting equipment, needs to be redesigned and new products developed in accordance with the new technical standards. In addition, a new round of laboratory testing and live network pilot testing must be carried out before the construction of the 5G shared network can be started with mature and verified products.

So although China Telecom Chairman Ke Ruiwen stated at the Tianyi Intelligent Ecosystem Industry Summit Forum held on September 19 that the innovative cooperation model of 5G co-construction and sharing will make "network construction faster", the premise still depends on whether the response speed of the 5G equipment industry chain can keep up with the sudden changes in market demand of operators in a short period of time.

Near the end of September, China Telecom officially notified users who participated in the 5G experience event that the 5G experience event, which was originally scheduled to end at the end of September, was postponed to the end of October. This also means that the plan of the three major operators to commercially release 5G services and officially implement 5G tariff packages in October, which was previously expected by the industry, has been delayed by at least one month. This may also be related to the fact that the 5G co-construction and sharing cooperation agreement between China Unicom and China Telecom has just been signed, and there are still a lot of details to be studied and implemented.

3. Co-construction and sharing will challenge 5G operation and service quality

According to the cooperation agreement on co-construction and sharing, China Unicom and China Telecom will jointly ensure the unification of network planning, construction, maintenance and service standards in the 5G network co-construction and sharing areas, and ensure the same level of network services, under the premise that "the user ownership of both parties remains unchanged, and the brands and business operations remain independent."

Therefore, although China Unicom and China Telecom have become partners that can share in 5G network construction, they are still competitors in 5G market operations. However, it is still questionable whether the "same network service level" can be guaranteed by this agreement in actual implementation. For example, can the network quality complaints of one party's users get timely feedback and solutions from the other party responsible for network operation and maintenance? Especially in the future, after 5G networks serve vertical industry customers through SA architecture, the timeliness of network resource allocation for industry customers will be greatly improved. When the needs of one party's customers encounter coverage or scale bottlenecks, how can the other party responsible for network investment and construction consider investment without output?

Even if we assume that the cooperation agreement can ensure "equal network service levels" for both parties, how can the two parties form differentiated competition in 5G operations and the 5G market? In order to compete for customers, will they return to the old path of price competition?

Especially in the division of construction areas between the two parties, except for 15 large cities and Guangdong and Zhejiang provinces, the eight northern provinces were allocated to China Unicom and the 17 southern provinces were allocated to China Telecom, basically in accordance with the principle of traditional strength dominance. Such a division may give full play to the local resource advantages of each party in 5G network construction and operation and maintenance, and play a role in complementing each other's strengths, but it may also lead to a situation in which the strong always get stronger and one party completely overwhelms the other in local 5G operations and services, and ultimately cause the party without network resource dominance to completely lose its competitiveness in the local 5G market.

Although this result is not the original intention of the two parties to cooperate in co-construction and sharing, it is a significant loss for 5G users who hope to obtain better services and superior experience from the market competition among operators.

Especially in the process of planning and construction of 5G shared base stations, under the current NSA architecture, 5G shared base stations and both parties' respective 4G base stations and 4G core networks involve engineering implementation issues such as anchoring and transformation. Under the premise that both parties have unequal dominant positions in the areas where 5G is independently constructed, how to coordinate the resources of both parties to ensure that the construction of 5G shared base stations does not affect the service quality of existing 4G users is also a considerable challenge.

Previously, when the three major operators were independently building 5G networks, frequency adjustments and network upgrades affected the user experience of the existing 4G network, which caused users to misunderstand that the operators deliberately slowed down the 4G network. As a result, the three major operators issued announcements to refute the rumors, but this has already caused a bad impact on society.

Therefore, in the initial network planning and construction as well as the later operation and maintenance of 5G co-construction and sharing by China Unicom and China Telecom, there are still many difficult problems that require a lot of time to study and solve. Although the prospect of saving money on investment is good, whether it can obtain corresponding returns in market competition still faces too many unknown challenges.

(IV) Rationally plan 5G network deployment around industrial applications

The driving effect of 5G on China's economy is not only reflected in the investment in network construction, but more importantly, it is combined with vertical industries to create digital economic value by enabling the development of other industries. Therefore, facing the heavy investment pressure of 5G networks, the three major operators also need to return to their original intentions and plan and build 5G networks on demand around the key points of 5G industry applications, rather than hyping the concept of 5G for the sake of market competition. They should not be forced to take shortcuts such as co-construction and sharing in pursuit of comparative advantages in network coverage, which seem to be shortcuts but are actually detours.

On September 20, Miao Wei, Minister of Industry and Information Technology, answered questions from Xinhua News Agency reporters about 5G at a press conference held by the State Council Information Office. He said that for the majority of users, 4G mobile phones are sufficient and 4G is sufficient for most applications. Therefore, the demand for 4G networks is extensive and long-term. The three major operators must stabilize their investment in 4G networks. They cannot significantly reduce 4G investment just to build 5G networks, thereby affecting 4G network quality and 4G user experience.

It should be noted that the current 4G network still has insufficient coverage in remote areas and insufficient capacity in hot spots. The activation rate of services such as VoLTE to meet the voice needs of 4G users is also not ideal. Therefore, the three major operators must first focus on the needs of the majority of users for 4G networks and functions, and continue to develop and maintain the 4G network with the goal of continuing to improve the 4G user experience. Because for quite a long time, 4G will be the most widespread social demand.

Regarding the construction of 5G networks, as Minister Miao said at the press conference of the State Council Information Office, 80% of the real application scenarios of 5G should be used in the communication between things, such as industrial Internet, Internet of Vehicles, telemedicine and other fields. Therefore, the network layout of 5G must change the arms race aimed at pursuing network coverage, and should focus on the needs of industry customers and industrial users, concentrate funds and resource advantages, and focus on solving the coverage needs of industry customers and the surrounding areas of industrial layout.

Due to the increase in frequency band and power, 5G base stations are much more expensive than 4G base stations. Therefore, the planning and deployment of each 5G base station should be considered and evaluated from the perspective of long-term industry return rate. The three major operators' complaints about the heavy investment pressure in 5G actually stem from their failure to recognize the government's positioning and mission requirements for the 5G industry. They still follow the idea of ​​planning 2G and 4G networks to flood 5G network coverage, positioning 5G networks as using new bandwidth to mitigate the impact of data traffic on 4G networks, thus making 5G networks a supplement to 4G and greatly reducing the industrial value of 5G.

Planning 5G network construction according to such outdated ideas will inevitably require adding several times more 5G sites within the same coverage of 4G sites, resulting in 5G investment being several times that of 4G. It is based on such 5G planning ideas and 5G investment orientation that China Unicom and China Telecom decided to adopt a co-construction and sharing cooperation approach to invest in 5G networks. Such a 5G network can certainly save investment in duplicate construction, but such a 5G network is itself a duplicate investment for the existing 4G network, so why should it be co-built!

Similarly, positioning 5G sites to divert traffic from 4G networks will inevitably ignore the new coverage needs of vertical industries and industries outside or at the edge of 4G network coverage, resulting in insufficient 5G investment. For example, in a large industrial park, the demand for 4G data services is concentrated in the dormitory area after get off work, but the new demand for industrial Internet is concentrated in workshops and factories during working hours. If we still follow the planning idea of ​​adding 5G base stations in 4G traffic-intensive areas, how can the needs of industrial Internet in workshops, factories and other places for 5G scenarios such as mMTC and uRLLC be met?

Therefore, the savings in 5G investment cannot be achieved by simply co-constructing and sharing between the two operators, or by compressing the demand for 5G network construction. Developing the 5G industry with this "saving money" mentality will only lead to the curbing of innovation demand and the suppression of the supply-side industrial chain, which is fundamentally not conducive to the long-term development of China's 5G industry.

To develop the 5G industry, operators must have a long-term vision and make precise investments through reasonable planning around the 5G industry positioning, so as to make the best use of good steel. Considering the market competition pattern among the three major operators, it is necessary for the competent departments of the industry to unify the understanding, planning and deployment of the technical path selection, investment direction and commercialization process of 5G commercialization around the industrial positioning of 5G, and not allow operators to take advantage of their existing advantages to rush ahead through investment and create a 5G arms race in the domestic market that wastes social resources.