From 2G to 5G: Three Times the Power Over Mobile Internet Changed Hands | QDaily Business History

What exactly is 5G? Everyone seems to have a different answer.

Hans Vestberg, CEO of Verizon — America's largest telecom carrier — held up an iPad showing an aerial flight map. More than 400 kilometers away in Los Angeles, a drone lifted off under his remote control. Live footage from the drone streamed back to the screen, and a status bar in the lower-left corner showed the 5G connection hitting 900 Mbps.

This was Verizon's demonstration at the Consumer Electronics Show (CES). A run of keywords — "healthcare," "classroom," "gaming," "journalism," "city" — flashed across the big screen before settling on two words: Change Everything.

In Vestberg's telling, 5G will change everything — "a quantum leap beyond 4G, the fourth industrial revolution."

5G was the defining theme of CES. From carriers to chipmakers, from handset makers to automakers, the mood was electric as they showed 180,000 attendees what the tech industry does best: stay optimistic about the future.

In late 2018, America's four carriers — Verizon, AT&T, Sprint, and T-Mobile — each mentioned 5G an average of 28 times in their quarterly earnings calls. Qualcomm, the chipmaker that had been struggling for years, brought it up 38 times in its own call.

Huawei poured 5 billion yuan into 5G research in 2018, hoping to win more base-station contracts. By December it claimed to have signed 25 contracts and shipped more than 10,000 5G base stations.

Apple aside, every major smartphone maker — Samsung, OPPO, Vivo, and Xiaomi — had announced launch dates for 5G handsets. In 2019, 5G would be the headline selling point for new phones.

But what exactly is 5G?

Strip away the technical detail and you are left with this: a mobile network that transmits faster and responds faster.

Samsung Senior Vice President Justin Denison put it this way: "You won't have to remember to download your favorite TV season before you head to the airport — you can download it in a few seconds while you wait to board." Qualcomm's pitch runs along the same lines: 5G's peak download speed can reach 4,500 Mbps, with an initial median of 1,400 Mbps — roughly 20 times today's 4G. "Downloading a standard-size movie takes 17 seconds on 5G, against 6 minutes on 4G." It sounds exactly like a broadband ad from a decade ago.

Speed has never been reason enough on its own. The real question is what you do with all that speed. Different companies give different answers — but so far nobody has figured out what any of it means for ordinary consumers.

Intel is talking about smart factories and robots, VR and AR, digital surveillance and security — none of which has much to do with consumers.

Ford announced that all its new cars from 2022 on would ship with 5G, letting vehicles talk wirelessly to each other and to traffic signals.

Qualcomm, for its part, says that with 5G a virtual-reality headset could connect wirelessly to other devices, making it easier to build a visor the size of eyeglasses. But who still cares about virtual reality? At the world's biggest consumer electronics show, nobody did.

Verizon put up $1 million for a "5G Challenge," asking developers to help it find concrete uses for 5G — which amounts to admitting that even after betting hundreds of millions of dollars on 5G, Verizon itself has no idea what 5G will actually deliver.

The same thing, in fact, once happened with 3G.

3G was the most important network upgrade ever — but carriers spent seven years without finding a direction

Looking back, 3G was the single most important upgrade in the history of mobile networks. It made possible all the internet services you use today. Yet from the moment carriers started building the network and telling the 3G story to the point where it actually became useful, seven years passed. By 2006 the whole industry was asking whether the money had gone to the wrong things.

People were still using Nokia feature phones when Europe began deploying 3G infrastructure in 1999. In March that year Finland became the first country in the world to issue 3G licenses, ahead of Japan in 2001 and the United States in 2004.

3G sketched out a future of being online everywhere. The mobile telecom industry began with voice: the first generation of mobile technology (1G), an analog cellular radio system of the 1980s, could carry voice and nothing else. The 2G networks of the 1990s gained the ability to carry data. Put simply, 1G brought mobile calling, and 2G added text messaging and the ability to download content from the internet.

3G's defining feature was faster data download speeds, which enabled data-driven services: email, web browsing, photo sharing. Early 3G networks delivered download speeds of 300 Kbps to 2 Mbps — more than 30 times faster than 2G.

Caught up in that story, Europe's enthusiasm for 3G kept rising, and by 2000 thirteen countries had their own 3G licenses.

But the race to 3G quickly turned into a bubble built on license auctions. In 2000 the British government became the first to auction 3G licenses, selling five for a combined £22.5 billion (€38.5 billion). That equaled 2.3 percent of the UK's GDP that year and came in at more than four times what the media had predicted — even the cheapest single license fetched over £4 billion.

Germany, Italy, France, the Netherlands, and others followed, raking in vast sums from their own auctions. Germany set a record with a single auction that raised €50.5 billion.

Here is a classic example: in 1991 Li Ka-shing's Hutchison Whampoa spent HK$10 billion to buy the British mobile company Rabbit, which was restructured and renamed Orange in 1993 and listed in London in 1996. Riding the 3G license bubble, Li sold a 44.8 percent stake in Orange to France Télécom in 1999, clearing a profit of HK$110 billion.

The licenses cost so much that carriers ended up buried in debt, which badly slowed 3G's real-world progress. The American tech bubble of the early 2000s spread to Europe, and license prices slid. Companies that had announced plans to commercialize 3G now announced delays one after another. Some operators in Denmark, Luxembourg, Sweden, Norway, Portugal, and Finland gave up and pulled out of their 3G projects altogether. Carriers were forced back to low-cost voice service.

Vodafone spent $34 billion on its licenses, yet six years later its share of the European market stood at just 3.8 percent. In 2005 it had to change course and cut its tariffs.

But the deeper reason was simple: people had found no reason to use 3G networks.

By the end of 2005 Nokia was a phone colossus that could sell more than 80 million handsets in a single quarter, holding 35 percent of the global market. Its closest rivals — Motorola, Samsung, and LG — all sold feature phones built for texts and calls.

A 2006 New York Times article observed: "Despite carriers spending hundreds of billions of dollars on licenses, people today use their phones just as they did in 2000 — to make calls."

The article blamed 3G's failure in Europe on the lack of "killer applications": the promised high-speed wireless internet services had never reached users, and carriers had wildly overestimated how fast 3G would catch on.

"Operators misjudged the value of 3G licenses, and the governments that ran the auctions essentially extorted the industry. This was a failure from top to bottom," said Joachim Dreyer, former CEO of the German carrier Debitel, in that same piece.

That "failure" was the carriers' failure. How communications would innovate was still theirs to decide, and they still captured the industry's fattest profits. By 2006, China Mobile and Verizon were each worth more than ten billion dollars — far more than Nokia, the largest handset maker.

Carriers had already built a full set of connected services in the 2G era — but their imagination never went any further

The early 3G bubble was tied directly to the carriers' monopoly. They had built a complete set of internet services back in the 2G era, but failed to carry them into the 3G age.

You may have heard of something called the "Mobile Treasure Chest" (移动百宝箱) — a screen users opened on their phones to buy apps, ringtones, and games, charged to their phone bill. Ringtones and games made up most of it. In the carriers' books, all of these counted as "value-added services."

In China Mobile's ad copy, the Treasure Chest was "just like a supermarket": games, entertainment, business, and lifestyle sorted into four categories and laid out on "shelves" for users to browse and download as they liked.

In 2005, China Mobile's revenue and profit both grew by double digits. The value-added services delivered through the Treasure Chest grew by more than 50 percent.

Before the App Store existed, this was the app store of the 2G era. Carriers controlled this proven core service completely: the Treasure Chest came pre-installed on handsets, ringtone and game purchases were charged straight to the phone bill, and carriers took a 70 percent cut of content revenue.

In fact, many of the internet services we use routinely today were already on offer from carriers back then:

• Chat: SMS — a real-time messaging tool whose reach rivaled WeChat and WhatsApp, with an ID for every user. In 2005, more than 200 billion text messages were sent in China, a 217-fold increase in five years.
• Photo sharing: MMS, though it was a bit slow and the image quality a bit poor.
• News: the mobile newspaper — a daily push service with images and links.
• E-books: books charged automatically to the phone bill. To this day, China Mobile remains one of the country's largest e-book sales channels.
• Mobile payments: charged straight to the phone bill, with no complicated setup. Used mainly to buy games and ringtones.
• Email: BlackBerry's BIS and BES services, run with the major carriers, pushed email to phones in real time.
• Maps: a paid service that leaned heavily on cell-tower positioning.
• Browser: WAP pages — the internet pared down to text, hyperlinks, and a few compressed images.
• App store: the Mobile Treasure Chest — weaker than the App Store in every way, yet seemingly stocked with a bit of everything.
• Transit cards on phones: Sony and the Japanese carrier NTT Docomo put NFC on phones. Nokia tried something similar, without success.

What all these services had in common was that, with mobile networks so slow and handsets so limited, carriers leaned on their own servers and transmission layers to make the services usable at all.

Not great, but usable — and profitable. Which is exactly why every phone company of the era had to do as the carriers said, tailoring handset designs and software to their specifications. Even Nokia, the largest, was no exception.

The iPhone 3G made 3G truly mainstream — and after that the industry's profits began drifting away from carriers

In 2007, Steve Jobs took the stage to launch the original iPhone and used it to open the New York Times website, pull up Google Maps, and send an email. Those actions look ordinary today; at the time they were a huge leap. The old mobile internet, in Jobs's words, was a crude "baby Internet" — the iPhone was the first proof that a phone could reach the full internet just like a PC.

It was the eighth year of 3G construction, and the first iPhone — which supported only 2G — sold 1.39 million units in its first six months. That was a very big number at the time; Android handsets took nearly two years after the platform launched to cross a million in sales.

In 2008, the App Store arrived alongside the iPhone 3G, giving phone users their first way to pick and download apps through a channel that had nothing to do with carriers. It was a complete experience: developers built apps, users downloaded and paid for them, and Apple and developers split the revenue 70-30. Nowhere in that chain did anyone need to ask a carrier's opinion.

Before Apple, BlackBerry, Nokia, and Microsoft all had smartphones — but none dared challenge the carriers by building its own app store.

Only after the iPhone 3G did the Ovi Store (later the Nokia Store) inside Nokia's Symbian system, Microsoft's Windows Phone Store, and BlackBerry App World appear one after another.

The most successful by far were Android's Google Play and the iPhone's App Store. By 2011, Android was the world's largest operating system: more than 80 of every 100 smartphones sold ran Android.

It is fair to say that the smartphone the iPhone and Android brought was the foundation of 3G's mass adoption — and the start of the mobile internet.

After that, the mobile services of the 2G era were swept away completely.

WhatsApp launched in February 2009 and by 2013 had carried 27 billion messages. SMS was finished. With WeChat, Skype, and FaceTime, users no longer paid carriers to make video calls — as long as a phone could get online, over mobile data or Wi-Fi, the call was free.

What unlocked all of this was good products. Products good enough to actually use 3G speeds.

A great phone, it turned out, could outrun carrier control: users bought the device first instead of shopping for the best data plan. The original iPhone took nearly 30 percent of the US market in its launch year, more than any carrier-backed handset maker — even though it was not a 3G phone.

The iPhone's disruptive power lay in what it did to the carriers' grip. In its early years, Apple's basic strategy in each major market was almost always to sign an exclusive deal with a single local carrier, usually for two or three years. To win the most favorable subsidy and promotion terms at the table, Apple generally chose the second-largest carrier rather than the biggest — AT&T in the United States, China Unicom in China.

Every major market had a handful of giant carriers, but the iPhone partnered with only one — and not the dominant one. China Unicom, AT&T, and SoftBank held exclusive iPhone distribution for 33, 44, and 39 months respectively. Every carrier that sold the iPhone handed Apple enormous subsidies, yet the iPhone's pull was so strong that each one, without exception, drew large numbers of new subscribers onto its network. In the end, every other carrier had no choice but to accept Apple's terms.

Because of the subsidies, carrier margins shrank sharply. In the first half of 2010 — a year after China Unicom signed its iPhone deal — the carrier's handset-subsidy losses alone topped 3 billion yuan for the half-year. Carriers had to face the fact: in the telecom chain, they no longer called the shots.

4G made internet services far more usable, and the power shifted again — from handset makers to internet companies

The biggest change from 3G to 4G was, again, speed. LTE was the first 4G standard recognized by the International Telecommunication Union, and the only mainstream 4G standard, with download speeds of 100 Mbps — far faster than 3G.

China's Ministry of Industry and Information Technology formally issued 4G licenses in 2013. After that the handset business itself changed little: everything came to look like an iPhone, and the contest turned mainly on who had the bigger screen or the lower price.

Internet services, though, were pushed by the faster speeds into a vast industry. If 3G brought internet services into being, 4G made them universal.

By the first half of 2018, the two big app marketplaces — Android and the iOS App Store — together took in $33.4 billion in revenue, still growing 30 percent a year; in their first ten years combined they had listed more than 5.1 million apps. For comparison, in 2007 Microsoft, then the world's largest software company, had annual revenue of $16.3 billion.

Faster speeds and cheaper data sharply improved the experience of video and online gaming. Look at the revenue rankings on Apple's App Store today and video services are the biggest winners: five of the top ten apps by revenue are streaming companies, with Netflix at number one.

Then there is gaming: most mobile-market revenue comes from games. According to App Annie, in 2018 non-gaming apps accounted for 65 percent of downloads but only 23 percent of revenue.

4G has run its course, and the power in the telecom chain has tilted once more.

On one side, carriers have accepted their irreversible loss of standing. They have to lean harder on handset makers, and subsidies are no lasting strategy. From 2014 on, carrier subsidies to handset makers shrank sharply. You may remember what buying a phone looked like in the 3G era: carriers could still set up counters in stores and give away cheap 3G handsets for free when you topped up your account. The companies that lived on subsidies after that could not keep going — ZTE and Coolpad, for instance.

In the 4G era, carriers were reduced entirely to pipes for traffic — a role that even ate into their old voice business. In the first half of 2016, mobile data traffic at all three of China's major carriers grew by more than 100 percent year on year; more important, mobile data revenue passed traditional services for the first time to become the single largest source of revenue. The era of carriers making money from voice, texts, and value-added services was over.

Carriers did gain something — more and more users, and still-rising data revenue. By 2016, China Mobile had 429 million 4G subscribers at a penetration rate of 51.2 percent; China Telecom had 90.1 million and China Unicom 72.74 million. But the unit price of data kept falling, and the shopping, video streaming, and everything else that data made possible was where the real money was — none of it anything to do with the carriers.

The same was true of handset makers. After a golden decade of growth, the industry began to slide in 2017.

Internet companies, meanwhile, kept growing. Over ten years people had built their lives around internet services, so even as smartphone shipments flatlined, global mobile-app downloads and revenue still grew by double digits in 2018.

People had grown ever more dependent on their phones. Data from App Annie shows that time spent on mobile devices grew 45 percent over the two years from 2016, with 50 percent of that time going to social networks. In China, the average smartphone user spends more than 3.5 hours a day on the phone.

Profit has always followed power, and the recent trend is clear: internet service companies are squeezing handset makers.

Netflix has already decided to stop letting new users pay through iTunes, sidestepping Apple's 30 percent cut. Such moves have piled up and put real pressure on Apple; the public dispute between WeChat and Apple over whether tips should be subject to the cut made headlines and ended in Apple's concession. Now the question of whether Apple can claim 30 percent of all digital services is the subject of a major lawsuit underway in the United States.

Android is weaker still on this front. Google now lets developers bypass the Play Store's payment system, pointing users straight to any payment method they choose wherever an app charges money — with no cut for Google.

Even as Apple's market cap shrank by a quarter after the iPhone's sales collapse, Netflix's stock rose 50 percent over the past year, and Amazon became the world's most valuable company — now worth $90 billion more than Apple.

Carriers, chipmakers, and handset makers all treat 5G as a lifeline — but none of them is the decisive force anymore

From carriers to chipmakers to phone companies, investing in 5G helps every link in the chain. 5G has become the last resort for escaping a tight spot.

The phone industry's decade of growth has stalled. What is in short supply is a fresh reason to get users to upgrade. Analysts at IHS expect 5G handsets to carry a price premium of roughly 20 percent over non-5G models once they reach the market.

Lei Jun said in an interview that 5G will stir new demand in the phone market, and that Xiaomi phones will cost more. The same logic applies to every handset maker.

Carriers are hoping 5G will let them break free of their dependence on handset makers.

Whether it is Verizon's demonstration of remotely piloting a drone, or China Mobile's talk of using 5G to strengthen security monitoring and its connected-car partnership with SAIC, or China Telecom's plan to use 5G to transmit high-definition virtual-reality signals — every carrier wants to seize on 5G to connect itself to things beyond phones.

Except that, in all these visions, nobody has yet been able to explain what 5G is actually good for from a consumer's point of view.

4G already lets you make smooth video calls and stream video. As for downloading a movie "in seconds" — how much practical value does that have now that on-demand streaming has become the norm?

As BayStreet Research analyst Cliff Maldonado told the Wall Street Journal: "For things like browsing Facebook and checking email, you won't notice any difference on 5G."

In 2019, 5G will not arrive fast. 4G caught a wave of growth — when wireless standards moved to LTE in 2011, smartphone sales grew more than 60 percent that year. But IDC projects that rate at just 1.4 percent in 2019.

What is 5G actually good for, for consumers? The answer to that question decides how fast the next generation of mobile networks spreads. Carriers, phone companies, and chipmakers have been searching for years. But whoever finally answers it may not be any of them.

Charts by Zhou Shaohong; data compiled by Luo Cong

Cover image: Pixabay, Visual China