Telco operators typically seek to pack their networks with as many customers as possible, while other sectors, such as airlines and hotels, occasionally leave space open. These empty seats and rooms may present as lost opportunities, but in fact they are inevitable by-products of yield management: an approach to price optimization that telcos have been largely unable to pursue during the 3G and 4G eras.
The rise of 5G, however, has the potential to change that—paving the way for a significant shift in how telcos engage with customers. As the telco industry confronts a surge in network traffic volume, a massive proliferation of connected devices, and a future built around widespread automation and augmented reality (AR), carriers are facing a new opportunity to charge customers for what 5G promises and delivers.
Operators have already identified the enormous value that 5G core can bring in the B2B arena, and on this basis the 5G revolution is already under way. In the B2C market, however, the value proposition of 5G remains murky.
While 5G boasts dramatic improvements in specific areas—the technology can vastly improve the gaming experience, for example, by reducing lag time, and it can allow people to stream high-quality video from just about anywhere—there is currently no 5G use case compelling enough to transform the everyday consumer’s life. Potential “killer apps” may emerge, prompting large swaths of customers to pay extra for supercharged connectivity. But without knowing whether and when these apps will appear, telcos are struggling to put a price tag on 5G for consumers.
Despite this backdrop of uncertainty, there is a suite of promising innovations—including, but not limited to, yield management—that could allow telcos to monetize 5G in the B2C marketplace in the near term. Based on McKinsey’s experience working with telco operators across the globe, as well as on several recent surveys, including a survey of 2,400 customers in six countries that we conducted in April 2021, telcos have a clear path to monetize 5G in the B2C sector. Companies that want to stay ahead of the competition should consider investing in 5G core now.
Three innovative models—and one critical enabler—for monetizing 5G in B2C
There are three innovative models that telcos can pursue to monetize 5G in the B2C marketplace. Depending on the road that operators take, the technologies they invest in, and the partnerships they forge, we see a potential for operators to increase average revenue per user (ARPU) by between 16 and 20 percent—if not more.
For years, telcos have been unable to make incremental revenue from their services to a degree commensurate with recent capital-expenditure investments. Operators’ investments in 4G arguably paved the way for the entire app economy and the rise of software-as-a-service (SaaS) businesses, but meaningful monetization did not follow. This is partly because technological limitations have prevented operators from offering customers highly differentiated plans based on their divergent digital habits and needs.
5G core has the potential to change that. By enabling “network slicing,” it can allow telcos to shed the traditional one-size-fits-all model and differentiate among offerings that share physical infrastructure. This ability to charge customers more for parts, or slices, of a network that feature premium performance underpins all three of our innovation models.
Network slicing allows telcos to introduce sophisticated “speed tiering,” which is a critical enabler and prerequisite for the three innovation models. Speed tiering represents a fundamental shift away from the wireless industry’s standard gigabyte-based “data bucket.” While there is a perception throughout the industry that B2C customers will reject speed tiering on mobile devices, our research suggests otherwise.
Our survey shows that 74 percent of customers have a positive or neutral feeling about their operators offering different speeds to mobile users with different needs. Speed, we have found, correlates with higher customer satisfaction, even when a larger bill is attached. Elisa, a Finnish telco, reports that customer-satisfaction scores are around 50 percent higher for customers whose plans afford them speeds of greater than 300 Mbps, compared with those with plans offering less than 100 Mbps. Eventually, these customer-satisfaction rates should allow for higher average billing.
Still, there is a limit to how much customers will pay for increased bandwidth and speed alone. According to our survey, two-thirds of customers are unwilling to pay more than five euros per month for ten-times-higher speed. At the same time, 49 percent of customers expect consistently high speed, and 43 percent expect new applications and services.
By simply upselling traditional portfolios with 5G speed, we believe that telcos can increase ARPU by 3 to 6 percent. What’s more, by creating highly personalized and targeted offers, selling “experiences” as opposed to connectivity, and pursuing B2B2C partnerships, telcos have the potential to triple or even quadruple these gains (Exhibit 1).
Innovation #1: Impulse purchases and ‘business class’ plans
The first innovation model has telco carriers taking a page from the travel industry to engage in sophisticated yield-management strategies. 5G core allows telcos to move away from standard monthly subscriptions, which offer the same experience every month, toward flexible plans that allow customers to make impulse purchases to upgrade network performance when and where they so desire. With 5G, operators can also introduce “business class” plans, which feature premium network conditions at all times.
For example, if a customer needs stronger connectivity to stream a video, play an interactive game, or make an important phone call, they can simply press a button, pay $1 to $2, and receive a temporary performance boost. This pay-per-use 5G will be especially valuable to customers when networks are congested, allowing telcos to reasonably monetize the temporarily scarce resource of premium connectivity. A forerunner of this approach is the option to purchase Wi-Fi on an airplane; customers can decide in the moment whether the additional charge is worth it.
Companies are already seeing the benefits of this strategy. By creating differentiated tariff structures, multiple Hong Kong telcos, for example, have increased ARPU among the highest-paying customers by 20 to 30 percent—driving an expected revenue growth of 5 percent in the next three years.
The potential for telcos to make gains in this area is real. According to McKinsey analysis, 7 percent of consumers would be ready to use 5G boosters and would use them an average of seven times a month if the cost was $1 per boost. Among 18-to-24-year-olds, that figure rises to 14 percent. Overall, we see such impulse purchases increasing ARPU by 1 to 2 percent (around €0.20 to €0.40, or $0.60 to $1.20).
The second needs-based option would be to offer 5G business class plans, guaranteeing users unlimited premium network performance (in terms of speed, latency, stability, and network access). Our analysis suggests a potential ARPU increase of 2 to 4 percent from such plans, with 15 to 20 percent of customers willing to pay between 7.5 and 15.0 percent more for guaranteed network performance.
To seize the potential inherent in this model, telcos will need to have a sharper understanding of where customers are located and what they need at any given moment. This heightened level of targeting will require telcos to revamp their operational and business support systems so that they are able to engage with customers 24/7. It also will be important for telcos to differentiate 5G offers in a way that makes sense to customers. Lastly, regulation could become a complicating factor, as regulators may consider limiting the ability of telcos to establish measures such as speed caps.
Innovation #2: Selling 5G-enabled experiences
By focusing on specific customer experiences rather than selling connectivity alone, telcos can tap into additional revenue streams. For example, the high speeds and low latency of 5G can translate into seamless multiplayer cloud gaming, AR sports streaming, and other enhanced experiences that are highly coveted by certain segments of the population. As new, enticing 5G-reliant products and services emerge, the monetization potential of catering to these types of customer segments will grow.
According to our research, customers have expressed a willingness to pay for the following 5G-enabled experiential use cases (Exhibit 2):
- Low-latency multiplayer gaming: Real-time, multiplayer gaming, featuring AR and high degrees of interaction; potential ARPU increase of 2.0 to 2.5 percent.
- Immersive entertainment: Virtual-reality (VR) entertainment, featuring 360-degree views, for watching sports, visiting museums, exploring cities, and more; potential ARPU increase of 4.0 to 4.5 percent.
- Smart stadiums: Connected experiences built into live sporting events or concerts allowing spectators to view the event from multiple angles and access augmented content through personal screens or smartphones; potential ARPU increase of 0.5 percent.
- Fixed wireless access (FWA) hybrid plan: Hybrid router—using both fiber and 5G connectivity—to offer ultrahigh network stability and high-speed broadband (with no outage, thanks to 5G) in the home; potential ARPU increase of 1.0 to 1.5 percent.
- Real-time translation: Translation services in real time, including as an add-in for videoconferencing or to aid in live discussions; potential ARPU increase of 0.5 percent.
Although most of these use cases are niche, appealing to between 6 and 30 percent of the total customer base, combined they could potentially increase ARPU by 8.0 to 9.5 percent.
To adopt this model, operators will need to develop an ecosystem of partners that provide an expansive, enticing catalog of user experiences. These partners will provide coveted, high-quality experiences, while telcos will provide connectivity and customer access.
Here, part of the challenge will be to explain to consumers why, exactly, they are paying for premium connectivity. A model solution may lie in the home-appliance market, where an industry-wide ratings system for energy efficiency makes it easier for customers to understand pricing differentiation that would otherwise be complicated to convey.
Innovation #3: Using partnerships to deliver 5G-enabled experiences
While a certain number of customers will be willing to pay telco providers for an enhanced gaming or other app experience, a much larger share may be more open to the idea of paying content providers directly for better, on-demand network performance. When assessing the willingness to pay for 5G cloud gaming, for example, we saw that 74 percent of customers would prefer buying a 5G connection directly from the game app rather than from their mobile provider.
Because content providers have strong brands and relationships, they may be better positioned to tap into some of the value that 5G promises. Bundling a 5G charge with fees levied by a partner such as the popular online game Fortnite, for example, could prove more efficient than charging for 5G separately. To create a seamless experience for customers, telcos might consider embedding 5G connectivity directly into partners’ apps or devices. By acting as a wholesale provider of connectivity in this way, operators can greatly expand the potential customer base for these 5G use cases.
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An early example of this approach is the Kindle, which Amazon chose to introduce with baked-in connectivity, allowing readers to seamlessly browse and buy books from anywhere. More recently, Niantic, the AR-game developer behind Pokémon GO, announced in 2020 that it was collaborating with carriers including Deutsche Telekom, Orange, and Verizon (as well as device manufacturers) to build a “planet-scale augmented-reality platform.”
“Creating the best AR experiences requires bridging content with high-performance devices and networks,” Niantic announced. “Together, we’re building toward a shared goal of creating amazing real-world AR experiences that demonstrate the possibilities of 5G.”
It is important to note that these three models for innovation are additive. They can (and, we believe, should) be stacked atop one another. When focusing on user experiences, telcos will need to consider carefully where it makes sense to charge customers directly and where it is preferable to charge content providers.
Requirements for capturing value
5G technology built on a 4G core network can enhance mobile broadband in terms of speed and network capacity and provides latency that is low enough to support Internet of Things (IoT) functions such as smart homes and buildings. It is also less expensive to deploy, as it leverages existing LTE networks and equipment and can be introduced through software upgrades without significant changes to architecture or massive new capital-expenditure investments.
Unlocking the full potential of 5G, however, requires a more dramatic shift toward 5G core. 5G core makes network slicing possible and offers the ultralow latency that is necessary for the most ambitious use cases, including mission-critical operations, autonomous cars, manufacturing automation, and AR. As such, it offers the potential to tap into adjacent businesses and build ecosystems with partners across verticals.
We believe that the shift to 5G core is inevitable and that early movers will benefit. First, they will be able to skim the market to attract early-adopting customers. Second, it is unclear whether the robust wholesale market that arose for 4G networks will also exist for 5G networks. If early movers choose not to wholesale parts of their 5G networks, lest they erode the value, late movers seeking wholesale agreements could find themselves shut out of the market.
To maximize the potential of 5G, telcos should consider making the following moves:
- Invest in 5G core. Full, stand-alone 5G requires C-RAN architecture, new equipment, a revamped operational and business support system, and a new core network. Operators will need to make careful choices around technology investments, considering cost and timing for backhaul upgrades, coverage extensions, and the introduction of mmWave 5G. Given that monetizing low-latency use cases depends on the maturing of the edge-computing ecosystem, operators have one to three years to upgrade their networks to 5G core. The investment in 5G core is substantial. Companies that invest early will be better positioned to capitalize on the promise of 5G.
- Overhaul understanding of customers. Telcos will need richer insights into their customers. They will need to segment their customer base and develop customer-life-cycle-management and customer-value-management engines to determine what to sell, and to whom, in real time. The 4G rollout predated the big data revolution. Now, however, telcos have an opportunity to capture real-time customer information and make data-driven decisions. By adopting analytics-driven customer-value management, one European telco, for example, increased revenue by 5 to 8 percent in just four weeks.
- Develop the right partnerships. Operators will need to develop multiple partnerships with content developers to monetize the 5G-enabled experiences that appeal to smaller segments of consumers. They will need to carefully consider which content providers to partner with, create provider-friendly platforms, and determine whether to bill customers directly or leverage content providers’ strong brands and relationships.
- Encourage adoption of 5G devices. Operators will need to develop a strategy to promote the adoption of 5G devices, which have upgraded processors and graphics capabilities. To encourage this shift, telcos will need to ensure that 5G-ready devices are widely available. To offset the cost of the devices, carriers may consider offering subsidies or introducing leasing plans. In Asia, Europe, and the United States, 5G-ready devices are growing more popular and are expected to reach mass market in 2022. To accelerate adoption, carriers could offer incentives such as rebates, discounts, and trade-in arrangements that are commonly built into 4G phone plans.
As part of this overhaul, telcos will need to avoid the following pitfalls:
- The race to the bottom. It only takes one player to destroy the value pool of an entire market. During the 4G era, some carriers felt pressured by competitors and mobile virtual network operators (MVNOs) to roll out low-priced unlimited-data plans, undermining their ability to adequately monetize their capital-expenditure investments. 5G monetization will require patience. Telcos that rush to offer customers plans with unlimited 5G data and premium network conditions may gain more customers in the short term but will ultimately suffer from an inability to adopt more sophisticated and rewarding monetization models.
- Disappearing from the value chain. During the 4G era, the telco industry built the infrastructure that enabled new digital habits and businesses—then disappeared into the background. Carriers sold 4G as connectivity alone rather than focusing on and monetizing the exciting new experiences the technology enabled. The move to 5G is an opportunity for telcos to reposition themselves as a critical part of the value chain rather than merely the providers of connectivity.
- Slow product rollouts. When it comes to innovative offerings such as 5G boosters and selling experiences, the market will favor carriers that behave like start-ups—introducing minimum viable products that are continually improved upon rather than waiting to go to market with a polished product.
The urgency of the moment
The 4G evolution changed the world. Suddenly, people could use their smartphones to order dinner, call a cab, post to social media, refresh their wardrobe, or watch a movie. Entire industries shifted and sprang up around this sea change, which the telco industry made possible.
The anticipated 5G evolution is poised to reshape the world again. But this time, carriers are positioned to capture the value they create. Only now does the technology exist to manage customers in real time, offer (and charge them for) precisely what they need, and create opportunities for expansive partner ecosystems.
Rapidly shifting customer behavior also distinguishes the current moment. Connectivity needs are poised to skyrocket over the coming years, driven by developments including the explosion of high-definition on-demand video content, the rise in cloud-based processing and storage, and the proliferation of social media. Overall, the volume of network traffic is expected to grow by 20 to 50 percent per year over the next five years. A decade from now, network traffic is expected to be ten times what it is today. These needs cannot be met solely by building 5G on a 4G core network.
Each year, the number and variety of connected devices increases. Machine intelligence is predicted to match that of humans by 2029, paving the way for an enormous influx of connected devices for personal and business use. IoT devices are poised to take off, becoming two to three times more prevalent by 2025 than they are today.
In addition to these steady growth trajectories, telcos should prepare for sharp, sudden increases in demand, which 5G has the flexibility to accommodate. For example, two weeks after Pokémon GO was introduced in 2016, 45 million active daily users were running around the streets, searching for characters to battle. And when the COVID-19 pandemic erupted last year, voice, data, and fixed mobile traffic patterns shifted dramatically and abruptly.
Just a few years ago, simplicity was paramount for customers. They may have rejected pay-per-use connectivity boosts, for example, or the notion of paying each content provider separately for the premium connectivity specific to their game, app, or experience. However, as people’s digital lives become more robust and complex, customers are growing more comfortable juggling multiple devices and content subscriptions. Increasingly, they are embracing the kind of immersive, interactive experiences that may have seemed like science fiction only a few years ago. Telcos that invest in 5G core are in a position to meet these and other needs, at a time when the opportunities for monetization are ripening.