Can You Put A Price On Competitive 5G Markets?

Why are call and data plans for smartphones so much more expensive in some nations than in others? Likewise tickets for short-haul airline flights? Why can broadband access fees vary by 100% or more in developed economies?

In what is likely to become one of the seminal books on economic research of recent times, Professor Thomas Philippon of the Leonard N. Stern School of Business at New York University addresses these very issues and more in his recently published work on competition and free markets.

In a nutshell it’s all about competition (or rather a lack thereof). Philippon and his research team assert that an ostensibly free market can be subsumed into a system where an illusion of choice prevails. He contends that concentrating important economic sectors and geographical markets,  sometimes to just a couple of domestic players, can have a significant impact on a nation, especially when the effect is to entrench incumbent firms and help them dominate and retain market share. Equally, establishing an environment that is not conducive to new entrants or potential disruptors can lead to other economic ailments such as increased inequality, weak levels of business investment, reduced skills training in the workforce, and very low levels of productivity growth.

Why Competition Is a Must

A restricted competitive environment leads to many negatives and few positives, except increased profits for a few privileged firms and their owners. This will be especially true for emerging technologies and the digital (soon to be intelligent) economy and, for example, 5G network infrastructure.

It’s broadly agreed that when competition does not have room to flourish, higher equipment costs, rollout delays, and a slower diffusion of associated technological innovation will result. However, to date, there has been no systematic attempt to quantify the potential scale of these effects. With this in mind, Huawei commissioned British economic research consultancy Oxford Economics to assess the economic cost of restricting competition in eight markets.

The methodology used is a three-stage modelling framework which calculates the economic impact of restricting competition in the provision of 5G network equipment. First, to calculate the economic impact of restricting competition, we started by estimating the increase in mobile network operators’ investment costs when a major infrastructure provider is restricted from the market. We did this using a range of techniques developed in collaboration with Dr Martin Pesendorfer from the London School of Economics and Political Science.

Second, we translated the increase in investment costs to delays in rollout using a network rollout model built in collaboration with Dr Edward Oughton (Cambridge Judge Business School). This model translates an increase in investment costs to a reduction in the share of the population covered for each country and scenario by assuming that the overall operators’ CAPEX remains the same. Our baseline—i.e. with no competition restrictions—forecasts for 5G rollout and CAPEX were sourced from the GSM Association.

Finally, the increase in investment costs and delays in rollout were translated into lower productivity growth using estimates of the likely economic productivity benefits of 5G from various academic and industry studies. These were then fed into the Oxford Economics Global Economic Model to estimate the impact on a range of macroeconomic indicators such as GDP and household consumer spending.

In so doing, we are able to put an economic price on the cost of restricting competition. And the results are striking. Restricting a key supplier of 5G infrastructure from helping to build a country’s network would increase that country’s total 5G infrastructure outlay costs by a total of between 8% and 29% over the current decade. Linked to these investment cost increases, the restriction in competition for 5G infrastructure would inevitably lead to delays in network rollouts.

This would mean that millions fewer people would be covered by the 5G network by say 2023 in each country. A delay in the rollout of 5G would also result in slower technological innovation, inhibit first-mover advantages in the economic sectors of the future and lost economic growth. In our central forecasting scenario, this would ultimately result in reductions to national GDP in 2035 ranging from U$2.8 billion to US$21.9 billion in two of the nations studied.

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Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.