Unlocking transportation’s next frontier through 5G - The economics of 5G networks

Unlocking transportation’s next frontier through 5G - The economics of 5G networks

The promise of 5G in transport

5G is expected to have a profound impact on the transport industry, as its ability to connect more devices faster creates opportunities to change the way people travel and goods are moved. 5G is the fifth and latest cycle of technology that mobile network operators (MNOs) are deploying on their networks. If its full potential (referred to as ‘full’ 5G) is realised, 5G will offer:

  • expanded bandwidth, allowing for faster speeds across larger volumes of data;
  • lower latency, reducing the delay between sending/receiving information; and
  • more applications, e.g. network slicing, which allows ‘virtual’ networks to be created within the network that are tailored to specific requirements/applications.

The World Bank, in a 2020 paper, mapped the features of 5G to technologies and use cases in the transport industry. It said 5G could unlock the following three key opportunities:

  1. Connected and autonomous vehicles;
  2. Smart and efficient logistics; and
  3. Improved urban mobility and public transport.

It estimated that these new use cases could add as much as $230bn to global output, accounting for one-third of the total expected impact of 5G on the global economy. But which, if any, of these benefits have been observed to date?

Figure 1 – Impact of 5G on the transport industry

Source: World Bank Group, “Envision 5G: Enabled Transport”, June 2020, figure E.1.

The reality check – slow 5G deployment in Europe

Unlocking new use cases in the transport industry requires full 5G (almost) everywhere. For example, the value of an autonomous vehicle is directly proportional to the geographic area covered by a full 5G network. Similarly, the real-time monitoring of passengers, needed to improve urban mobility and public transport, requires that they have 5G connections while on the move.

The challenge is in ensuring that MNOs deploy 5G networks that are capable of delivering these outcomes and benefits. Evidence suggests that this is not currently the case in Europe. Figure 2 below shows that, in almost all EU countries, less than 50% of existing 4G base stations have been upgraded to 5G. It also shows that the 3.6 GHz spectrum band, which is a frequency expected to deliver the full potential of 5G, has been deployed to even fewer existing base stations. This is reflected in 5G outcomes in Europe:

  • 5G population coverage across EU Member States is 81% and remains as low as 51% in rural areas; and
  • 5G is falling short in quality with regards to end-users’ expectations and industry needs.

Figure 2 – 5G base stations as a percentage of existing 4G base stations in EU

Source: European 5G Observatory, Biannual report, April 2023. 

The hold-up problem – unlocking 5G’s potential in transport

The disconnect between the potential value of full 5G and slow deployment can be explained by the “hold-up” problem - a classic problem in the economics of investment. It occurs when two firms, A and B, mutually benefit from an investment by A, but cannot effectively contract for the investment upfront.

In this case, the MNO’s investment in full 5G could generate substantial value for stakeholders in the transport industry. But the MNO will make this investment only if its share of the value covers costs. The issue is that its share of value is unknown ex-ante, and contracting for its share is precluded by uncertainty in specific-investment outcomes, as 5G use cases are still being developed.

There is a crucial role for government policies to resolve this hold-up problem and ensure that the transition to a 5G-enabled transport system is smooth and effective.

  • On the supply side, there's a clear need for policies that help MNOs deploy 5G networks quickly and widely. This means making changes to spectrum licensing to focus on efficient use, offering financial support to set up 5G in areas where it might not otherwise be profitable, and creating a regulatory environment that encourages investment and innovation – which in some cases may imply more in-market consolidation across Europe.
  • On the demand side, the government can set an example by using 5G technology in public services. This could include equipping (or requiring others to equip) public transport with 5G to allow for real-time tracking and management, or introducing connected and autonomous vehicles for public use. By being early adopters of 5G, governments can show that they believe in the technology's benefits and encourage wider adoption. Public-Private Partnerships (PPPs) can also speed up the use of 5G technologies by bringing together the government and private sector to work on projects such as furnishing public transport networks with 5G. Doing so would make logistics more efficient and improve the experience for passengers through faster connectivity and new services.

By taking on the roles of both supporter and customer, governments can do more than just make public services more efficient; they can also drive the entire sector forward, encouraging innovation, investment and the development of new services and applications by private companies.

As we move towards integrating 5G into transportation, it's important for all involved parties to work together. With the right policies in place, we can fully use 5G's potential to transform transportation, making it safer, faster and more connected.