What’s Holding Back 5G

But the uneven growth of wireless-service revenue in many countries has raised fears that those expensive upgrades might not meaningfully lift network operators’ profits.

To understand why, consider the two kinds of 5G technology often mentioned in the same breath. One is basically a souped-up version of 4G, making smartphone downloads and wireless hot-spot connections even faster. Such coverage is quickly becoming commonplace in rich countries. The number of world-wide 5G connections topped 520 million last year, according to telecom-industry researcher Omdia. But it remains to be seen whether telecom companies can reap much new revenue from these consumers.

The second version promises to change the way the business world works by creating swarms of smart devices, distributed data centers and private cellular networks. This is where the big money is, because it could create a whole new crop of internet-connected industries where none existed before. But there are still few businesses using or offering this advanced type of wireless service.

Industry optimists insist that the second wave is on its way; it just will take several more years for such innovations to move from the drawing board to the real world.

But even if the telecom industry’s optimists are proved right about the coming 5G boom, it’s no guarantee that their employers will reap the rewards. Big technology companies including Google owner Alphabet Inc., Amazon.com Inc. and Microsoft Corp. are making moves to profit from these new mobile standards by developing software and services tailored for 5G networks.

How long it takes for true 5G to take hold—and how much businesses will be willing to pay for it—could have long-lasting effects on telecom companies’ investors, customers and even the economies of the countries in which they operate.

So, why hasn’t 5G been the game-changer yet that so many in the industry predicted? Let’s take a closer look at some of the reasons.

Consumer apathy

Wireless companies looking to profit from 5G investments must first convince their existing base of cellphone users that the faster service is worth paying a premium to use. They have seen mixed results on that front.

Big Bets

Telecom companies have spent billions of dollars on equipment and licenses to prepare for 5G after a decade of uneven results from 4G service. Big tech companies are meanwhile ramping up infrastructure investments.

Global spending on government spectrum auctions

Mobile network operator revenue growth, quarterly

Annual capital expenditures

Mobile operators

Big tech companies

Global spending on government spectrum auctions

Mobile network operator revenue growth, quarterly

Annual capital expenditures

Mobile operators

Big tech companies

Global spending on government spectrum auctions

Mobile network operator revenue growth, quarterly

Annual capital expenditures

Mobile operators

Big tech companies

Global spending on government spectrum auctions

Mobile network operator revenue growth, quarterly

Annual capital expenditures

Mobile operators

Big tech companies

Global spending on government spectrum auctions

Mobile network operator revenue growth, quarterly

Annual capital expenditures

Mobile operators

Big tech companies

On the positive side, cellphone carriers like Verizon Communications Inc. and T-Mobile US Inc. have amassed hundreds of thousands of 5G home internet customers in areas where there was previously less competition for customers. The faster internet services rely on tens of thousands of U.S. cell towers recently upgraded with new 5G equipment.

Both wireless companies have said they plan to reach a few million of those broadband users in the coming years. That would be a small slice of revenue at U.S. companies that each boast more than 100 million cellphone users, though the extra revenue from an already-built network could help their bottom lines.

The willingness of existing smartphone customers to pay a premium for 5G is less apparent. Verizon in 2019 tested a $10 monthly fee for certain mobile 5G links, for example, before abandoning the surcharge. The carrier now includes full 5G service with all of its premium wireless plans, which include other perks like subscriptions to Disney+.

In February, consumers polled by the Recon Analytics Mobile Intender Survey ranked “better 5G” fourth among the reasons they would choose or drop a carrier, well behind more basic concerns like lower prices and network coverage.

Some of that popular indifference stems from the activity that still chews up most of a wireless network’s bandwidth: video. The spread of 4G connections allowed video services like Netflix and TikTok to flourish by making high-definition videos available everywhere. The perks of a 5G connection—like seamlessly streaming even higher-quality video—are wasted on small screens that can’t even display ultra-HD video.

All of this means that people are happy to upgrade to a 5G phone but won’t necessarily pay a premium for a matching cellular connection. Meanwhile, there are few new apps out that can show off what the new wireless standard can do.

“People want faster speeds, no doubt about it—but they don’t care that it’s 5G because there’s no killer app for that,” says Recon Analytics chief Roger Entner.

Dearth of devices

Many telecom-industry experts predict that 5G’s killer app won’t be one thing, but instead will be its ability to transform industrial settings, where an “Internet of Things” like sensors, vehicles and other equipment is already serving farms, factories and transportation networks. But manufacturers have yet to mass-produce many 5G-enabled things—a chicken-and-egg problem that bedevils the telecom world.

Schneider Electric SE, for instance, was retrofitting its 64-year-old electrical-equipment factory in Lexington, Ky., to boost productivity with Wi-Fi-connected digital sensors and other tools. But when the French industrial giant built a new private wireless network to improve efficiency, the off-the-shelf sensors and robots it used needed to be adjusted to become 5G-ready

So, Schneider hired NTT Ltd., a subsidiary of the Japanese telecom giant Nippon Telegraph & Telephone Corp. 9432 0.18% , to manage its network and wire up new machines to make them 5G capable. The machines connect to a custom-built 5G network only available around the factory. While the project’s leaders say those high-speed links make the machines more useful, they weren’t initially designed for a cellular connection.

“Where are the devices?” asks Shahid Ahmed, executive vice president of NTT. “Right now, we end up custom-building almost everything.”

Technical difficulties

It’s not just a lack of devices that is causing companies problems. Some of 5G’s promised benefits for business users are bumping up against the technical limits of the technology.

To enable companies to take advantage of 5G, networks need low latency, meaning a bit of data will make a quicker round trip through a network’s chain of circuits and microprocessors than it would through a comparable 4G connection. Trimming latency could allow a range of sensitive applications to take off. But these lightning-quick reflexes are hard—and expensive—to build into a network.

“We’re battling it milliseconds at a time just like everyone else,” says Dave Mayo, executive vice president for network development at Dish Network Corp. He says his wireless company has succeeded in getting various parts of a complex new network working seamlessly.

The responsiveness of a 5G network, which is measured in milliseconds, also depends on the physical distance a piece of information has to travel before it is processed. That means low-latency applications like videogames and augmented-reality headsets could end up confined to urban areas where companies have made the necessary investments. Miniature data centers at the base of every cell tower would be “utopia” for 5G software developers, Mr. Mayo says, but tech and telecom companies will probably make more targeted investments that could make 5G technology more powerful in some geographic areas than in others.

Breaking the bank

Although large U.S. cellphone carriers have spent billions of dollars on 5G, other carriers—especially in emerging markets—have been reluctant to plow scarce financial resources into 5G technology while other priorities demand their attention. At the same time, these executives are bristling at the cost of obtaining new wireless-spectrum licenses that are suitable for the next-generation signals.

Such reluctance stems from the fact that the smartphones that connect to those networks are still too expensive to buy in much of the developing world—which means it may be a better investment for them to beef up 4G services in those countries instead of building up 5G. Cellphone carriers in North America routinely offer discounts and other subsidies for smartphones that cost more than $1,000 apiece. By contrast, the average mobile device sold in some of Latin American operator Millicom International Cellular SA’s TIGO 1.60% markets costs about $30.

“The rush into 5G only forces capital away from where it’s needed,” says Millicom Chief Executive Mauricio Ramos. “Let’s finish the job on 4G.”

Mr. Ramos says that many developing-nation cellphone carriers are devoting scarce resources toward fiber-optic infrastructure and more 4G equipment to cover millions of users who still lack reliable mobile-phone service.

“Not a penny spent on 4G will be lost,” he adds, because the 5G networks are compatible with the previous generation of smartphones.

GSMA Intelligence, the wireless trade association’s in-house research group, estimates that 5G investments will make up 97% of North American carriers’ capital spending between 2021 and 2025. That share drops to 63% in Latin America, the Middle East and North Africa and 34% for sub-Saharan Africa.

Who profits?

The 5G future that telecom companies have promised—high-speed internet connections, low-latency links to nearby data centers and swarms of smart devices ready to tap into those networks—might be inevitable. But even then, the telecom companies that have invested in those systems risk losing the money game to big tech companies poised to take a valuable share of a still-nascent market.

Wireless-industry leaders often speak enviously of how 4G led to a financial boom for the companies that took advantage of 4G’s capabilities—phone and app makers, for instance—while the telecom companies themselves struggled to increase revenue.

Telecom companies failed to capitalize on the boom for a variety of reasons. Some companies, for instance, invested in growing sectors like streaming video and data-center management only to abandon those bets after nimbler rivals took market share from them.

“Incredible value is there to be made, but too often in the past, as a sector, we have left too much of that value on the table,” Andrew Penn, chief executive of Australian network operator Telstra Corp. TLSYY -1.43% , said during a recent appearance at the industry’s Mobile World Congress event in Barcelona. “The telecommunications sector has provided the platform for growth but others have realized the majority of it, and we can’t let that happen again.”

Some telecom and technology executives have privately expressed doubts that domestic phone and broadband companies would be in as strong a position as big tech to profit from clients looking to run complex 5G applications in the cloud. If big cloud-services providers are the companies billing clients for 5G software, data storage and even private networks that take the place of Wi-Fi or wired connections, telecom companies could be reduced to a secondary role that earns them less profit.

Despite the apathy and delays, the high costs and low return so far, many telecom companies remain optimistic. Verizon, one of the world’s biggest spenders on 5G spectrum and infrastructure, said during a recent investor update that the new high-speed wireless technology would dramatically boost its growth over the coming years.

The company cited opportunities in selling cellphone users more expensive plans, new business from wireless home broadband service and the more long-term opportunity from selling mobile edge compute services for businesses—which promise to make things like manufacturing much more efficient.

With mobile edge, manufacturers could use software that runs on cloud-computing servers on the factory floor or at a nearby cell tower—instead of in faraway data centers—to make things like assembly-line robots more responsive.

Verizon plans to offer those mobile edge compute services in two ways. A private-network model lets the cellphone carrier control its relationship with the client. But Verizon has also struck agreements to build public varieties of mobile edge compute systems that draw on resources from Amazon Web Services, Microsoft’s Azure and Google Cloud Platform. Clients may choose either option.

Verizon Chief Executive Hans Vestberg says it makes “no difference when it comes to our potential to make revenue and profit” whether a business customer interacts with Verizon or a big cloud-computing company to run a private 5G network.

At Ford MotorCo. ’s Dearborn, Mich., production line for electric trucks, AT&T and Azure have partnered to provide 5G services. AT&T business chief Anne Chow says both service providers generate revenue by running parts of the auto maker’s nascent factory-area 5G network, which helps workers send software updates to vehicles over the air, scan components for imperfections and keep phones and tablets connected to the internet.

“It’s very much a relationship of equals in support of a shared client,” she says.

Yago Tenorio, director of network architecture at European telecom giant Vodafone, VOD -0.63% says tech and telecom companies will share the benefits of providing 5G services. But he says network operators enjoy a key advantage because they control hundreds of thousands of points of presence—space near cell towers and other prime real estate—that could support low-latency applications like drones, augmented-reality glasses and software that has yet to be invented.

“That may be 10 years away. But that is the direction [the industry is traveling]. So I think this time the gods favor the operators,” he says.

Mr. FitzGerald is a Wall Street Journal reporter based in Washington, D.C. He can be reached at [email protected].