Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: However uncertain the very near-term may seem, the future is still happening. Consider that the world is set to generate a fivefold increase in data by 2025. It therefore needs the infrastructure to support this. 5G telecoms networks can play a crucial role in solving this challenge. The promise is that such networks can deliver tenfold increases in speed and efficiency with similar reductions in latency. 5G could herald an era of more connected factories and autonomous vehicles. By the middle of the decade, there may be over 1bn 5G connections. Forecasts about the economic benefits 5G could bring are even more optimistic. The reality, of course, may be very different. Any new services offered are only as good as the networks on which they sit. Technology fragmentation (as a result of US-Chinese conflicts) may also impede industry development. Investors should be wary. The most promising opportunities may be found in the tower business and network test spaces.
We are just at the beginning. Over 30 different operators across 20 countries say they have launched 5G services. During the next year, an increasing range of networks are set to move online and consumer devices become available. Sure, the trillion-dollar global buildout of 5G networks is one of the biggest infrastructure projects ever, but almost every business across the value chain is talking up its potential and claiming that the technology is a game-changer. However, the reality is likely to be much more mundane and industry development more gradual than rapid. If history is any gauge (and your author remembers writing extensively about the rollout of 3G services in the early 2000s), 5G is currently in a hype phase. Against this background, not only corporates and consumers, but also investors may be disappointed if they attribute too much hope in the near-term to this new technology.
What is 5G? At its most basic, the next generation of mobile standards, as defined by the International Telecommunications Union, a subsidiary of the United Nations. It refers to a name for the systems, components and related elements that support enhanced capabilities beyond those offered by 3G and 4G services. Most of us now take mobile broadband for granted, with 4G having enabled the rise of online platforms for retail, transportation and the like to almost ubiquitous levels. Looking forward, 5G claims to bring the promise of a fully enabled internet of things into reality, an ultra-low latency and ultra-dense networks that will allow for an overlap of computing power, connectivity and sensors.
Most industry experts consider 5G as a quantum leap forward relative to 4G in terms of speed and throughput. Industry players suggest that 5G can provide up to 100 times greater network efficiency, more than 10 times increased connection density, 10 times greater throughput and more than a ten-fold decrease in latency (data per Qualcomm). To provide some context, if it takes a 90-minute movie 3-4 minutes to download on a 4G network, with 5G, the same movie could take as little as 10 seconds to download (per Verizon, a leading US telecoms operator).
The main reason, of course, for making higher-frequency (or more efficient) spectrum available is simply to account for the data deluge. We have discussed this topic regularly in previous commentaries, but the reality is that the world is producing
and consuming increasing quantities of data and needs the appropriate network infrastructure to support this. In 2018, the world generated 33 Zettabytes (ZB) of data, yet this figure is expected to increase by a factor of more than 5, to 175ZB, by 2025 (per IDC). Thought of another way, UK consumers are, for example, currently consuming 40% more data annually than in the year prior (per Ofcom). Admittedly only half of the world’s population currently has broadband-enabled mobile handsets (per McKinsey), but 5G technology is less about user growth and more about how we use the internet. 5G could take the internet beyond people, to things.
For enterprises, the promise of 5G is arguably more compelling than it is for consumers. At least in theory, 5G networks could herald the smart factory and usher in an era of predictive maintenance; 5G thought of as a connectivity fabric for the digital economy. Manufacturers could use automated machinery, providing and reacting to real-time data to improve efficiency. Meanwhile, transport networks, local authorities and other public bodies could use 5G to improve public services like parking, traffic management and street lighting. Furthermore, any network of fully autonomous cars communicating with each other in real time would require 5G infrastructure in order to function with efficiency.
Self-driving vehicles may sound exciting (or daunting, depending on your perspective), but they are clearly many years away, given the multiple regulatory and legal issues that have been discussed extensively elsewhere. For consumers, the challenge is to identify a ‘killer app’ that may spur 5G adoption. No industry player with whom we have spoken has yet identified such an application (immersive communication involving some form of augmented and/or virtual reality currently seems the most popular). Nonetheless, over two-thirds of Chinese consumers and some 40% of developed world consumers have said that they would be willing to pay (more) for 5G services if it means quicker upload speeds for social media and the ability to play games with little wait-time (per Deutsche Bank).
Over 250 operators in more than 100 countries are currently actively investing in 5G (per GSMA, an industry body). South Korea became the first network in the world to turn on 5G services in April 2019, but some version of 5G is now available in more than 20 different countries globally, with around another 70 operators currently trialling services. The world had approximately 1m 5G users by the end of last year. While this may sound impressive – especially in the context of what has been achieved since the date of new network launches – some 1.4bn smartphones were sold globally last year. The expectation, however, is that 5G users will grow to 37m by the end of 2020 (per Ovum). Looking further ahead, GSMA forecasts 1.1bn 5G connections by 2025, although Ericsson is more optimistic, predicting 1.5bn by 2024. More bullish and longer-term forecasts suggest that 5G could create up to 3m new jobs in America alone, boosting the country’s GDP by $500bn (Accenture) or enable $13.2tr of ‘incremental global economic output’ supporting 22m jobs by 2035 (per IHS Markit). With predictions such as these, it is easy to see how the 5G hype-machine is already in overdrive.
From our perspective, we can identify a number of challenges the industry will need to overcome before 5G can be considered a practical reality. First, any service is only as good as the network on which it sits. 5G will only be meaningful for most when coverage levels are adequate. Consider that at the start of 2017, eight years after rollout, only 60% of Europe’s population have access to full 4G-grade internet services (per GSMA). Moreover, all the figures cited previously regarding superior network speed and reduced latency should be considered theoretical; they rarely get achieved consistently in the real world, given the practical constraints of physics and economics. Just because a handset says ‘5G’ on it does not mean it will always run on a 5G network.
Another matter of importance is fragmentation. One lesson learned from the rollout of previous standards, is that the industry is more successful when it avoids fragmentation in terms of spectrum, technology and operator services. However, technological standards around the world appear to be bifurcating as a result of the growing digital cold war between the US and China. While Donald Trump has said that 5G is “a race America must win”, China officials have similarly been on the record stating that the nation would “do whatever it takes” to be the global leader in 5G. For China, 5G is deeply bound up with its industrial ‘One Belt, One Road’ strategy; the core communication layer for the government’s digitalisation and AI agenda of smart cities, surveillance and so on. With an increased number of ‘things’ connected to 5G networks (maybe electricity grids, water systems, fuel pipelines etc.), the logic not only of cooperation, but also protection against potentially malicious actors only grows. Beyond any considerations about cybersecurity risks and the ethics of privacy/ data security, a failure for the industry to support consistent standards may distort competition, stifle innovation and therefore negatively impact value for users.
Against this background, picking industry winners is unlikely to be easy. Investors should also be aware of the salutary tale of Nokia. Despite being the world’s most popular mobile handset manufacturer in the early 2000s, the Finnish manufacturer did not see the smartphone revolution coming. Massive transfers of value can occur very quickly. At the same time, almost all parts of the telecoms value chain are shifting from being hardware-centric to software-driven. Investors also need to make a distinction between who adds value to the industry and who creates value for shareholders. Perhaps the best analogy is that technological innovators should be thought of like ice breaker ships, providing the way for all others. Few of the major telecoms equipment vendors (hardware or software) have delivered share price outperformance relative to the MSCI World Index over the last decade. Notwithstanding the current debate regarding technological bifurcation, the current leading 5G patent holders are Samsung, Huawei, ZTE, Ericsson and Qualcomm (per 13D Research).
If not the equipment vendors, then what about the network operators? No single operator benefited at the expense of all others during the 3G/ 4G eras – since offered services were (or at least quickly became) broadly similar – and it seems unlikely that things will be different once 5G begins. The bigger challenge remains the chicken-and-egg issue of whether to offer new services before true (5G) network differentiation is possible. This logically may create a lateral investment opportunity within the tower business space. Network densification will inevitably be needed in order to support any form of 5G and towers comprise a scarce asset, especially given their positioning in often-strategic locations. American Tower is the world’s largest tower business (present in 17 countries with over 170,000 towers). Other players include Crown Castle International and Cellnex. Vodafone has also publicly stated that it intends to demerge its towers business.
Whether it is cell towers or indeed any other part of the protocol stack (both hardware and software), all vendors need to test not only that new technologies work – the different parts ‘talk’ to each other - but that they interact with existing infrastructure. Network test businesses offering electronic measurement solutions such as Keysight Technologies may, therefore, be well-placed, especially if they are equipment vendor agnostic. With much still to be resolved and hence proven with 5G, even if 2020 turns out to be a year of relative disappointment for many players across the value chain, the theme looks set to run for many years more. Creating value will likely remain the biggest challenge.
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