Wireless technology for mobile telecommunications commenced with analog and voice-only 1G in 1981. In the early 1990s, 2G enabled users to send SMS and MMS messages between two mobile devices. In 1998, 3G brought faster transmission speeds allowing internet browsing and video calls, and in 2008, 4G enhanced prior capabilities while also providing the ability to download and upload larger files such as video. It seems a new generation is developed every decade.
Who benefits from 5G?
The advent of fifth generation (5G) technology now has the world on the precipice of a major communication and mobile internet revolution. We were recent investors in Telstra at around $2.70, and much earlier in Apple below US$100, so we cannot ignore the implications of a 5G-connected world.
As providers switch to offering radically faster 5G speeds, an acceleration in the adoption of Internet of Things (IoT) devices and virtual and augmented reality will occur. We will probably move into edge computing (where computation is performed on distributed ‘smart’ devices or ‘edge devices’ as opposed to primarily taking place in a centralized cloud environment), smart cities, efficient energy usage and autonomous vehicles. I say ‘probably’ only because cheap interest rates have hitherto played a part in the willingness of investors to fund loss-making start-ups. Higher rates could curtail investor enthusiasm.
Investors should also avoid being blinded by the promises of new technology changing the world because history shows it is the consumer that benefits from such changes, more so than shareholders. By way of example, airlines, television manufacturers and car makers have indeed changed the course of human history but it has often been to the detriment of their shareholders.
That said, telcos, equipment makers, chip manufacturers, network utilities and data centre operators are just some of the businesses that may benefit or be disrupted. 5G will produce some winners and many losers.
The 5G opportunities
In June 2018, the 3rd Generation Partnership Program (3GPP), a global telecommunications standards partnership, announced a final standardisation for the first phase of 5G for new, standalone 5G deployments. The previous standardisation, finalised in December last year, covered non-standalone deployments, where 5G’s dramatically-faster internet speeds are achieved using existing 4G infrastructure.
The June standardisation will permit high-speed connections for much more than just mobile phones. Cars, trucks, digital concierges, autonomous robots, and hitherto unimaginable devices will be given rein to literally change the course of human history again. Verizon and Nokia jointly recently achieved throughput speeds of up to 1.8Gbps through carrier aggregation, where an individual device, such as a smartphone, connects to multiple cellular frequencies at once. By comparison, 4G can deliver 450Mbps in Sydney’s CBD but the average is about 33Mbps. According to another report, “Verizon and Nokia transmitted nearly seven times faster than 4G’s latency …”
Here’s how Balázs Bertényi, Chairman of 3GPP, painted the accomplishment of the second standardisation:
“5G NR Standalone systems not only dramatically increase the mobile broadband speeds and capacity, but also open the door for new industries beyond telecommunications that are looking to revolutionize their ecosystem through 5G”.
Today, decreasing latency – the delay prior to the transfer of data beginning after its request – is the goal, and sub-one millisecond is the aim currently required for satisfactory reaction times of autonomous vehicles. The demand for private vehicle connections is accelerating rapidly. 5G will enable vehicle-to-vehicle and vehicle-to-infrastructure communications at speeds allowing cars to anticipate and react to dangers much faster than the organic matter that sits between the driver’s seat and the steering wheel (humans).
The 5G spectrum ultimately adopted will depend on the carrier, country, application, spectrum auction results and the user’s location. But multiple radio spectrum frequencies and shorter wavelengths will allow 5G to support an estimated one thousand more devices per square meter than 4G. This is essential, for example, for seamless communication between and among multiple autonomous vehicles in crowded urban environments.
Unsurprisingly, countries around the world are racing to deploy the networks that would make all of this possible. In South Korea, the major carriers, including SK Telecom, KT, and LG Uplus, agreed to work together to build a single 5G network, keeping capex down and accelerating its roll out, which begins in December 2018 and is expected to be completed by 2022. In India, the government-owned telecom department is pressing ahead on its 5G rollout as early as 2020, while expanding the size of its spectrum releases. From Japan to Serbia, the desire to deploy 5G and take advantage of its benefits is unbounded.
Investors now have many ways to invest in this space. In addition to the usual telco suspects such as China Mobile, SingTel, Vodafone, AT&T, Verizon, T0Mobile, Sprint and Orange, there’s a global telecoms ETF managed by iShares (IXP) and a US Telecoms ETF also run by iShares (IYZ). Fidelity run a MSCI Telecoms Service Index ETF (FCOM) and there is also the S&P Telecom ETF SPDR (XTL).
Nearly 80% of the estimated US$350 billion spend on 5G infrastructure will be on hardware and network transformation projects. Cisco (CSCO), DellEMC, Hewlett Packard Enterprise (HPE), IBM (IBM), Lenovo (LNVGY) as well as Nokia (NOK) and Ericsson (ERIC) are expected to benefit. Tower cells will be required and owners include American Tower Corp (AMT) (20,954 towers including US, India, UK, Mexico), Crown Castle Corp. (CCI) (22,231 towers, US and Australia) and AT&T Towers (10,792 towers in the US). There are long lists available for each country.
Upgrades and adoption periods
When the current 4G standard was released in 2008, it didn’t become a commercial reality until 2010, and a sharp 75% jump in smartphone sales, to over 300 million units a year, occurred. While newer generations of phones are backward compatible – a 4G phone can communicate through a 3G – a 4G phone will not be able to communicate through the 5G network. Each new generation typically requires cell phone providers to make upgrades on their towers, requiring end users to upgrade devices such as phones so that signals through the new infrastructure can be received and sent. In its 2018 Mobility Report, Swedish telecom equipment manufacturer, Ericsson, estimated 1 billion 5G devices will be in use by 2023, accounting for approximately 20% of mobile data traffic. Apple, Samsung, Sony, OnePlus, Huawei are leading mobile device manufacturers.
In turn, these devices, which include mobile phones and PCs, will need 5G chips. Intel (INTC) is currently seen as the leader in chips, while Samsung, Nokia, Huawei, Ericsson and ZTE are also major 5G participants described as leading 5G development.
Investors however should again be reminded not to get too excited or blindly believe that the benefits to consumers and society will automatically translate to huge profits for providers and suppliers. The requirement, for example, of thousands of small cells (on towers and sides of buildings) as well as ‘beamforming’ – an important highly directive feature for base station antennas – will be essential to maximize 5G’s capabilities and these will be a huge capex burden for providers.
More of Moore’s Law
In 1965, the semiconductor pioneer and cofounder of Intel, Gordon Moore, observed that the number of components that could be mounted economically on a standard computer chip was doubling every year. Similar laws can be observed in everything from photovoltaic cells to broadband capacity and they have important implications for investors. Back in 1954, the average price of a transistor was about US$5. Over the following 50 years, the price of computing power steadily dropped and today an integrated circuit is worth a billionth of a dollar. The consequence is that manufacturers and suppliers need to run faster and do more just to stand still. As power or capacity increases and costs fall, markets open, competition increases and the consequence is slimmer margins.
Investors excited about the prospects of 5G need to keep this dynamic in mind, along with the knowledge that 6G will be rolling out by 2030.
Roger Montgomery is Chairman and Chief Investment Officer at Montgomery Investment Management. This article is for general information only and does not consider the circumstances of any individual.