Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 278

Are there profits from the 5G revolution?

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.

 

10 Comments
mc
November 03, 2018

4G already provides excellent download (and upload) speeds where the vast majority of Australians live, but loses out to the NBN and ADSL for many applications on price grounds.

While I see a lot of press about how amazingly fast 5G will be, when is the cost likely to be comparable to NBN pricing for use in homes and offices (and everywhere else with wifi now)?

Greg
November 11, 2018

Every base station requires fixed line backhaul (fibre) and putting this in is expensive.
5G requires higher frequencies (for bandwidth) which means shorter range which means more base stations to cover the same area which means more backhaul and that has to be paid for.

Ben
November 02, 2018

How about Qualcomm!? Is Intel the real leader in chips innovations, specially when it comes to the chips that connect devices to networks? Also how about royalties in 5G bands; is it going to be similar to what happened with 4G , when Qualcomm was and still the main beneficiary?

MIck McGuire
November 02, 2018

Roger. Do you have any knowledge of 5G's range.
I have read it is only good for a couple of hundred meters.
That would make it's rollout very expensive and useless to us fringe dwellers.

Greg
November 11, 2018

5G requires more bandwidth.
More bandwidth requires higher carrier frequencies.
Higher carrier frequencies means less ability to bend around obstructions meaning shorter ranges.

john gannon
November 02, 2018

does moore's law apply to telcos? they are rentiers not component manufacturers.

Wes Smith
November 01, 2018

Roger....there is an interesting interview between Alan Kohler & Ken Sheridan (NTC) where 5G gets a mention & NTC's plans.
Worth a listen

Dave
November 01, 2018

If Korean companies can cooperate to build the infrastructure in a small geographic area such as Korea wouldn’t it be great if Telstra, Optus and TPG/Vocus did the same here and then competed for customers. Smaller capex spend should give better profits to providers and cheaper costs to consumers. Win/win

Greg
November 11, 2018

We have had a few joint ventures here.
Telstra/Orange, Optus/Voda

Frank
November 01, 2018

Thanks, Roger. Great summary not only of the investments, but also what 5G will do for us. It's too easy to assume all companies participating will suddenly have a gravy train.

 

Leave a Comment:

     

RELATED ARTICLES

5G is coming: who wins and who loses?

Is 5G all hype or real investable opportunity?

Internet of things and the power of 5G technology

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.