What you need to know about investing in 5G

The fifth generation of mobile communication technology will revolutionise industries around the world. We look at what you need to know about investing in 5G and what 5G stocks to keep an eye on.

5G network Source: Bloomberg

'Technology feeds on itself. Technology makes more technology possible' – US author Alvin Toffler.

5G is regarded as such an important key to unlocking the next wave of the world’s technology that it is being dubbed ‘the fourth industrial revolution’.

While today’s 4G networks form the backbone of modern-day industry – seven of the ten most valuable publicly-listed companies in the world rely on mobile data and Internet connectivity – the evolution to 5G will take both business and society to an entirely different level that goes beyond powering social media, streaming services and online shopping.

Read more: how to invest in new technologies

What are the benefits of 5G vs 4G?

The two key characteristics of 5G that make it such a significant improvement over 4G are speed and latency.

At peak performance, 5G can offer download speeds up to ten times faster than offered by 4G (10GB/s vs 1GB/s) – meaning downloading a full HD film takes under ten seconds rather than ten minutes on current networks. And, in reality, it could be up to 100x faster than 4G.

5G will virtually eradicate any latency on the network (how long it takes between sending an instruction, like opening a smartphone app, and for that instruction to be completed), reducing it down to as little as one millisecond from the 50 milliseconds delay offered on 4G. Fractions of a second may seem insignificant but quicker download speeds are nothing without better latency and the anticipated improvement is so drastic that 5G will be capable of handling critical tasks that current networks simply cannot handle.

Driverless cars are a prime example: 49 milliseconds is a huge amount of time for a self-driving vehicle responding to incidents and other road users.

Read more: Who will be the winners of the self-driving car revolution?

Some of the other anticipated benefits of 5G will take longer to come through and won’t be reaped during the initial years. The provision cost is expected to continue declining as the technology develops and coverage expands, mainly because the amount of data being used will continue to rise exponentially as 5G is introduced. Vodafone is eventually expecting the cost of supplying 5G on a per Gigabyte basis to be up to ten times less than current 4G networks.

5G requires a whole new way of thinking

5G faces unique challenges that require both industry and governments to change the models and approaches that have been used to launch 4G and other previous mobile communication technologies. The mentality behind 4G will not work for 5G.

5G will need a lot more infrastructure

Firstly, the structural challenges posed by 5G means the roll-out will be much more gradual than the more sudden launch of 4G. 4G only started to be introduced eight years ago and there still isn’t a single country that has 100% coverage today. 4G and 5G will initially work in parallel with one another much like 4G and 3G do today and the ‘switchover’ to a full 5G service (when 4G would end) isn’t expected until some time during the 2030s.

5G will take considerably longer to roll out because it needs to run on higher radio frequency bands to deliver faster speeds. Problem is, transmission and coverage both suffer the higher the frequency: the fastest 5G networks will run on frequencies that can’t even be transmitted through walls or people and are highly vulnerable to interference. This means more sites (often called small cells) are needed to transmit signals in buildings and on the streets, which require much more infrastructure to be built.

Whereas lower frequencies can cover a wider area, 5G will need more connections to make the network work properly, and most countries are trying to retrofit this new infrastructure on existing equipment like lampposts, antennae or electricity boxes. According to Deloitte, this requires carriers to add 'three to ten times the number of existing sites to their networks'. Hence, 5G will only initially be deployed in densely populated areas with the highest speed and capacity reserved for dedicated networks.

Considering 4G coverage is still not ideal, it is safe to say that the added infrastructure burden means it could be decades before 5G is as commonplace as today’s mobile networks.

Limited 5G capacity sparks debate on network slicing and net neutrality

There is only limited capacity on each radio frequency and those used for today’s 3G and 4G networks are already crowded, sparking fears that there will not be enough spectrum (the industry term for capacity) in the future. Frequencies used for 4G will eventually be repurposed to add extra capacity for 5G, but this is not enough to alleviate concerns.

The main method that the industry will use to ensure 5G is available where it is most needed – network slicing - has caused huge controversy, particularly in the US. Network slicing allows multiple networks to be run off the same infrastructure, each of which can operate within their own bandwidth. For example, the infrastructure at a music festival could be broken down into three ‘slices’: one to provide 5G for general internet access, another to stream the festival to people online, and a third to facilitate communication between emergency services. In short, network slicing allows providers to dedicate different capacity and speeds to different slices depending on what each slice needs, and each slice operates within its own limits.

Self-driving cars are good examples that support the use of network slicing. It is hard to argue against prioritising 5G for services like this or healthcare over scrolling through social media and checking emails. However, it is also an example of how the success of 5G and all the industries that rely upon it are heavily intertwined. As Tesla’s Elon Musk once said, everything only moves as fast as the slowest moving part.

Read more: Investing in electric cars

Still, this logical idea has also sparked concerns about ‘net neutrality’: the principle that Internet service providers treat all data equally and don’t discriminate or charge differently depending on who is using it or how/why it is being used. In a nutshell, those advocating for net neutrality believe slicing allows companies to dictate who gets what speeds and charge what they want for different services.
Considering the United Nations (UN) regards internet access a human right, this debate will rumble on for years to come.

The race for 5G and why it matters

The arrival of 5G poses both opportunities and challenges to governments around the world. The global race to lead the 5G revolution, as well as faster full-fibre broadband, is arguably the most important of the modern era and one that could decide who dominates vital technological advancements, like Artificial Intelligence (AI).

The correlation between 4G and the success of US tech is often under-appreciated. The country was the first to introduce 4G networks, beating Europe and the likes of Japan, which led to the endless list of US tech success stories over the past decade – everything from the social media giants like Facebook and Twitter, search engine behemoth Alphabet and e-commerce champion Amazon. All of these businesses rely on the 4G networks used today and will increasingly lean on the quality of 5G in the future, and although the US was not miles ahead of the competition when it came to embracing 4G the head-start certainly contributed to the dominance of the US in global tech today.

Read more: Where next for the FAANG stocks after tech sell-off?

Today, the contenders in the race for 5G supremacy are vastly different to the one held eight years ago. The biggest new entrant is China which, having been unable to compete with the high-tech industries of Japan, the US and even neighbours like South Korea, has put 5G at the heart of its strategy to thrust the country into the modern era throughout the 2020s. This is hugely significant at a time when the US and China are locked in a trade war that, amongst other things, boils down to concerns about technology and IP being stolen. The US has previously (and temporarily) banned Chinese telecoms firm ZTE from the country. Plus, four out of the ‘Five Eyes’ security alliance - the US, Canada, Australia and New Zealand – have placed restrictions on what type of work their domestic companies can conduct with Huawei, which has made huge in-roads in foreign markets, over fears the Chinese company could pose a security risk. While the UK remains open to Huawei, which works with nearly all the country’s major telecoms providers, some companies have started to review their relationship with BT Group, stating it would not allow Huawei to work on its core 5G network plans.

Read more: US futures fall upon Huawei’s chief financial officer (CFO) arrest and rising trade tensions

Business is operating on a global level to make 5G a reality. There is a huge number and wide variety of partnerships between the world’s biggest telecoms and technology firms. However, governments are increasingly looking inward and screening their partners more carefully.

Unique challenges of 5G require different models

Governments have taken different approaches in the way they encourage the roll-out of 5G and full-fibre broadband, creating a lack of standardisation. Even the European Union (EU) has failed to form a cohesive plan, with its current ‘5G Action Plan’ only guiding developments in France, Germany, Spain and Sweden (although it does have the ‘Digital Single Market’). Plus, all four use different regulatory models. A UK government review on what model to adopt for the roll-out of full-fibre broadband considered five different regulatory approaches, spanning from the mixture of regionally-focused public and private competition in Sweden to the largely unregulated industries in France and Spain where regulation runs at a national level.

For governments, the biggest task is ensuring 5G is rolled out properly and initially used in areas where the maximum reward can be earned. Much of this will come down to incentivising the private sector and creating the right environment for the technology to flourish.

The more limited coverage and more intense infrastructure requirements; meaning building the 5G network will be expensive for business and pose problems when it comes to introducing it to rural areas.

Importantly, the issue with range poses a bigger problem for larger nations like the US and China than it does for smaller countries like the UK or Japan. This has also prompted most countries to change the way they auction-off spectrum (radio frequency capacity) to telecoms companies by taking a more regional view rather than the national auctions that have been used for 4G to ensure it is used efficiently.

One way both industry and governments are trying to tackle this is through collaboration, with companies sharing infrastructure and more public sites being made available to facilitate new connections.

5G: an international comparison

5G services have started to be introduced this year with US firm Verizon launching the 'world’s first commercial service', 5G Home, in four US cities in October. Rival AT&T will have launched 5G services in 12 cities by the end of 2018 with another seven in the pipeline during the first half of 2019.

As expected, the UK is lagging behind with 5G not being rolled out until 2019 or possibly 2020. The government has said it expects competition to drive the expansion of 5G services as companies initially focus on bolstering existing 4G services with faster 5G capabilities, in turn encouraging rivals to keep up. The tactic does have merit, with the largest UK mobile carrier, BT’s EE, stating it hopes to gain a first mover advantage by launching its own 5G service in 16 cities before the end of next year. Still, widespread coverage is not expected in the UK until 2022 and the government doesn’t expect over half of the UK to have access to 5G before 2027.

Elsewhere, China is reported to be building 5G infrastructure at an “unprecedented rate”, according to Deloitte. Virtually all the towers, small cells (the additional sites attached to lampposts etc) and core connection sites are owned by one company, China Tower, which is reported to have opened 460 sites per day in 2017. At that rate, China is managing to add more infrastructure in three months than what US tower and telecom companies have in the past three years. Overall, Deloitte estimates China has almost 2 million sites compared to just 200,000 in the US, and that China has 13 more sites per 10 square miles and three times as many per capita than its Western rival. One US company that has seen shares surge higher this year is American Tower, which owns about 40,000 towers that are prime for additional 5G equipment to be added, on expectations it will be benefit as US infrastructure investment steps up. In the UK, mast and fibre infrastructure company Wireless Infrastructure Group recently raised £220 million worth of debt to fund new 5G work.

Although the UK is not at the forefront of the 5G and full-fibre race, it is performing relatively well compared to the rest of Europe. Full-fibre broadband, a vital and complimentary partner to 5G, has barely started to reach UK homes and businesses whereas the likes of South Korea and Japan have almost perfect coverage. However, many European countries, including Germany and France, still lack superfast broadband coverage let alone faster, full-fibre broadband. Although, there is clear evidence in some countries like Spain and France that the development of full-fibre has taken investment away from superfast coverage:

Broadband and full fibre coverage chart

Broadband and full fibre coverage chart

Telecoms convergence: full-fibre, 5G and more

Full-fibre broadband is an important element to the 5G story. Not only does 5G need dense fibre networks to operate but it is also solving problems with the concept of fixed-line broadband. For areas where cabling broadband networks can be too expensive or impractical, 5G mobile data services are expected to be quick enough to offer a viable alternative: on a small scale, this could help boost Internet access and speeds in rural areas and, on a larger scale, it could prove the solution to the infrastructure problems across the likes of Africa. However, the range limitations of higher frequency 5G still pose a problem.

The development of broadband is also relevant because of the growing trend of convergence within the global telecoms industry, whereby companies bundle numerous services like TV, mobile and broadband into a single and more attractive package for customers. Both BT Group and Vodafone have been pushing bundled offers with a view of increasing sales and loyalty while reducing customer churn.

Read more: BT Group, the ‘complex and overweight’ telecoms giant

This is gradually moving beyond telecoms services and expanding into the new range of smart devices and the digital services used on them. AT&T’s acquisition of Time Warner and the news it is launching its own HBO-powered video streaming service to rival the likes of Netflix demonstrates how telecoms providers are eager to offer more services to their customers and give them more reason to sign up, and stay.

Read more: Netflix vs Disney vs AT&T and the battle for video streaming supremacy

T-Mobile and Sprint: the first 5G merger

'It is critically important that America and American companies lead in the 5G era. Early U.S. leadership in 4G fuelled a wave of American innovation and entrepreneurship that gave rise to today’s global mobile Internet leaders, creating billions in economic value and job growth. Only the combined company will have the network capacity required to quickly create a broad and deep 5G nationwide network in the critical first years of the 5G innovation cycle – the years that will determine if American firms lead or follow in the 5G digital economy' – T-Mobile and Sprint.

The trend in convergence, coupled with the need to collaborate on 5G, has already encouraged the first proposed mega-merger as T-Mobile and Sprint aim to create a $146 billion giant in the US wireless, video, and broadband markets. The justification for the merger is a great demonstration of the challenges the industry face. They expect to make at least $6 billion in cost-savings (helping lower the cost burden) and combine their respective spectrums and infrastructure (addressing the range problems).

The two claim a combination is the only current option on the table for the US to ensure it has a company with the resources and scale it needs to ensure it wins the 5G race. Although both Verizon and AT&T hold considerably more spectrum than what the combined company would have, T-Mobile argues everyone currently lacks the network required to ensure a quick national roll-out.

Although there are still discussions about whether the deal can get clearance so it can close in the first half of 2019 as expected, it is highly likely that this will be the first of many 5G-inspired mergers in the coming years. A merger between Telefonica’s O2 and UK network Three was blocked only two years ago because of concerns it would weaken pricing competition. This is another issue for governments as they can’t acknowledge 5G needs greater collaboration without opening up the possibilities of some big-name mergers in the process.

5G stocks will have to spend big to win big

The greatest challenge for telecoms companies and infrastructure providers is balancing time and money: ensuring they invest the right sums without blowing the budget or under-spending and being left behind. Rolling out 5G, regardless of the benefits for the world, is not cheap.

The UK government’s ‘high-level assessment’ suggests it will cost £4 billion to £5 billion just to bring existing sites up to scratch so they can cope with the minimum frequencies needed for 5G and to introduce additional capacity in high-demand areas. Another estimate implies the cost of deploying the 200,000 small cells (the connectors that would be attached to lampposts, for example, to boost the low range, high frequency spectrum) needed to provide outdoor 5G coverage in “most urban areas” would cost a further £3 billion.

Further, the Telecommunication Development Sector (ITU-D), an international body, estimates the cost of kitting-out a small city with the necessary small cells would be around $6.8 million while a large, dense city would cost closer to $55.5 million.

The ITU-D forecasts it would cost £71 billion to roll out a 'ubiquitous 5G network' across the UK. Notably, that sum plummets to £38 billion on the basis that companies share infrastructure, demonstrating the importance and possible benefits of increased collaboration. That compares to the estimated $300 billion that would be needed to do the same across the US, and the €300 billion to €600 billion budget needed to get 5G along the length and breadth of Europe.

The upfront costs are high too: the first 5G spectrum auction in the UK saw Vodafone, BT and Telefonica spend over £1.2 billion alone (out of a total of £1.35 billion) on new capacity. Although the capacity sold under the lower frequency of 2.3GHz can be used immediately on existing 4G networks, the capacity sold under the 3.4GHz spectrum is earmarked for future 5G use. Securing spectrum is a long-game but the returns from the money spent by the trio on the higher frequency, close to £1 billion, are a long way off.

Read more: Where next for European telecoms giant Vodafone?

Making 5G profitable: what happened with 4G?

5G is not designed to outright replace 4G. Initially, it will be used to improve existing networks (to alleviate congestion and speed-up existing 4G, often described as ‘4.5G). The fastest speeds offered over the highest frequencies will be confined to individual buildings and small bespoke networks, for a lone hospital or factory for example.

The fact that 4G remains relevant and acts as a foundation on which to build 5G is important because the industry has already invested vast sums into developing 4G and has only just started to recoup their investments. In the UK, the average cost of supplying each unit of mobile data in 2012 was near £120 but in return they were getting just £20 back from customers. It was only in 2016 that the cost of supplying 4G mobile data fell below the amount consumers spent on data. However, this has not been because spending has increased (its edged down over the last five years) but because people have been using more data – six times as much as they did in 2012.

The amount being invested in mobile networks in the UK and Europe has historically trailed that in the US and Japan, although UK telecoms have managed to grow revenue from mobile services at a rate that largely outperforms the worldwide average. Global mobile revenue growth over 2017 to 2020 is forecast to run at about 1% per year, whereas the UK delivered growth of between 0.9% to 1.5% over the latter half of last year.

The four UK mobile network operators – BT, Vodafone, Three and Telefonica – have marginally grown their capital expenditure from around £2.4 billion in 2014 to £2.6 billion in 2017. The UK government has said, because capex has 'stayed broadly flat the last few years', that operators should be able to 'collectively' invest £1 billion extra per year on rolling out 5G. Based on last year’s spending, the UK government expects at least 28% of all investment in the UK to be dedicated to 5G, which it believes is sufficient to introduce 5G 'on a mid-2020s timetable'.

Read more: 5G stocks: what industries will benefit from 5G?

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