5G is coming, and closing the gap on fixed-line broadband
It’s regarded as the future of mobile, but a recent research trip to the US drove home that 5G is also going to be one of the biggest investment themes this year.
Telecommunications companies are particularly excited about the implications 5G has for fixed wireless and the companies we spoke to give useful insight as to what we can expect from the big players in our region.
Big speeds, big capacity, big opportunities
Telecoms giant Verizon plans to use 5G network’s capacity for fixed wireless. When fully operational, the company expects its new 5G network will be 10-20x faster than with existing 4G technology and carry 10x more data. On top of that, it will be 10-12x cheaper (on a cost/byte basis) to run.
This speed and cost savings will significantly close the gap between fixed-line and mobile broadband services, and this is likely to result in many subscribers shifting to a mobile-only services.
The decline of the Fixed Line
Verizon’s target is to move 30 million homes in the US (around 25% of its subscriber base) to fixed-wireless services.
In fact, the company has already stopped investing in fixed-line access, as wireless is set to be more profitable than fixed-network customers. As customers make the switch, Verizon is projecting fixed lines to revert to negative growth within five years.
In Australia, Telstra, Optus and Vodafone are all building 5G networks.
We believe that Telstra, with around 50% share in both mobile and fixed broadband markets, is well placed to also switch some of its customers from fixed to mobile. Like Verizon, this should be a driver of future earnings, with Telstra’s mobile business earning around 40% EBITDA margin versus a barely profitable NBN business1.
Similarly, in New Zealand, Spark New Zealand is targeting approximately 25% of its subscriber base for fixed wireless. As incumbents shift customers onto more-profitable mobile products, competitors such as Optus and Vodafone will follow – which has implications for fixed-line operators such as NBN and Chorus New Zealand.
Cost savings from the cloud
The investments made by telecommunications companies into 5G will enable them to shift much of their legacy networks to the cloud, allowing automation of many of the manual processes in older legacy networks. This automation allows greater reliability (less human error) and targeted costs reductions.
Verizon has already stopped investing in fixed-line access, as wireless is set to be more profitable than fixed-network customers.
For example, Verizon is looking to reduce 47,000 positions (around 30% of the workforce) by next year. Telstra has also flagged a labour reduction, targeting 8,000 positions.
Tailored customer access
Unlike legacy networks, the greater automation being employed by next-generation networks will allow telecommunication companies to evolve tiered pricing structures for corporate clients and therefore will enable telecommunications companies to greater monetise the increasing demand for speed and connectivity, rather than become ‘dumb pipes’.
Connected to incremental revenue
Just as we saw with the rollout of 4G, smartphone penetration grew rapidly, driving the ‘app economy’, the rollout and adoption of 5G, and the greater speed and capacity, is likely to lead to more connected devices and new uses which are yet to be conceived (think autonomous vehicles, augmented reality, surgery, wearable devices, gaming, smart homes etc.).
This is all incremental revenue for a telco as it will leverage the existing infrastructure.
Some investment will be required to capture this but, we believe, will be within the current capex envelope (outside of the spectrum auctions).
The long-term picture
However, this will be a multi-year process. Most telecommunications companies will roll out a 5G network in line with customer demand. But customers will wait for 5G-enabled handsets to hit the market.
Samsung and some of the Chinese handset manufacturers are due to launch 5G-enabled devices in the first half of this year. But it won’t be until Apple releases its 5G handset next year that we will see a consumer shift to 5G, given Apple has a 54%2 of the handset market.
Nonetheless, it is shaping to be a more positive environment for the communications sector over the next few years driven by new technology and new operating models.
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1 Source: Martin Currie Australia, company reports
2 Source: Statista; Market share of leading mobile device vendors in Australia from April 2017 to April 2018
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The information provided should not be considered a recommendation to purchase or sell any particular security. It should not
be assumed that any of the security transactions discussed here were or will prove to be profitable
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