How Safe Is Telecommunications Companies’ Trillion-Dollar 5G Investment?

Select cities across the world already boast of 5G networks with many more to join in the near future. If all goes according to plan, the new networks will provide the backbone for mobile communication throughout a large portion of the 21st century. They will also play a pivotal role for the spread of technologies such as driverless cars, the Internet of Things and virtual reality.

For telecommunications companies, who will be investing billions of dollars in 5G networks, the technology could catapult revenue and open new business opportunities; a promise that has led to a spur of 5G-related M&A. That is if things according to plan. For now, though, many crucial business cases remain hazy. All of which begs the question: is 5G a sure thing for telecommunications companies or the equivalent of an unprecedented large roulette bet?

The Sky’s The Limit    

When speaking to telco industry insiders and experts, there is much excitement about 5G networks’ ability to open up new revenue streams, as well as grow existing revenues.

One could pretty much fill a phonebook by listing the industries that could be revolutionised thanks to 5G’s data transfer speeds and low latency. To pick a few industry highlights:

  • Manufacturing: smart factories and Industry 4.0
  • Utilities: smart grids
  • Agriculture: farming automation
  • Retail: VR dressing rooms
  • Healthcare: wearable healthcare devices
  • Gaming: streaming and mobile games
  • Restaurants: inventory and stock management
  • Marketing: mobile display advertising

Each industry will see far more widespread changes thanks to the new networks than there is room to cover in full here. In each case, 5G will improve a wide array of existing solutions and lead to entirely new products and services. Many of the near-future opportunities across industries are intrinsically linked to IoT, whose full potential could be unlocked by 5G.

Telecommunications companies stand to gain by providing the networks, as well as services, such as cloud computing and other, relevant applications, such as online commerce and e-payments. Further down the line, 5G looks likely to become the backbone of disruptive new technologies like self-driving cars and smart cities – again leading to new revenue streams.

Analysts are still busy trying to gauge the exact size of the future revenue growth. One US-focused report estimates that 5G networks will generate $533 billion in U.S. GDP over a seven-year period and $1.2 trillion in long-run consumer benefits.

Rising 5G M&A

While the first 5G networks are installed, there is much left to be done before they become ubiquitous. The process will be costly, with infrastructure expenditures alone running into double-digit billions of dollars over the coming years. With many telecommunications companies facing a dearth of internal resources and expertise, partnerships and acquisitions are on the rise. The partner companies themselves are also engaging in M&A to provide services on the scale 5G necessitates.

Data: MergerMarket Graph: BDO Global

5G network infrastructure will be centred on two pillars: cell towers and cable/fibre optics, and as result there are a lot of deals in these particular sectors.

Data MergerMarket, Graph: BDO International

The 5G activity is contrasted by a slight drop in M&A activity in the telecommunications space.

Data: MergerMarket Graph: BDO International

Telecommunications has been undergoing gradual consolidation for several years now, and it seems like something similar is happening in the 5G space. We can expect to see more deals involving especially physical infrastructure such as fibre networks and related software solutions. Other areas of increased activity will likely include 5G-related service providers and technology and media companies developing solutions that take advantage of 5G’s capabilities.

The Big Bet

Spending capital on M&A comes on top of what is already a massive investment for telecoms. A recent report from Greensill predicts that the cost of rolling out 5G technology will top $2.7 trillion by the end of 2020. Upgrades to infrastructure will account for $1 trillion of that total, in part due to the many high-band frequency towers 5G relies on for its high bandwidth and low latency.

In other words, telecoms need 5G to be a runaway success to recoup expenses; something that is easier said than done. As Graeme Ferguson, director of S&P Global Ratings, told The Nikkei earlier this year:

"Monetizing 5G investments will be a significant challenge for most players,"

In the near term, structuring deployment and coverage, gaining access to frequency bands, figuring out cost-to-build vs cost-to-buy, adapting to changing legislative frameworks and addressing cybersecurity issues all present challenges. At the same time, telecoms are dealing with risks such as increased competition, fast arrival of new technologies and access to finance.

Uncertainty regarding the strength of near-term business cases and the underlying economics further complicate the matter. In other words, will customers want the improved services and new services underpinned by 5G? Plus, what will they be willing to pay for said services? Medium to long-term business cases, which seem pivotal for 5G to create enough revenue to make the networks profitable for telecommunications companies, are often tied to emerging technologies. When we will see them become ubiquitous remains unclear. Self-driving cars are the prime example of this conundrum.

A Trip to the Casino?

The huge investments and somewhat uncertain business cases in mind, it can seem like telecommunications companies are placing roulette-level bets on the future of 5G.

However, there are several reasons why that is not the case.

Firstly, current 4G networks are already strained by ever-increasing demand, meaning there is already a need for more bandwidth and data transfer services. Secondly, many new technologies and solutions currently being rolled out across various industries, such as IoT sensors, are dependent on network connectivity to be effective. Thirdly, future technologies like smart cities and self-driving cars will stall without 5G’s transfer speeds and low latency. Fourthly, the risk of falling behind necessitates committing to 5G sooner rather than later. Fifthly, 5G preparedness will be an important factor for company valuation for both telecommunications companies and companies in related spaces. Telecoms operators without access to 5G risk becoming niche players or even be forced out of marks.

Furthermore, telecommunications companies are currently moving beyond traditional industry borders to diversify their offerings and product portfolios. The strategy of diversification is to a large degree due to a realisation that without such moves, they risk becoming relegated to infrastructure providers. Something we have already seen happen with over-the-top communication services like Skype and WhatsApp.

Telecommunications companies have had a long time to prepare for 5G. For many, well planned out, documented and audited business plans are in place, dictating careful roll-out strategies and strong due diligence when engaging in M&A. 

Many operators are treading cautiously, leveraging 5G for near-term objectives and waiting for fuzzy use cases’ economic details to become clearer. Given the expense required to prove those use cases, it could be an uncomfortably long wait, necessitating rebalancing business expenditures and reformulating plans.

Getting the ball rolling

While the initial roll-out is already underway, it will be some time before we see 5G appear everywhere. In the short to medium term, telecommunications companies will likely need to focus on some of the lower hanging fruits such as:

  • Building 5G excitement and offers. Customers still need convincing of the opportunities the new networks enable. Building excitement around next-wave use cases should be prioritised.
  • Implementing comprehensive spectrum strategies. Access to relevant spectrum (bandwidth) will be vital. Developing and implementing a comprehensive strategy for the acquisition of spectrum for 5G networks is a core consideration.
  • Detailing geographic roll-out on the micro-level. There are geographic areas where the 5G business case is stronger than others. Companies need to plan their roll-out accordingly.
  • Exploring cost-sharing collaborations. The deployment costs of 5G are an argument for network sharing and other cost-sharing collaborations possibly being the way to go.
  • Securing key resources. The new networks will require access to fibreoptic cables and networks and optimal tower locations. Securing these for short, medium and long term plans is a priority.

Finally, telecommunications will likely be heeding the sentiments expressed by Nokia’s CEO, Borje Ekholm, at this year’s Mobile World Congress:

“Is one use case going to finance 5G? The answer is: not really. It’s going to be a multitude of use cases that benefit from the features of 5G.”