Investors need to factor in the opportunity and potential disruption of new technology and changing consumer preferences for mobile and fixed broadband communication. Fifth generation mobile networks (5G) provide a transformational shift in the telecommunications landscape. Why is this change so important?
- It enables new technologies, like driverless cars, mobile medicine, the Internet of Things
- It may accelerate the transition from fixed to wireless networks encouraging substitution, and
- the 5G proposition is radically different from its predecessors opening the world to smart cities
The introduction of 5G may have significant implications for investors in the listed telecommunications sector. As a result, over the last year, Harbour’s research analysts have been considering overseas trends in 5G and discussing these observations with local companies to draw together the issues we need to explore in a New Zealand context. This note provides an overview of our recent research into 5G.
What is 5G?
The question of the purpose of 5G has evolved massively from earlier mobile offerings. No longer is it sufficient to simply offer a signal for a simple telephone call (3G and earlier) and then provide sufficient data capability to enable Facebook and Instagram updates (4G and 4.5G), but rather it must provide a pervasive quality of coverage to support very reliable data connectivity for a raft of future applications. The International Telecommunications Union (ITU) has identified numerous use cases for the emerging 5G network, outlined in the illustration below:
Source: International Telecommunications Union
So, what is 5G? 5G is the next mobile technology platform evolution. Many countries are transitioning now from the current standard 4.5G LTE[1] to 5G. In its current development 5G is reaching speeds that are between 20x and 100x faster than 4G depending on which 4G service you are referring to.
Theoretical top speeds for 5G of between 10 to 20Gbps are being demonstrated in controlled environments. In practical deployment terms, most carriers are targeting speed consistently in excess of 1GBps
Samsung has called 5G “wireless fibre”, promising a super-fast low latency network everywhere. For instance, at 10GB per second, the average two-hour movie could be downloaded in 3.6 seconds, compared to just over 6 minutes on 4G at 32Mbps[2].
Source: Getty Images
Perhaps, more importantly, the latency on 5G is claimed to be 4milliseconds (0.004 of a second) as opposed to 20ms on 4G LTE today. This has major implications for practical uses for mobility in transport, gaming, education and healthcare to name a few industries.
The intent of the 5G evolution is to provide a network of networks; providing speed that far outstrips the home broadband network of today, leveraging common approaches and existing infrastructure. The proposed architecture of the 5G proposition is radically different from its predecessors; reflecting different use of radio spectrum, the placement of more distributed intelligence at the edges of the network, wireless consistency and many other innovations in technology.
The key design goals of 5G are:
- Enhanced mobile broadband, enabling better speeds and capacity over the existing connections. The target is a connection speed consistently well in excess of 1Gbps. This will necessitate more fibre to cell sites and a closer orchestration of fixed and mobile and fixed wireless eco-systems. This convergence is expected to deliver cost, power and complexity reductions for the mobile operators.
- Increased availability, coverage and capacity. Already existing LTE 4G networks in dense environments are struggling to cope with the data explosion from existing user demands.
- Massive connectivity to facilitate adding many more connected devices (such as IoT – Internet of Things). While the data demand of IoT applications individually may not be massive, if the number of devices lives up to the hype, the amount of additional data crossing the mobile network will be massive.
- Ultra-reliable, ensuring low deterministic latency, tiered quality of service and secure and resilient service, necessary to cater for things such as driverless vehicles, remote-controlled robotics, real-time data, drones, augmented and virtual reality, etc.
While 5G has been under development for over seven years, there is still no universally adopted standard (although much of the core architecture has been agreed), and yet there is already modest deployment in Asia (China, Japan and South Korea) and the US, as well as soft launches in Australia (Optus, Telstra) and other markets.
For instance, China Telecom has been deploying 5G across more than a dozen cities in China and claims to be the largest 5G network. Competitor China Unicom has just commenced a commercial rollout of 5G after the launch in Chongqing of an 8k VR streaming over 5G, while multiple equipment providers are offering 5G-ready smartphones, tablets and watches.
Source: Huawei unveils the 5G foldable Mate X smartphone starting at $2,600. https://venturebeat.com/2019/02/24/huawei-unveils-the-5g-foldable-mate-x-smartphone/
Deloitte has said that China has outspent the US on 5G supporting infrastructure by over $24bn. In 2018, China had 1.9million mobile sites being 14.1 sites for every 10,000 people using mobiles compared to just 200,000 sites in the US which is 4.7 sites on an equivalent basis[1]. The China mobile network has been trialling autonomous cars and buses, smart water treatment and mobile remote medical services.
Although one can question whether current 5G launches are truly comprehensive 5G networks, there is no doubt that the technology provides such a breakthrough that deployment is a key political objective. 5G is the new arms race for the adoption of so many smart technologies. 5G is seen by many as having the potential to significantly lift productivity and open up new business investment opportunities. In contrast, the step from 3G to 4G largely seemed to benefit consumers wanting to upload video content and share photos.
Interestingly, the White House announced in April that “thanks to President Donald. J. Trump, America is now leading the global race to deploy secure and reliable 5G”. While we consider this claim to be open to debate, what it does highlight is the perceived importance of 5G in supporting a raft of new technologies and industries globally. 5G is more than just an evolution to higher speeds and more capacity. It is the precursor to supporting a range of new industries and the enabler of new technologies.
Irrespective of who is driving the adoption of 5G technology, the experience of 4G demonstrated that there is considerable flexibility within manufacturers to accommodate a range of network specifications without negating economies of scale from achieving conformity across all the regions/radio spectrums.
5G – a game changer for mobile carriers and fibre networks?
Many commentators believe that 5G mobile connections will increasingly replace fixed line (fibre) networks in many instances. One of the consistent demands by consumers has been for mobility and the ever-increasing data usage which has seen mobile operators introduce two generations of mobile technology (3G and 4G) within a ten-year period.
AT&T believe 5G will be commercially deployed in depth across its network within the next 2-3 years. Already it is getting 14 GB performance in test environments and they are targeting a 1 GB ubiquitous network, which could replace the fixed line offering in many instances. AT&T’s future 5G mobile offering will not be limited to residential, with its current B2B offering of net bonded[1] (to Amazon and Azure), combined with a VPN[2] overlay, addressing the security concerns of both SMEs and enterprise businesses.
Meanwhile, Verizon has launched a 5G home offering in the last quarter of 2018 in “select neighbourhoods”. The service is talking of speeds of 300 Mbps, but possibly as fast as 1 Gbps. While labelled 5G this offering, in our opinion, would appear to be more a “5G lite” offering, using small cell technology to cater to the explosion in data usage. Verizon believes this technology has tipped over the cost/benefit point of adding more spectrum and that cell splitting can bridge the gap between 4G and “full” 5G deployment. It also pre-empts much of the necessary 5G capital spending on network architecture that will be required over the next 2-3 years. Potentially every street lamp post in urban US can be a small cell/5G cell site. 5G will be wireless fibre, with fibre only needed to within 50m-300m of the house and then delivered via Wi-Fi to multiple houses.
5G architecture, with fibre to the lamp post and then small cell / Wi-Fi delivery, will potentially result in the largest fibre networks being those that support wireless networks. This is an interesting position when contrasted to the fixed line broadband providers of today, being largely cable network providers and ‘old’ fixed line telephony providers. This potential 5G technology deployment most likely explains Chorus’ interest in being involved in 5G deployment in its submission to the NZ Commerce Commission mobile market study last year (discussed below).
In the US, Verizon notes that the speed at which the mobile consumer is changing means they must constantly reassess their assets and strategies. A key to this is gaining data analytics and being sufficiently close to the end user to understand first what is coming around the corner.
Today the consumer wants mobile, snack-sized, digitally unique “live” offerings they can share with their peers – read Instagram, SnapChat, WeChat and WhatsApp sharing of video and pictures.
This complex media proposition from Verizon’s current perspective represents average viewership of 30 minutes a month, averaging 2-3 minutes a session, centred on the pillars of sport, news, finance and entertainment. However, full 5G deployment opens a totally new capability in augmented and virtual reality, transportation and many business applications. It may also remove the need for broadband delivered to the house.
Telstra and Optus in Australia have also announced a go live with 5G offerings in the last two months. Again, these are limited offerings (Optus initially to only 60 suburbs and 1200 cell sites by March 2020, while Telstra has offered coverage across 10 cities in the next 12 months). Both offerings seem to be aimed at competing against fixed-line broadband. Optus’ cheapest NBN plan (fixed wire broadband) is $15 a month more expensive than its 5G home broadband pricing. The broadband package has a lower guaranteed speed. Telstra has also indicated their 5G pricing will be offered at the same price for high tier customers ($104 per month for large mobile data packages) while lower tier customers will pay a further $15 per month just for 5G access bringing starting packages to $70 per month for 10GB of data. The rollout is associated with free new Samsung S10+ 5G phones. Telstra is offering an unlimited NBN (broadband fibre) package for $90 per month[3].
What does it mean for New Zealand?
Many 5G deployments are being justified by the need to cater to exploding data demand. This imperative is not an immediate concern for New Zealand. A constraining factor for 5G deployment in New Zealand is that the C-Band spectrum is currently not due to be released until 2022. The Government is looking to auction this spectrum in early 2020 but unless they accelerate access by buying out existing spectrum owners, meaningful deployment in NZ seems unlikely prior to 2022.
The New Zealand Commerce Commission’s study of the mobile telecommunications market released in August 2018 noted “several proof-of-concept trials pointing to the first stage of commercial development around 2020”. Spark has initiated a trial associated with the America’s Cup (the boats will rely on 5G technology) and has a 5G “lab” in Wynyard Quarter.
The Commerce Commission policy document highlighted the importance of spectrum (particularly in 3.4-3.7GHz range) and disappointingly left unanswered how this spectrum will be auctioned off. Arguably this factor is the biggest issue as to how and when 5G networks will be introduced into New Zealand.
From the mobile operators’ perspective, the proposition to move to 5G is enhanced by “cutting the fibre loop” to consumers (and thereby bypassing Chorus’ network). The two main carriers – Spark and Vodafone, have indicated the potential for infrastructure sharing, with the recent takeover of Vodafone by Infratil and Brookfield providing another opportunity for both carriers to make the case for the Commerce Commission to press ahead with spectrum launches. Both Vodafone and Spark expect significant fixed to mobile substitution and the more rapid deployment of 5G-enabled new technologies.
While the Commerce Commission considers the possibility of up to four mobile network operators (MNOs), in our opinion any 5G deployment, at least in the short term, will be limited to Spark and Vodafone. Comments by both Spark and Vodafone suggest 5G lite rollouts in densely populated areas within the next 2 years is very likely, depending on spectrum allocation and handset availability. Spark has also downplayed the issue of the current suspension on deploying Huawei 5G equipment, although privately we suspect that Spark is disappointed with this decision as they see Huawei as currently leading some components of 5G technology deployment globally.
Source: https://www.spark.co.nz/5g/#/
Despite a significant amount of global news on 5G, with some 60 operators globally announcing roll-outs this year we do not envisage a full 5G deployment in New Zealand before 2022. Both Spark and Vodafone are highlighting the approaching 2020-21 America’s Cup as an international showcase opportunity to emphasise to government the importance of spectrum allocation as soon as possible.
In terms of investment implications, consumer uptake of 5G is a key consideration.
It seems clear that pricing, coverage, handset availability, speed, latency and applications will be key factors in 5G take up and substitution from fixed line broadband.
Those within the mobile industry see a much higher take-up of 5G. Many analysts expect wireless broadband to take between 15% to 20% of the market over the next five years. Already 18% of Spark’s customers are on wireless broadband plans. Both Vodafone and Spark expect a much larger take-up of 5G relative to fixed-line offerings over the next five years. It is far too early to mark the ground on this key issue; however, this measure remains a key value driver for both mobile operators and Chorus so the issue of 5G deployment in New Zealand will be closely watched.
[1] LTE stands for Long Term Evolution and refers to a 4G wireless communications standard developed to provide 10x the speed of the old 3G (third generation) wireless network for smartphones, tablets and wireless hotspots.
[2] https://www.uswitch.com/broadband/guides/broadband_download_times/
[3] https://techblog.comsoc.org/2019/03/19/china-telecom-to-accelerate-5g-deployment-100-fiber-network-coverage-gigabit-fiber-broadband-deployment/
[4] Combining multiple internet channels into a single resilient service providing increased network bandwidth, improved reliability and control over network latency and downtime.
[5] VPN – virtual private network. Extends a private network across a public network, such as the Internet. It enables users to send and receive data across shared or public networks as if their computing devices were directly connected to the private network. Applications running across the VPN may, therefore, benefit from the functionality, security, and management of the private network.
[6] https://www.canstarblue.com.au/internet/5g-vs-nbn/
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