5G: A multi-faceted opportunity

5G is poised to revolutionize a diverse array of industries around the world. Is a new global economy on the horizon?

Oct 21, 2019 | Petra DeLeo

When investors consider the impending “fifth generation” (5G) wireless transition, they frequently focus on 5G’s direct impact on telecommunications companies (telcos), network equipment vendors and smartphone makers. While true, this is an incomplete assessment. We expect 5G to drive change and opportunity across many diverse industries in the upcoming decade, not just in communication services. In this blog, we provide historical context on how prior wireless technology transitions impacted various industries and where 5G’s greatest opportunities may lie.
 

A historical perspective on wireless technology
 

The story of wireless technology begins in the late 1970s. Starting in 1979 and extending through the 1980s, 1G established analog wireless voice communication technology. In the early 1990s, 2G supplanted 1G by introducing digital voice and low speed data transmission capabilities. While both 1G and 2G developed critical pieces of technology, neither transformed the world.
 

3G networks, introduced in 1998, further increased data speeds and made mobile internet access practical. At first, 3G networks were simply faster. It wasn’t until 2007 when Apple’s iPhone was unveiled that the revolutionary power of 3G was unleashed. The iPhone and the new mobile economy that smartphones launched became the “killer app” (the term for an invaluable application) 4G, introduced in the US in 2011, built upon the 3G revolution with even faster speeds and greater network capacity.
 

Despite the surge in 4G-related economic activity, US telco revenue barely grew during the 4G era (see Figure 1). Unlike prior wireless technology transitions, incremental value creation mostly bypassed the telcos; instead, it was accrued largely to new technology companies. Some businesses, such as WhatsApp and Viber, destroyed the telcos’ lucrative international voice and text message revenue streams by providing free or ad-supported “Voice over Internet Protocol” (VoIP) and instant messaging services. Other businesses, such as Uber (peer-to-peer ridesharing) and Spotify (mobile music streaming), while not directly attacking telco revenue pools, would not be possible without pervasive 4G networks. Cleverly, these companies built mobile data-centric businesses by leveraging the networks that the telcos had built, without bearing the upfront spectrum investments, initial capital expenditures and ongoing maintenance costs.
 

Figure 1: US wireless industry revenue and year-over-year growth
 

Source: Bloomberg, L.P. Actual data as of Dec 2018. 2019E and 2020E are estimated forecasts. Past performance is not a guarantee of future results.  There can be no guarantee that estimated forecasts will come to pass.
 

The 5G opportunity
 

With 5G network rollouts just beginning around the world, it’s still early days in terms of monetization opportunities. While certain infrastructure suppliers, such as tower, network equipment and semiconductor companies, have already benefitted from 5G network build-out activity, 5G “killer apps” are still under development.
 

In comparison to 4G, 5G networks promise speed enhancements (10 to 20 times faster than 4G), latency improvements (a 90% reduction in transmission delay) and capacity expansion (100 times more traffic capacity per square meter).1 5G is expected to enable ubiquitous connectivity and exponential growth in data transmission. Previously uncaptured data will be stored and analyzed. The companies able to harness this data and use it to build new businesses stand to benefit enormously. Similar to the 3G and 4G eras, we believe that much of the economic value will accrue to the companies best able to exploit the deluge of new data to gain unique insights and build previously unimagined businesses, not to the companies solely involved in data transmission.
 

On the consumer side, the initial 5G telco-supplied use cases of 5G wireless service and fixed wireless service appear incremental. While 5G wireless service will be faster than 4G, it’s unlikely to meaningfully enhance the typical consumer mobile internet experience. Bandwidth-heavy activities, such as watching videos, already work sufficiently well on existing 4G networks. As for fixed wireless service, that technology is expected to be on par with cable broadband, a service already available to most US consumers. By analogy, we view these initial 5G consumer use cases akin to digital wallets in the US. Like 5G mobile wireless and fixed wireless service, digital wallets are nice to have, but they’re somewhat of a “solution in search of a problem” since the physical credit cards that digital wallets aim to replace already work well and are easy to use.
 

Future 5G applications that lie outside of core communication services are far more exciting and have the potential to be revolutionary. Vehicle-to-everything communication seeks to usher in self-driving cars for fully autonomous transportation. Within healthcare, 5G hopes to enable better health outcomes through remote robotic surgery, continuous health tracking and medical implants that adjust drug delivery in real time. The data captured by the transportation and health care industries should interest insurance companies, which can potentially use it to adjust customers’ premiums. In digital gaming, 5G aims to untether gamers from their consoles and PCs, and stream graphic-intensive and multi-player games directly to consumers’ phones. On the enterprise side, widespread sensors connected to 5G networks are expected to enable “smart” cities, factories and agriculture. The list of potential applications goes on and on.
 

Figure 2: Possible 5G-enabled applications

Source: International Telecommunication Union, “Setting the Scene for 5G: Opportunities and Challenges.” IMT = internet marketing technology. For illustrative purposes only.
 

While many of the aforementioned technologies and applications are not expected to be commercialized for at least several more years, some companies are investing heavily now in order to position themselves for the future. Unsurprisingly, major technology companies such as Alphabet, Amazon, Microsoft and Facebook are taking the lead. These companies already run massive data-centric businesses and are at the forefront of information collection and processing. Advancements in machine learning algorithms are enabling these companies to speed up and increasingly automate their data analysis, driving a virtuous cycle of innovation and possibly extending their dominant market share positions and resource advantages. Undoubtedly, innovative companies from other industries and future startups will also participate in this new economy.

Petra DeLeo is an Associate Equity Portfolio Manager on the Unit Investment Trust Equity Portfolio Management and Research team for Invesco.
 

^1 Source: International Telecommunication Union, “Setting the Scene for 5G: Opportunities and Challenges”
 

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