The marketing buzz around the arrival of 5G has been building intensely over the past several years. But the reality of full deployment is something different.
In May 2018, worldwide 5G standards were largely established at the Third Generation Partnership Project (3GPP) meeting. But U.S. carriers were working toward the initial phases of field testing 5G fixed wireless broadband even before then. While the carriers gained some commercial benefits from the limited overlay as part of their testing, full deployment still seems far off, making a network rollout appear like a marketing overreach at this stage.
All of the major U.S. carriers tout ambitious plans to deploy 5G. Verizon expects initial deployment of fixed wireless in the U.S. by the end of 2018, with a full 5G wireless network offered by 2020.1 AT&T’s 5G Evolution Plan details the company’s desire to launch fixed and mobile 5G services before the end of 2018 with plans to move to a standards-based 5G core in the future.2 Major rivals, including T-Mobile US, Sprint and second-tier carriers, are working to adopt pre-standard 5G technology and plan to initiate deployment of 5G starting in 2019.
Meanwhile, tech firms such as Qualcomm and Corning (fiber optics) are going full speed into 5G devices and networks. Qualcomm expects to launch its own line of 5G smartphones in 2019. Corning has multi-use platforms that utilize versatile plug-and-play components and eliminate splice points and high labor costs associated with field splicing.
But even these tech firms face challenges to full rollout. Any number of limitations or flat-out delays in getting standards established could delay deployment; for example, new technologies developed or key hardware, small cells, ancillary fiber hardware or mobile chipsets deployed.
Factors Hindering Full Deployment
Today there are several key factors currently limiting the ability of carriers to dive fully into 5G. These are the primary three:
Lack of Fiber Availability
The United States lacks the critical fiber infrastructure needed to enable 5G speed and capacity at this time. Because 5G will use mostly millimeter wave frequencies, the coverage area will have approximately a 1,000-meter radius for each cell to support fixed broadband. That will require many more cell sites and much more fiber to support backhaul.
On the mobility side, in June 2017, Verizon stated that it would need 5 to 10 times the number of 5G nodes (small cells) for mobile 5G than it would for 4G LTE nodes because coverage is much smaller per node4. (In downtown Los Angeles, for example, Verizon anticipates needing 200 to 300 small cells to densify for 4G LTE.)
Fiber access across any metro area to support this type of deployment is a major deal, however. Companies like Verizon continue to install massive amounts of fiber on a metro-by-metro basis; the company recently committed to a $1.05 billion annual fiber purchase commitment with Corning to accelerate its 5G infrastructure deployment. Despite these spend levels, operators are still years away from having sufficient fiber density to support a full-blown 5G deployment.
Site Acquisition and Right-of-Way Complexity
Carriers expect to face roadblocks with local jurisdictions reluctant to allow small-cell deployment in public rights-of-way. These moves could create significant challenges. Many municipal siting and zoning policies on occasion hinder the acceleration of infrastructure development (such as 5G) by imposing regulatory barriers, including excessive fees, prohibition on small-cell placement, aesthetic restrictions and prolonging the permitting process. In response, and to help limit the challenges posed by regulatory restrictions, the FCC has implemented a Notice of Proposed Rulemaking and a Notice of Inquiry (NPRM and NOI) to examine and reduce regulatory impediments to wireless infrastructure investments.
The FCC could implement “dig once” policies to lower costs and improve favorability among local jurisdictions. But these policies require congressional approval of bill H.R. 4986 (“Ray Baum’s” Act of 2018), which passed the House but remains to be heard in the Senate. While federal action can improve the conditions for infrastructure development, approval by Congress and cooperation among carriers will be critical.
Consider this: The annual capital budget for one of the largest U.S. mobile carriers is on average $12 billion. Analysts expect carriers to spend $8 billion per year on 5G spectrum investment alone, which would consume about 70 percent of carriers’ capital budgets5. In total, the capital needed to achieve the necessary fiber density is estimated at upwards of $130 billion. That’s far more than budgeted capital expenditure. Even conservative estimates of LTE network upgrades and 5G build-out through 2025, which total $104 billion, are well short of what will be needed.
One Other Major Factor: Time
Setting aside build-out costs, the time frame currently talked about for full deployment also seems challenging. The deployment of 4G/LTE provides a good historical proxy to estimate the timeline for 5G. Discussions about 4G first took place as early as 2002-2004. However, the International Telecommunication Union (ITU) did not ratify 4G standards until 2008. Field trials and tests for LTE began four years later, pushing out the evolution of 4G. As of June 2017, a good 15 years after initial discussions began, LTE had achieved 86.5 percent penetration across the United States.
If the protracted rollout of 4G is any indication, 5G’s earliest launch will be beyond 2020 and as far out as 2022 or 2023. 5G is still in the beginning phases, with several field trials taking place in cities around the world.
The first demonstration took place in February at the 2018 PyeongChang Olympics. The results were largely deemed underwhelming and limited in scope. Most recently, Ericsson and MTS (a Russian operator) held 5G trials during the 2018 FIFA World Cup. As of the date of this article, no reports have been published on the results of those trials. The 2020 Tokyo Olympics will give more of an indication of how quickly the technology is advancing 5G’s practical use. It is realistic to expect that 5G will be more widely available after these trials and demonstrations are completed.
So Where is the Value Today?
While keeping an eye on realistic timing for the 5G rollout, there is still opportunity for investors in the critical components of the 5G value chain. “IHS Markit” anticipates the collective investment in R&D and capital expenditure for the next several years will average $56 billion annually. In addition, 5G networks will use a wide range of frequencies for different applications. Companies like Qualcomm, Ericsson and Nokia are working on chipsets with integrated antenna. For deployment, MIMO antennas and new radio access network (RAN) equipment will need to be purchased.
Larger corporations such as Corning, Prysmian, Cisco, Huawei, Nokia, Qualcomm and Ericsson dominate the market for fiber and network hardware components. But smaller technology players offer a number of interesting value chain opportunities. The key components include: small cells, network functions virtualization (NFV),6 multiple-input and multiple-output (MIMO),7 5G mobile architecture, radio systems and module equipment. (Even with the large-corporation dominance, opportunities also exist for smaller players in fiber and its ancillary hardware.)
The predicted multibillion-dollar investment in 5G infrastructure in fact positions smaller and emerging players for acquisition or rapid growth. For example:
- SpiderCloud Wireless has developed a LAN-enabled small-cell system that enables mobile operators to deliver scalable coverage, capacity and cloud services to enterprises and venues. SpiderCloud was acquired by Corning in 2017 for an estimated $200 million, a 2.5x revenue multiple.
- Accelleran, founded in 2012, provides hardware-agnostic small-cell software and product solutions; the company completed a €3 million funding round in April 2017. As the leader in small cells for TD-LTE networks, Accelleran is a potential target for TD-LTE proponents such as SoftBank, Clearwire or China Mobile.
- Airspan Networks is a leading vendor of small-cell and backhaul technologies, developing 5G products and solutions based on small cells combined with gbit/s backhaul and virtualization. The company’s current market cap is $450 million; its share price has approximately doubled over five years.
- DAS Worldwide, recently rebranded as Wave Wireless, designs, builds and manages indoor wireless networks, including DAS.
- Silvus and MIMOtech are attractive smaller companies in MIMO. Silvus generates an estimated $10 million annually, and is a leader in MIMO communications, providing software-defined radios. MIMOtech provides microwave carrier Ethernet, mmWave fronthaul and backhaul, and high-capacity IP backhaul. The Industrial Development Corporation of South Africa (IDC), Redwave Communication (Turkey), CSG Science and Technology (China) and Optimus Investments hold the corporate interests, which total 62.4 percent, and private shareholders hold the balance of equity.
Despite the likely delay in monetizing 5G as a service, there are still multiple areas that offer value opportunities for investors. It is necessary to move past fixating on deploying 5G, and look more carefully at the critical components and equipment that will serve as precursors for 5G.
While 5G isn’t going to be where we want it when we want it, the technology is nonetheless generating the ability to create value.