For investors, is 5G living up to the hype?
Morgan Stanley Research11/09/21
Summary: Investors have had mixed reactions to the 5G rollout worldwide, but an analysis of early-adopter markets suggests that 5G is surpassing expectations. Here are five key takeaways.
In April 2019, in a ring heard around the world, South Korea became the first nation to unveil 5G wireless technology. Carriers in other markets have since rolled out this latest generation of mobile connectivity.
Enthusiasm among investors has been mixed. Some have taken a wait-and-see approach, pointing to high investment costs, coverage gaps, and a dearth of 5G-equipped devices and apps. Proponents, including Morgan Stanley Research, believe that 5G marks a significant step-up in speed, efficiency, and coverage. This opens doors for investment opportunities related to everything from new devices and applications, to premium pricing and tower upgrades.
Now, well into 5G’s global debut, early-adopter markets offer a window into the future of wireless—and so far, so good. Initial observations from Korea, China, and Hong Kong suggest the return profile for 5G could be better than expectations.
While 5G adoption will look different in every market, Morgan Stanley's analysis of these markets shows that customers have been upgrading to 5G—and at premium pricing—while carriers have been disciplined about spending to build out their networks. Meanwhile, 5G devices and related apps should support a virtuous cycle, in which new products spur additional demand and more investment.
Overall, this sets good reference points for markets that have just started 5G coverage or are in the process of rolling out.
Here are five takeaways from the frontlines of 5G.
1. Take-up is surprisingly strong
Despite concerns related to perceived network speeds and a lack of killer apps, take-up of 5G services has been robust in the two earliest markets. Within its first 18 months of launch, South Korea had 8.7 million 5G subscriptions, accounting for approximately 15% of the country's handset base. MS Research estimates that China had more than 100 million 5G subscriptions just 10 months post-launch, accounting for roughly 10% of the country's subscriber base.
More recently, in October 2021, a major Korean operator reported it was up to 33% 5G adoption, while a large US carrier disclosed that 25% of its base was on a 5G device.
New handsets, smart marketing, and growing demand for bigger data packages with the early success of 5G may be driving factors.
2. Premium pricing pencils out
Notably, customers who are moving to 5G are willing to pay a premium. In fact, pricing is what makes MS Research analysts most optimistic. Operators in Korea, China, and Hong Kong all offer mainstream 5G plans with more data, at a slight pricing premium compared to high-end 4G plans.
Customers seem to understand the value proposition—more data at faster download speeds, but at a lower unit price—and wireless operators are seeing 10% to 30% increases in average revenue per user, as subscribers upgrade to 5G.
3. Telecoms are investing prudently
One of the biggest knocks against 5G has been that it will take telecoms too long to recoup the capital expenditures needed to build out the new networks. Yet, capex spending so far suggests that companies are taking a more disciplined approach than they did with 4G LTE. Operators have been gradually expanding coverage, using existing 4G infrastructure and sharing network infrastructure to keep spending in check.
Operators in China, Korea, and Singapore have all committed to some form of infrastructure-sharing, which may be a sign that management teams are approaching capex with much more prudence this time.
However, in the US, carriers have spent significantly on acquiring 5G spectrum, and have announced accelerated capex plans.
4. New apps on the horizon
Although subscriber take-up has surprised on the upside, development of 5G-specific apps, including those with augmented and virtual reality, has been slower to arrive. The fact that the 5G app market has been limited thus far to Android OS in both Korea and China is one critical reason, as is the fact that the upgrade to 5G speeds has so far been closer to an upgrade from 4G than a significant generation upgrade.
However, as coverage and adoption continues to improve, supporting apps should become increasingly available, creating a more favorable environment for killer apps that depend on 5G. Some of the most exciting use cases could come in areas such as automated factories, smart cities, autonomous vehicles, agriculture, and telehealth.
5. New devices driving penetration
Looking ahead, demand for 5G goes hand in hand with new devices that can support this new connectivity, particularly for the US and Europe, where iPhones are the device of choice among key consumer segments.
With 5G finally coming to iOS in October 2020, the apps market is likely to gain the critical scale to attract developers to create apps that can fully leverage the faster speeds and lower latency of 5G. Looking ahead, the majority of new smartphones sold will likely be 5G-enabled.
Bottom line: For investors, the latest generation of wireless technology may present opportunities across the communications industry. As major wireless companies roll out these networks to stay competitive, consider the equipment, structures, technologies, and services that will both support and benefit from their global adoption.
The source of this Morgan Stanley article, For Investors, Is 5G Living Up to the Hype?, was originally published on November 16, 2020.
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