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Opinion: Weighing the bear versus bull case for 5G


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Opinion: Weighing the bear versus bull case for 5G

Opinions expressed in this piece are solely those of the author and do not represent the views of S&P Global Market Intelligence.

Despite a wave of rosy predictions about the impact of a fifth generation of wireless technology on consumer and enterprise connectivity, not everyone is bullish about 5G's potential.

Some analysts have questioned whether the costs of installing 5G networks will be worth the investment, at least in the near term, though U.S. wireless leaders including Verizon Communications Inc. are forging ahead.

SNL ImageBlogger Bishop Cheen is a
retired managing director
and senior analyst for
Wells Fargo Securities.

Global business consulting group IHS Markit in January 2017 estimated that the telecommunications industry will invest an average of $200 billion annually to deploy, expand and support 5G. IHS' white paper averages annual projected outlays from 2020 through 2035 for wireless carriers, chipmakers, device manufacturers, and software developers in the seven countries at the forefront of 5G development: the United States, China, Japan, Germany, South Korea, the United Kingdom, and France.

5G is still being tested in various U.S. and global markets with anticipation of a full 5G roll-out in 2020. Hybrid 4G and 5G services could debut as early as 2018, according to SNL Kagan analyst Sharon Armbrust.

Skeptics often point out that 5G's high-frequency spectrum is subject to interference from rain, fog and trees, in addition to facing a network densification challenge to sustain coverage. A stable 5G network will likely require deployment of more than 100,000 new small cell antennas in the U.S., according to SNL Kagan estimates, and perhaps millions of small-cell repeaters globally, as noted in a 2016 speech by former Federal Communications Commission Chairman Tom Wheeler.

5G bears also predict that the nascent wireless technology may not adequately stimulate wireless industry growth for years. It may take five or 10 years for 5G to translate into higher revenue growth, wireless consultant Chetan Sharma recently told Bloomberg News.

Global wireless industry association GSMA projects global mobile operator revenue could increase about 2.7% annually from $1,139 billion in 2020 — when most companies are targeting 5G roll-outs to $1,299 billion in 2025. That's about 70 basis points more annually than the 2.0% annual growth the industry is projected to generate from 2015 ($1,030 billion) through 2020.

Wireless heavyweight Verizon appears to be fully committed to 5G and plans to launch 5G residential broadband service in three to five U.S. markets in 2018, including Sacramento, the first new market on its wish list. Verizon says it successfully trialed 5G residential applications in 11 markets in 2017.

Wireless analyst Craig Moffett of Moffett Nathanson is among the skeptics of Verizon's plans, questioning whether 5G will be a suitable substitute for fixed wired broadband in a report published after the company met with analysts last month, as reported by Barron's and other media outlets.

Verizon does not see 5G as a "single use case network," according to CFO Matthew Ellis. Speaking Dec. 5 at a UBS Investor conference, Ellis predicted 5G will be more of an over-the-top service rather than just a linear TV substitute. He also detailed promising results from 5G trials concerning speeds and coverage distances.

SNL Kagan senior analyst John Fletcher thinks the bearish stories about 5G are missing the game changer: mobile video streaming. Fletcher told me that 5G mobile will likely be a formidable competitor to fixed broadband service in cable and telco for high-speed data subscribers. Fletcher also believes recent surveys of residential users that find less than 5% of mobile-only users in the U.S. use home internet via 3G and 4G service suggests a big upside of mobile-only subscriptions in 5G.

My experience is that new technology usually delivers in initially unexpected ways, and there tends to be denial or dismissal of a new tech's impact before it finds perch. Consider the infamous 1995 Newsweek column "The Internet? Bah!" that predicted the Internet would fail to disrupt incumbent media. Later, in 2006, asked when Apple Inc. would make a cell phone, The New York Times tech critic David Pogue wrote "probably never."

As any investor knows, short sellers can and do get it wrong.