For Investors, Is 5G Living Up to the Hype?

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, a year and a half since 5G made its 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 our expectations," says Seyon Park, equity analyst covering telecoms in South Korea.

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, recent and upcoming launches of 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," says Park.

Here are five takeaways from the frontlines of 5G.

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. South Korea had 8.7 million 5G subscriptions as of August, already accounting for approximately 15% of the country's handset base. “We estimate that China had more than 100 million 5G subscriptions as of August, accounting for roughly 10% of the country's subscriber base in just 10 months since 5G launched," says Park. He credits new handsets, smart marketing and growing demand for bigger data packages with the early success of 5G.

Notably, customers who are moving to 5G are willing to pay a premium. “Pricing is what makes us most optimistic," says Park. 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.

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 we see as a sign that management teams are approaching capex with much more prudence this time," Park says.

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," Park says.

However, as coverage and adoption continues to improve, supporting apps should become increasingly available, creating a more favourable environment for killer apps that depend on 5G.

Looking ahead, demand for 5G goes hand in hand with new devices that can support this new connectivity, particularly for the U.S. and Europe, where iPhones are the device of choice among key consumer segments.

“With 5G finally coming to iOS, we believe 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," says Park. “In 2021, we would expect the majority of new smartphones sold will be 5G-enabled."

 

For more Morgan Stanley Research on 5G, or to read the full Morgan Stanley Research report, “5G Update: Initial Signs Point to Optimism" (22 Oct 2020), speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.