5G: The Main Challenge And Its Initial Implications

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Includes: CHA, CHL, CHU, CMCSA, CTL
by: Paulo Santos
Summary

5G has one major challenge.

This challenge means that initial 5G solutions won't replace fixed broadband wholesale.

However, it also means initial 5G solutions might turn into the fixed broadband solutions of choice. This has implications for several types of players.

5G is the upcoming mobile network standard. Its large scale deployment should start in 2019. Succeeding 4G/LTE, 5G promises much higher bandwidth, lower energy usage (per bit transmitted), and the ability to serve many more simultaneous devices.

5G is set to deliver on its promises through a number of changes over 4G:

  • The best-known one is the usage of much higher frequencies, including those above 15GHz, around 26-30GHz and 37-40GHz. Higher frequencies allow for higher bandwidth since more wave peaks and valleys are available to represent data (there are other ways to improve bandwidth, like the amplitude of the waves, but these are common across frequencies). Higher frequencies also make available wider frequency channels.
  • Also as a way to improve bandwidth and connectivity, more antennas are to be used, along with the latest developments to wring more bandwidth out of the same frequency (like 256-QAM).

5G promises a lot. For instance, according to Ciena Corporation (NASDAQ:CIEN):

  • Up to 1000 times increased in bandwidth, per unit area
  • Up to 100 times more connected devices
  • Up to 10Gbps connection rates to mobile devices in the field
  • A perceived network availability of 99.999%
  • A perceived 100% network coverage
  • Maximum of 1ms end-to-end round trip delay (latency)
  • Up to 90% reduction in network energy utilization

Most of the "outrageous" 5G promises are based on the usage of higher transmission frequencies. However, there was a quick realization that the usage of so high frequencies brings problems. Namely, the higher the frequency, the less far the signal travels. The signal is much more easily absorbed by things such as the atmosphere itself, or obstacles like leaves, buildings, walls, even windows (depending on coatings).

With 80% of mobile data being consumed indoors, the high-frequency 5G having trouble getting indoors is an obvious problem. Thus, a new 5G specification, named 5G NR (New Radio) was developed to use frequencies below 6GHz. That is, frequencies similar to those used by current 4G systems (700Mhz up to 6Ghz, but with most current channels sitting below 3Ghz).

The thing here is, if we normalize for variables like the number of antennas used and advances like 256-QAM, already used in LTE advanced, 5G below 6GHz isn't all that different from LTE Advanced. It does then penetrate walls but does so at the cost of becoming what we already kind of have, performance-wise.

Putting It Together

So, what can we expect from this state of affairs? We can expect that:

  • 5G will deliver extremely low latency and extremely high bandwidth outdoors. It will also enable the connection of a much higher number of concurrent devices, eliminating saturation.
  • 5G won't be much different than LTE-A indoors unless the number of antennas explodes.

It's possible to design buildings so that the high frequency bandwidth available outdoors translates directly into access points inside the building. But while this can be done, it's not likely to be done massively as a retrofit to old buildings, on a building by building basis.

The Implications

The outdoors on a 5G-covered area will be like having a huge data pipe everywhere. This does have a major implication:

  • It will be much cheaper, faster, and convenient to connect individual dwellings to this pipe than to do it by running cables to the building and to each individual dwelling. You just need a modem that's able to tap into the outdoors (either by being close to a window or having an external antenna), which then generates a wireless high-bandwidth network within the dwelling (using WiFi as presently or perhaps 5G again). Such modems are already cropping up.

Thus, the most obvious impact from 5G, straight away, is that it's set to present a significant competitive threat to fixed broadband providers. This is also made more relevant by the already ongoing trend towards "cutting the cord" (relying on an internet connection for your video needs and doing away with video packs from the fixed broadband provider). In markets like the US, it's made still more significant because cable companies tend to offer very expensive fixed broadband connections, especially with video packages tacked on.

Since the ability to deliver this high exterior bandwidth relies on a much higher number of antennas and the antennas will be delivering more bandwidth themselves, this also implies a need for more "fiber to the access point", though not to the home. So really, those displaced by this evolution are typically the operators providing the last-mile access to the customer and not those providing the backhaul fiber networks. Sometimes, they'll be the same, sometimes they won't.

For instance, something like Comcast Corporation (CMCSA) is likely much more exposed to this 5G consequence because it delivers fixed broadband connections as well as lots of video-related services than CenturyLink (CTL), which while offering last mile connections, now also has significant backhaul business after acquiring Level3. However, second-order effects can easily happen as well if cable companies end up being relevant customers for this backhaul capacity. You'd have mobile companies using more of it, but cable companies using less.

Conclusion

Drawing from the nature of 5G, it would seem the very high bandwidth promises will stop at the door. Thus, the mobile connection won't be a wholesale substitute for a fixed broadband connection, even though outdoors, 5G should be able to offer the necessary bandwidth.

The solution will likely be access points mounted so that they can give access to the exterior bandwidth and then distribute it indoors. These will present a significant competitive threat for today's fixed broadband operators, which often act in markets served by few competitors.

The resulting equation should be negative for cable companies. They're typically last-mile access providers. They're likely to lose customers and see pricing pressure. The resulting equation should also be negative for the remaining fixed telecoms providing fixed broadband access through technologies like ADSL.

For mobile companies, the equation should be positive. They'll have a new premium service to propose to their customers. Also, this premium service is somewhat complementary to mobile access since mobile broadband access indoors will still present degraded performance (falling back to 4G-like speeds, plus limited sharing with other devices unless those also carry their own broadband subscriptions).

For fiber backhaul companies, the equation should be positive. More individual streams and more access points to be serviced will add up to the need for more capacity versus fewer "corporate", aggregated, streams, and fewer access points.

A curious thing happens when it comes to Chinese mobile telephony companies; China Telecom (CHA), China Mobile (CHL), and China Unicom (CHU). These companies control both the fixed broadband market and the mobile telecom market. As a result, they can choose how to deploy 5G to maximize the positives (like lower capex to provide fixed access and potential new services) and minimize the negatives (losing fixed broadband subscriptions) on the aggregate. Furthermore, fixed broadband access is extremely cheap - unlike in the U.S. - so less price erosion (if any) is likely to result from 5G adoption.

Disclosure: I am/we are long CHA, CHL, CHU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.