Show Transcript
As the 5G technology race heats up, the U.S. telecom sector has struggled to keep pace. Anthony Okolie talks with Andriy Yastreb, Telecom and Media Analyst, TD Asset Management, about the rollout of 5G and the implications for the telecom industry.
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- As the global race to develop and deploy 5G or fifth generation heats up, the US telecom sector continues to underperform the broader markets. Take a look at this chart. Andriy, why have telecoms underperformed the broader markets over such a long period, as the chart shows?
Hi, Tony. Thanks for having me. Well, the chart shows two lines. The yellow line is the tech industry relative to S&P 500 over the past 30 years, and the green line that is sloping down is the telecom industry relative to the S&P 500 over the same period of time.
And the slope down suggests that, over a very long period of time, telcos consistently underperformed relative to the index. As to the reason why, I think there's three reasons for that. One is regulation. There's always a lot of political pressure to keep mobile prices low.
Second reason is commoditization of data and competition. So because the economies have scaled in the wireless industry, each company is always trying to get that new subscriber and because of that, there is not enough discipline in the industry, and companies are always biking for new subscribers and lose pricing power.
And we are seeing some of that recently as well as AT&T and Verizon announced that they will provide the new iPhone 12 for free to some qualifying subscribers. It was announced the same day when iPhone 12 just came out.
And third reason is what I call a capital spending treadmill. Data usage increases at double digits every year. And in addition to that, wireless technology, that changes generation every decade or so, which means that the telecom companies have to continue to invest just to keep up with technology and demand.
And basically, they have to run just to stand still, and that's why the treadmill analogy. So the takeaway from this chart here is that telecoms invested a lot of money to develop the networks that connect us to the internet over the past 30 years, but the value created by those networks was mostly captured by the tech industry.
And the next question is, can 5G change this dynamic? Is 5G capable of shifting market power towards the telecom operators in your view?
- Well, Tony, I think there's still some debate about that. But my view is that I see it as very unlikely that telecom companies will be able to get better at negotiations with companies like Apple, Amazon, or Google. But having said that, I think that 5G has several benefits that potentially can help the industry post better returns on investment in the future and post better results.
OK, so let's talk about some of those benefits which could help performance.
- Sure. So one is that 5G should improve revenue growth over time, and that additional revenue growth is not likely to come from you and me paying more for wireless services. I think it's more likely to come from some of the new use cases, such as IoT and wireless broadband.
So if you think about it, in the past, wireless capacity was always limited, which meant that you had to pay for every minute of talk and for every SMS text message. Right now, talk and SMS is usually unlimited, and even data is unlimited on higher priced plans.
But in the future, as we move over the next several years to deploy 5G and 5G adds more capacity and speed, our mobile internet will feel a lot more like our broadband internet in the future. And this presents opportunity for wireless providers.
Over time, they can become a lot more competitive versus cable companies in some areas, mostly in suburban and rural. While in dense urban areas, the capacity will still be limited and will be mostly used for wireless use.
OK, and I want to circle back to your point earlier about telecom operators sort of operating or being on this capex treadmill, because I think it is a great analogy. Can 5G deployment change that dynamic?
- Yes, I believe it can. And 5G, what's different about 5G relative to previous generations is that 5G is designed to be an add-on to 4G in the early days, which means that operators can add some antennas to existing towers, and even it can use some existing 4G spectrum to dynamically, in the real time, share it with 5G coverage, which is a lot more capital efficient.
In addition to that, 5G is designed to be more standardized than previous generations of technology. In the past, companies had to choose one or two key suppliers and build their networks with those chosen partners, most of which just had proprietary technology.
So 5G allows telecom companies to procure equipment from a wider range of suppliers, which means that, over time, this will lead to more competition among suppliers and to lower costs for telecom companies.
OK. So the big question I have is, what are the investment implications of 5G for telecom stocks?
- Well, I think there are two broad implications. One is outside of telecom, 5G will provide better connectivity with increased capacity and better speeds, which is positive for data-heavy use cases. And currently, that would be streaming.
I think in the future, we might see more new use cases such as virtual reality and augmented reality. And second, specifically for telecom companies, by deploying 5G networks, telecom operators will unlock some new use cases as the cost of sending one unit of data declines over time, and that will help them in incremental revenue.
The issue there is that this should result in better returns for telecom companies, but only as long as those benefits are not regulated away or competed away by the industry.
Andriy, thank you very much for your time.
- Thank you for having me.
[MUSIC PLAYING]
Hi, Tony. Thanks for having me. Well, the chart shows two lines. The yellow line is the tech industry relative to S&P 500 over the past 30 years, and the green line that is sloping down is the telecom industry relative to the S&P 500 over the same period of time.
And the slope down suggests that, over a very long period of time, telcos consistently underperformed relative to the index. As to the reason why, I think there's three reasons for that. One is regulation. There's always a lot of political pressure to keep mobile prices low.
Second reason is commoditization of data and competition. So because the economies have scaled in the wireless industry, each company is always trying to get that new subscriber and because of that, there is not enough discipline in the industry, and companies are always biking for new subscribers and lose pricing power.
And we are seeing some of that recently as well as AT&T and Verizon announced that they will provide the new iPhone 12 for free to some qualifying subscribers. It was announced the same day when iPhone 12 just came out.
And third reason is what I call a capital spending treadmill. Data usage increases at double digits every year. And in addition to that, wireless technology, that changes generation every decade or so, which means that the telecom companies have to continue to invest just to keep up with technology and demand.
And basically, they have to run just to stand still, and that's why the treadmill analogy. So the takeaway from this chart here is that telecoms invested a lot of money to develop the networks that connect us to the internet over the past 30 years, but the value created by those networks was mostly captured by the tech industry.
And the next question is, can 5G change this dynamic? Is 5G capable of shifting market power towards the telecom operators in your view?
- Well, Tony, I think there's still some debate about that. But my view is that I see it as very unlikely that telecom companies will be able to get better at negotiations with companies like Apple, Amazon, or Google. But having said that, I think that 5G has several benefits that potentially can help the industry post better returns on investment in the future and post better results.
OK, so let's talk about some of those benefits which could help performance.
- Sure. So one is that 5G should improve revenue growth over time, and that additional revenue growth is not likely to come from you and me paying more for wireless services. I think it's more likely to come from some of the new use cases, such as IoT and wireless broadband.
So if you think about it, in the past, wireless capacity was always limited, which meant that you had to pay for every minute of talk and for every SMS text message. Right now, talk and SMS is usually unlimited, and even data is unlimited on higher priced plans.
But in the future, as we move over the next several years to deploy 5G and 5G adds more capacity and speed, our mobile internet will feel a lot more like our broadband internet in the future. And this presents opportunity for wireless providers.
Over time, they can become a lot more competitive versus cable companies in some areas, mostly in suburban and rural. While in dense urban areas, the capacity will still be limited and will be mostly used for wireless use.
OK, and I want to circle back to your point earlier about telecom operators sort of operating or being on this capex treadmill, because I think it is a great analogy. Can 5G deployment change that dynamic?
- Yes, I believe it can. And 5G, what's different about 5G relative to previous generations is that 5G is designed to be an add-on to 4G in the early days, which means that operators can add some antennas to existing towers, and even it can use some existing 4G spectrum to dynamically, in the real time, share it with 5G coverage, which is a lot more capital efficient.
In addition to that, 5G is designed to be more standardized than previous generations of technology. In the past, companies had to choose one or two key suppliers and build their networks with those chosen partners, most of which just had proprietary technology.
So 5G allows telecom companies to procure equipment from a wider range of suppliers, which means that, over time, this will lead to more competition among suppliers and to lower costs for telecom companies.
OK. So the big question I have is, what are the investment implications of 5G for telecom stocks?
- Well, I think there are two broad implications. One is outside of telecom, 5G will provide better connectivity with increased capacity and better speeds, which is positive for data-heavy use cases. And currently, that would be streaming.
I think in the future, we might see more new use cases such as virtual reality and augmented reality. And second, specifically for telecom companies, by deploying 5G networks, telecom operators will unlock some new use cases as the cost of sending one unit of data declines over time, and that will help them in incremental revenue.
The issue there is that this should result in better returns for telecom companies, but only as long as those benefits are not regulated away or competed away by the industry.
Andriy, thank you very much for your time.
- Thank you for having me.
[MUSIC PLAYING]
