5G has been hailed as the next huge innovation in wireless internet. Anthony Okolie talks with Andriy Yastreb, Telecom and Media Analyst, TD Asset Management, about the recent rollout of 5G across Canada, and what that means for telecom giants and consumers.
- Andriy, many of us have heard about the 5G networks that are being rolled out across Canada right now. But what does 5G actually mean?
- Hi, thank you for having me, Anthony. 5G stands for fifth generation of wireless technology. So we could think about the history of wireless. Basically, it started with 1G, which was basically phone calls on wireless phones. 2G added a little bit of data, which was basically texting. 3G added faster-- some internet, but it was pretty slow. So it enabled email and some simple web browsing. That was basically the era of BlackBerry. And 4G added faster internet speeds that enabled audio and video streaming, as well as apps such as Uber and Spotify, and created a whole new ecosystem of technology companies.
So 5G will build on that it. It will increase wireless speeds. Speech will increase to over 1 gigabit per second in many cases. But in addition to that, 5G is the first generation of wireless technology that is designed for Internet of Things. So it will enable more capacity. So the number of connected devices will increase up to 1 million per square kilometer. It will also have lower latency. And it will also provide longer battery life for connected devices. So, in summary, in addition to faster speeds, 5G will enable a lot of new applications that have-- very often will have nothing to do with a smartphone.
- And how important is 5G? And why does it matter?
- So from consumer perspective, benefits of 5G in the short term are quite minimal. Basically, you can have faster speed. But that's about it until there's new use cases. But in the longer term, 5G will become a bridge between physical and digital world. And what I mean by that-- for example, one of the key advantages of 5G, that it will only enable small chips about the size of a fingernail that will be connected to the wireless network and to GPS will cost about couple of dollars and will also be able to connect to other sensors and chips and have battery life up to 10 years. So technologies like that will enable efficiency improvements in factories and in logistics.
In fact, 5G will also be flexible. And it will offer opportunity to build custom wireless networks or large facilities like factories or ports, for example. And there will be other implications as well. So imagine a connected pacemaker that makes a 911 call automatically when it detects a heart attack in a patient.
There are already some smart watches that have that capability. But the benefit of 5G chip is that it can have multi-year battery life. So it will be a lot more reliable. So in short, 5G will spur innovation in this IoT space, from smart cities, to autonomous cars, to drones, and virtual reality, to, as I mentioned, more automation and more efficiency in factories and logistics.
It's still a bit early. It's still early days here. Because technical rules for 5G that enable a lot of these IoT applications known as release 16 rules, they were delayed. And they were being just released this summer.
- And what's the financial impact of the 5G rollout, particularly for Canadian telecom firms?
- So I think this question has three parts to it. One, what happens to revenue? Second, what happens to costs, operating costs? And third, what happens to capital expenditures?
So from a revenue perspective, as I mentioned, opportunity for incremental revenue in the short term are limited. Maybe some customers are willing to pay a premium for faster speeds. But it's not exactly clear if the whole industry can price 5G at a premium to 4G if all it offers is faster speeds. So maybe if there is a new and exciting use case, maybe that will be the case. So in the longer term, obviously, all those IoT applications that I talked about, they will create a new revenue pool in the long term. But it's still early for that. And what will be the profitability of that revenue still remains to be seen.
So from operating cost perspective, what 5G will do with that it will dramatically reduce the cost of sending 1 gigabit of data wirelessly, which should enable the telecom companies to provide more capacity at lower cost over time and should, in theory, result in higher margins over time. And from a capital expenditure perspective, Canadian operators overall are in good shape here, because they invested heavily-- most of them invested heavily into fiber-- dense fiber networks over time. And all wireless antennas are ultimately connected by a wire. So they're in good shape there.
But this brings me to another point. All previous generations of wireless technology-- in most cases, two or three generations of technology have to coexist in this separate infrastructure. So for example, if you were building 4G network, you'd have to either rip and replace some of the antennas for 3G or put-- you have to put some additional antennas specifically for 4G using separate spectrum bands.
5G was designed differently. It was designed to be built on top of 4G. And what that means is that 4G and 5G can share the same antennas. And in many cases, it will-- the new technology will also enable them to even share a spectrum with technology called dynamic spectrum sharing, which will be available later this year.
So in essence, 5G is going to be a lot more efficient to deploy and less costly to deploy than in the past. So if you summarize all of the above, eventually, over time, there will be some incremental 5G revenue opportunities, and probably not in the short term. But on the operating cost and on all the work capital intensity front, there's opportunity for telecom companies to grow free cash flow pool, even from its distant revenue over time.
- OK, let's talk about something that's been in the news lately, the Huawei factor. Of course, the US and its allies have banned the Chinese telecom giant from their 5G networks. Where does Canada stand on Huawei?
- So I think the whole discussion about Huawei is largely political at this point. If you look at what we've seen in the public eye, there's no evidence-- there's no hard evidence-- that the US publicly disclosed the Huawei equipment was ever used to spy on anyone. And while the US and its allies still debate whether to ban Huawei, some other countries, like Switzerland, for example, are using Huawei equipment today to do 5G networks.
So in Canada, we have two companies, Bell and Telus, that used some Huawei equipment in 4G networks in the past. But they mostly used it in radio access networks, meaning in antennas. They didn't use it in core electronics that actually runs the networks.
And recently, both companies announced that within their list of equipment providers for 5G, they excluded Huawei. And what that means in essence is that it's relatively easy for Canadian government. Because none of their Canadian telecom companies, at this point, plan to use Huawei for their 5G networks. So if government decides to actually put a formal ban in place, it will be more of a political deliberation at this point.
- And finally, we just have a few seconds left, but for investors who are looking to get exposure to the telecom sector, what's one way that they can participate?
- Well, in this world, there are many ways to get exposure to a theme, so through either individual stocks, or sector ETFs, or sector funds. Here at TD, we have TD Global Entertainment and Communications fund. So it provides exposure to telecom companies, as well as to a lot of the internet companies that are very savvy in technology and will be, probably, among the leaders in developing all those new IoT applications that we were talking about before, and that will define the 5G era.
- Andriy, thank you very much for your insights.
- Thank you for having me, Anthony.