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Paths Diverge Free to View / Equities Diversified Telecoms October 2020 By: Global Telecoms team www.research.hsbc.com SPOTLIGHT SPOTLIGHT 5G 5G Paths diverge 5G so far has underwhelmed, but the latest version brings new capabilities – and real opportunities to differentiate Network ‘slicing’ is a potential revenue generator – but this will take time to develop Asset // Subcategory Operators and suppliers are taking very different paths with 5G: this divergence in strategy will create Equities Equities execution risk and reward | Diversified Telecoms Diversified | This is a redacted version of the report published on 07-Oct-20. Please contact your HSBC representative or email [email protected] for information. October 2020 Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Free to View ● Equities - Diversified Telecoms October 2020 Why read this report? 5G so far has underwhelmed, but the latest version brings real opportunities for operators – as well as execution risk Network ‘slicing’ is a potential source of new revenue – but this will take time to develop Operators and suppliers are taking very different paths with 5G: this divergence in strategy will create execution risk and reward 5G so far has been underwhelming – what’s coming is much more interesting The initial version of 5G has underwhelmed, with only minimal differences in services and performance for customers, and price and demand for investors. The latest version, Release 16, is being deployed now, and is materially different. Operators will be able to offer ‘slices’ of the 5G network to different groups of customers. 5G slices can be tailored to specific bandwidth, latency and Quality of Service parameters. This creates the potential to bill based on the quality of service provided, and may help grow revenue. Yet the upgrade decision isn’t simple. The migration to a ‘cloud-native’ StandAlone core is complex, with dispute in the industry as to the best architecture, and considerable execution risk. As a result, most operators (particularly in Europe) plan to deploy 5G radio alongside their 4G core − helpfully termed ‘Non StandAlone’. This will enable operators to get more return from their 4G investment in the absence of any clear 5G business case. After a period of relative homogeneity with 4G, we expect the 5G experience to differ between operators, creating winners and losers for investors. Network ‘slicing’ is the service to watch Network slicing creates the ability to customise the network for corporate and consumer needs. This could help reclaim some of the value in the provision of connectivity – a service that is increasingly commoditised. The improved capabilities of 5G will make it relevant to new groups of corporate users. Needless to say, slicing brings its own complexities. Billing, provisioning, and after-sales support are challenges additional to making sure the technology works. Operators are likely to struggle with this – offering opportunity to those who execute well. Disruption ahead Services have been relatively homogeneous in the 4G era. Equipment from the same ‘big four’ vendors is deployed to the same timelines. Operators offer the same services and handsets, and the same billing models. Connectivity has become commoditised, and the telecom industry investment case has suffered as a result. 5G promises dislocation, and with it opportunity and risk for investors. On the supply side, accelerated swap-outs of equipment offer opportunities for smaller vendors and the Open RAN movement. Operators are taking different approaches to the core upgrade, as well as to spectrum and Mobile Edge Compute. We explain why billing based on quality of service is a key indicator, why 5G mobile gaming is a test case for the enterprise, and why the Internet of Things and the connected car are (still) the services of the future. This is a redacted version of the report published on 07-Oct-20. Please contact your HSBC representative or email [email protected] for information. 1 Free to View ● Equities - Diversified Telecoms October 2020 Contents Why read this report? 1 Facts and figures 3 Executive summary 4 Release 16: the real deal 7 5G – new services 17 On the spectrum 25 Supply chain disruption 31 Disclosure appendix 35 Disclaimer 37 2 Free to View ● Equities - Diversified Telecoms October 2020 Facts and figures Release 16 3x Finalised in July 2020, this is the Lower costs per unit of data on 5G next iteration of 5G – and very compared to 4G different from the current version Network ‘slicing’ is one of the key features of Release 16: it enables precise Hundreds configuration of speed, latency, and Quality Of separate network ‘slices’ are of Service for a ‘slice’ of the network, which possible – although telcos are debating can be reserved for a certain group of users how many are practically feasible 5-10% 800MHz 200MHz Increase in Average Quantity of mmWave 3.5GHz spectrum available Revenue Per User as spectrum held by each to each operator in China customers migrate to 5G operator in South Korea Mobile radio technology typically uses 10-20+ vertically integrated kit from a single The number of vendors involved in vendor. Open RAN uses open interfaces Rakuten Mobile’s ‘Open RAN’ network, and advanced software to change this, compared to 1-2 for most operators bringing the flexibility and scalability of the cloud to mobile. 5-20ms 4Q20 Latency on a 5G network, compared to 5G launch using Open RAN technology by c50ms or more on 4G Rakuten in Japan, and Dish in the US 3 Free to View ● Equities - Diversified Telecoms October 2020 Executive summary 5G StandAlone network launch is starting now: this is the real deal, with potential for new services, and new billing models The key in 5G is the potential for bespoke services – after a period of relative homogeneity in 4G, 5G offers the chance to differentiate Differences in strategy are starting to emerge – network slicing could separate the 5G leaders from the others Standalone deployments mark the beginning of the ‘real’ 5G 5G to date has been underwhelming. Users haven’t seen much performance improvement over 4G, and investors have seen little differentiation in tariffs or services. Yet in most markets capital intensity looks likely to rise due to 5G (and has done dramatically in Korea and China in particular). To restate the title of our 2018 report, What’s the use? We think things will get (much) more interesting from here, as StandAlone 5G networks are deployed, alongside services and devices aligned to the latest 5G standard, Release 16. Key improvements are as follows: A 5G connection from end-to-end, not just in the radio. Nearly all the 5G focus so far has been in the radio access network (RAN). Yet this is just one component of 5G. The true value of 5G will become apparent when operators and developers can work with a set of 5G processes and functions from deep in the core network to the device. The 5G core network is ‘cloud native’, enabling much improved flexibility and scalability. Processing can be pushed to the network edge, enabling lower latency. Network ‘slicing’. This end-to-end control will allow ‘slicing’ of the network for different use cases and scenarios. These will be defined and set up according to quality of service Exhibit 1: China − mobile revenue vs Exhibit 2: Next steps in 5G services mobile data 1,000 140,000 Enhanced mobile broadband (eMBB) 900 120,000 800 GB/s Communication 3D，UHD Video 700 100,000 600 Cloud Office/Gaming 80,000 Augment Reality 500 Smart Home 400 60,000 Industrial Automation 300 40,000 Voice 200 Highly reliable 20,000 Application, such as 100 Smart City Mobile Healthcare Autonomous - - Vehicles 2010 2012 2014 2016 2018 Massive machine type Ultra-reliable and low latency Revenue, RMB bn Traffic, GB m communications (mMTC) communications (uRLLC) Source: Company data, HSBC estimates Source: ITU 4 Free to View ● Equities - Diversified Telecoms October 2020 parameters – an emergency service or smart robot facility would have a very different down-time and latency sensitivity compared to a logistics service tracking shipping containers. Operators could deploy tens and eventually hundreds of different slices. Why care? Slicing will enable operators to create very different services, and potentially reclaim ‘Slicing’ is a 5G capability that could help reclaim some some of the value in the provision of connectivity. Currently, of course, Over The Top platform of the value in the network companies capture much of the value in the digital economy. We consume vastly more data than we did, and would be lost without our smartphones. Yet our mobile bills are – in many markets – lower than they were five years ago. The shift in focus from connectivity to service could enable new billing structures. Currently, 5G tariffs have the same structure as 4G: while some operators have reported a 5-10% increase in spending as customers migrate, this is mostly a function of early adopters being willing to spend more – we expect this gap to narrow. The initial focus has been on enhanced Mobile BroadBand, a similar service to 4G. Release 16 and Standalone add the two remaining corners of the 5G triangle: uRLLC (Ultra Reliable Low Latency Communications) and enhanced Internet of Things capabilities, termed Massive Machine Type Communication (mMTC). Of course, this will take some time to develop – the near-term impact of 5G on stock prices will – mostly – be limited. Supplier market is opening up, creating opportunity for operators A key development in the past two years has been the opening up of the telecom equipment market: Vendor lock-in has been the default mode. The complexity of mobile telecoms – particularly in the radio network – has meant that so far only vertically integrated hardware / software can handle the processing loads.
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