Why 5G won't turnaround the Telstra share price like 4G

The arrival of 5G won't give Telstra Corporation Ltd (ASX: TLS) the same advantage as 4G did but what's more surprising is that the biggest winners from 5G may be local councils.

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Those holding on to hope that the roll-out of 5G will give Telstra Corporation Ltd (ASX: TLS) the same strategic advantage to outperform its rivals as 4G did should temper their expectations.

This isn't to say the next-gen mobile technology won't bring some exciting new applications to consumers, but the different nature of 5G and 4G has implications on how telecommunications companies build out the faster data service.

Investors do not need to know the technical details of the technology but you need to understand the basics given that some of the 5G hype is being priced into the Telstra share price (in my opinion) after its 40% surge over the past year compared to the 8% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

The winners from 5G isn't Telstra but local governments

The arrival of 4G in 2014 gave Telstra an edge because it could offer better coverage than its competitors. This is due in a large part to its ability to lock others out of its mobile towers and base stations as it owns those properties.

The world of 5G will change that. The new technology has a much shorter range than 4G and that means its properties won't be as useful in helping our largest telco from cornering the market.

This may surprise many but I think the power is shifting to local councils because Telstra and friends are eyeing street lighting poles to set up small cells to extend the range of 5G. Suddenly, local councils have a new revenue stream as they can "rent" space out to telcos.

This also means they are unlikely to just give access to any one company – hence providing a more level playing field to mobile operators, which will also include TPG Telecom Ltd (ASX: TPM) if its merger with Vodafone proceeds.

Small cells mean big capex

Mobile operators will need to set up many small cells if they want to provide complete coverage in the major cities and suburbs given that the range of small cells (which some call macro sites even though there's nothing macro about them) drops to less than 200 meters when data traffic density jumps above 0.5 petabyte per square kilometre per year, according to a research report by McKinsey & Company.

McKinsey believes that Melbourne's traffic density will surge to 1.1 petabyte by 2025 from less than 0.2 petabyte in 2017. If you are wondering that the range of 4G is, Telstra says it's typically 3km to 7km.

This means mobile operators will face a second issue – an unavoidable and significant increase in infrastructure costs.

Depending on the growth in data, total cost of ownership (TCO) for a 5G networks could jump by as much as 300% if data demand increases by 50%, according to McKinsey which looked at one European country.

Let's hope Telstra's other businesses would be springing back soon to cover the capex bill for 5G or shareholders might be asked to foot the bill by forgoing dividend growth (or cut) and maybe even a cap raise if Telstra wants to be first to market.

Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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