Can 5G elevate Telstra's share price?

Telstra Corporation Ltd (ASX: TLS) is the first mobile network in Australia to be 5G ready, made possible by a colossal $8 billion investment. But will Telstra's 5G bet pay off?

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Telstra Corporation Ltd (ASX: TLS) is the first mobile network in Australia to be 5G ready, made possible by a colossal $8 billion investment over five years to 30 June 2019.

But will Telstra's 5G bet pay off? Can the large investment pale in comparison to its returns?

Contracting telecom industry profits

5G is touted as revolutionary. It is thought that giant industries like gaming can use 5G to augment user experience, while manufacturers can develop the interconnected, automated factories of the future. It is also thought that 5G is the key to making the Internet of Things (IoT) go mainstream.

Yet access to 5G rights is not automatically access to a golden goose.

For instance, 4G mobile operators did not make the same great returns as they did from earlier generations. In some regions, like Latin America and Europe, revenues actually dropped after operators introduced 4G.

A 2012 McKinsey report estimated that in Europe, average revenues from fixed-line customers fell 3% a year and average mobile prices dropped 8% a year.

Astonishingly, the report found that Europe's telecom industry's earnings before interest, tax, depreciation and amortisation (EBITDA) margins declined by 4% a year, even as user population grew. That came to around $5–7 billion euros in lost profits annually.

Telecoms can pay billions for networks that customers end up accessing for paltry sums, yet a new-generation network is central to Telstra's plans.

Telstra2022

In a 2018 announcement detailing the Telstra2022 (T22) strategy, CEO Andrew Penn stated that the company plans to "prepare to lead the market and win in 5G. We will be network ready in the first half of FY19 with full rollout to capital cities, regional centres and other high demand areas by FY20."

He went on to say that "we already have tens of thousands of customers on 4G in enterprise, we have a healthy IoT business and 5G will help accelerate that."

Embedded in that statement is Telstra's pivot to "enterprise" as its big-money earner. Telstra is banking on businesses using its new 5G network as a foundation for their activities.

In light of this, Telstra announced a collaboration with Ericsson and Commonwealth Bank of Australia (CBA) to explore and trial possibilities of edge-computing. Telstra has also partnered with Aldi to develop an integrated freight-tracking platform.

In an article published last month in The Australian, Telstra's Global IoT Solutions executive Gerhard Loots stated that, "from vehicles to machines, infrastructure, smart meters, buildings, and much more, the benefits we can realise from a connected world are now real and attainable."

In the gold-rush world of interconnectivity, Telstra wants to be the one selling the network shovels.

But is 5G essential for the interconnected future? For example, CEO Andrew Penn already admitted that "tens of thousands" of customers in enterprise use existing 4G technology for IoT.

What is currently impossible with 4G that 5G will make possible?

The uses of 5G

Addressing this question, The Economist reported "no device exists that makes a compelling case for 5G."

William Webb, author of The 5G Myth, observed that "5G could end up being like Concorde – a superb feat of engineering but of limited value to all but a small minority."

Even GSMA, a trade body representing global mobile network operators, concluded in a 2014 report that potential 5G use-cases like cloud-based office computing, videoconferencing, and machine-to-machine connectivity are serviced ably by existing 4G and in some cases even 2G technology.

Further, when discussing augmented reality and tactile internet systems, the report stated:

[They] are very much in their infancy and their development will be largely dependent on advances in a host of other technologies such as motion sensors and heads up display (HUD). It remains to be seen whether these applications could become profitable businesses for operators in the future.

Importantly, the report concluded that "many of the services that have been put forward as potential 'killer apps' for 5G do not require a generational shift in technology, and could be provided via existing network technologies."

Summary

A 2018 McKinsey report soberly laid out that "the economics, business model, and ability to monetize [5G] use cases at scale in the near term to justify a nationwide rollout of 5G in any country today remain unclear."

GSMA's report suggested that, "if previous generations of mobile technology have taught us anything, it is it that, as with each preceding generation, 5G will unlock value in ways we cannot and will not anticipate."

Interestingly, this uncertainty was somewhat mirrored by Telstra's own commentary about 5G's potential to shake up entertainment: "the potential for 5G to expand into the broadcasting space is exponential, and if we can inspire the next generation of content creators, who knows what the future of entertainment may be?"

That is the worry. Who knows?

Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. 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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