Here’s a gruesome piece of trivia: road crashes are the leading cause of death in the United States for people aged 1-54. In addition to the 38,000 total deaths and 4.4 million injuries caused by traffic accidents on US roads, there is an economic impact on the economy estimated at 871 billion US dollars annually*. A significant contributor to these grim statistics is driver error. Therefore, many of these accidents are avoidable.
There are two solutions to eliminate driver error: better education or taking the driver out of the equation. For anyone who has ever tried to give driving advice to a middle-aged man behind the wheel, you’ll know how hard this is. Therefore, 5G-powered technology is perhaps the more effective solution.
Imagine a driver fiddling with his phone as he approaches a pedestrian crossing at 50 km/h. The light is red for the driver as a schoolboy on his bike, pedaling as fast as his legs can spin, approaches the crossing. At these speeds, an automobile-on-bicycle collision can be fatal. Many of the latest cars already have collision warning systems, but the speed a signal is sent concerning an impending collision is critical. This is where 5G technology can make a significant impact.
The time it takes to send and receive information is known as latency. Currently, 4G latency can be as high as 100 milliseconds, which would mean the car would travel about 1.2 metres. With 5G, the latency is about 10 milliseconds, meaning the car would travel only 12 centimetres. While we may think of 5G as just some technology that makes our social media apps run faster and our connections more reliable, from the above example, we can see that, in fact, 5G can mean the difference between life and death.
Why 5G is important for US telecom operators
Improved safety measures are not the only benefit; 5G will transform the way we live. As an entirely new kind of network, 5G is designed to connect virtually everyone and everything, including smart devices, vehicles, and industrial machinery (see graphic below). The appeal of 5G boils down to the combination of enhanced speed, increased capacity, and reduced latency.
Here, we get a bit technical, but not to worry, we’ll keep it brief. Mastering the technical side, is key to understanding the business of US telecoms. 5G will eventually operate on spectrum bands that are typically classified into three categories:
- Low-band spectrum: Radio frequencies lower than 1GHz which offer the widest coverage and best wall penetration and hence require less cell sites to cover larger areas. However, the disadvantage comes in terms of speed, latency, and capacity.
- Mid-band spectrum: Radio frequencies ranging between 1GHz and 6GHz, which offer a balance of coverage, wall penetration, speed, latency, and capacity.
- High-band spectrum: Radio frequencies higher than 6GHz which offer the highest performance in terms of speed, latency, and capacity, but the coverage area is narrow and wall penetration is poor. Hence, this spectrum band requires more cell site deployment to cover large areas.
Going once, going twice….5G spectrum sold for 95 billion
From a US telecom perspective, 5G can make or break their business in the future, which is why telecoms providers are now spending whatever it takes to acquire 5G spectrum licenses auctioned by the US Federal Communications Commission (FCC).
In the latest US spectrum auction, the bidders spent a total of 95 billion US dollars, making it the biggest on record.
Up for auction were licenses for the exclusive use of fourteen 20MHz sub-blocks in the mid-band spectrum, a radio frequency spectrum suitable for 5G. This suitability, together with the large bandwidth (total of 280MHz) as well as the exclusive nature of the licenses, made the auction extremely important strategically. The FCC and satellite operators will receive 81 billion and 14 billion US dollars, respectively, for the licenses, clearing costs, and incentive payments. The big three US telecom companies, Verizon, AT&T and T-Mobile, acquired nearly all the spectrum licenses. The mid-band spectrum that was purchased will become available by the end of 2021 (100MHz) and 2023 (180MHz), in line with the relocation of the satellite operators that are currently utilizing the spectrum bands.
The FCC’s next spectrum auction is scheduled to begin on October 5, 2021. The value of this auction is expected to be less than the previous one, as only 100 MHz of spectrum will be available, and it is not exclusive use. The spectrum will also be sold in smaller block sizes. CreditSights’ (a credit research specialist) initial view is that the auction will bring in total proceeds of 20 billion. AT&T is expected to participate in the October auction, while Verizon and T-Mobile will likely stay on the sidelines, due to their better positioning in the mid-band spectrum.
In addition to acquiring spectrum licenses auctioned by the FCC, the US telecom companies will have to upgrade their hardware (antennas and other devices) on the macro towers, build out fiber, and add small cells. As spectrum bands become available, the companies will gradually do so and extend their 5G network coverage in a cost-efficient manner, i.e. use the right mix of spectrum bands to cover high density and rural areas. We believe that having a well-performing 5G network that covers a large portion of the population is necessary to effectively compete in the telecom sector in the long term. Another important part of the equation rests with consumers, since they will eventually need to upgrade to 5G compatible phones, so that they can enjoy the wide range of possibilities that 5G technology will bring along.
The investment case for telecoms
A telecom company’s position in 5G is an important part of our analysis, as it impacts the entity’s current and future competitive standing. Heading into the auction, T-Mobile was best positioned in mid-band spectrum, with AT&T a distant second and Verizon in third place. To narrow the spectrum gap and strengthen its competitive position, Verizon vastly outspent AT&T and T-Mobile, acquiring licenses valued at 53 billion US dollars, including payments to satellite operators. AT&T was the second-highest bidder, spending 28 billion, while T-Mobile spent a far lower 11 billion. Following the auction, T-Mobile remains in the lead in terms of mid-band spectrum, while Verizon moved into second place and AT&T fell into third place. The gap between T-Mobile and the other two players was narrowed significantly, however.
We have a positive long-term view of the telecom sector. Strengths include relatively stable operating trends, the big three telecom companies’ focus on reducing leverage following debt-financed spectrum purchases at the last auction, and T-Mobile’s acquisition of Sprint in 2020, and our expectation for moderate revenue growth. These factors are partially offset by intense competition for subscribers, creating a promotional pricing environment at certain times as companies look to increase market share, and high capital spending to build out networks and adopt new technology.
In our view, now that the big three telecoms have secured more mid-band spectrum, the event risk in the sector has dissipated and we expect them to profit through upgrading customers to premium wireless service plans, growth in new end markets (such as fixed wireless), and productivity gains. While the telecom companies have taken on a lot of debt to acquire mid-band spectrum, we expect them to pay it down over time with their strong cash flows. Overall, the big three telecom companies are well capitalized and offer bond investors a wide range of debt maturities with solid carry, providing investment opportunities along the credit curve.
The word “revolutionary” is much overused, but with 5G’s impact on society and our daily lives valued in the hundreds of billions, 5G is thoroughly worthy of this title.
*Association for Safe International Road Travel