5G Conference

European telecoms bosses are breathless about 5G mobile networks, but not in a good way. Delegates at the Mobile World Congress (MWC), the industry tech-fest that rebooted in Barcelona this week, were treated to dizzying visions of humanity’s wired, digital future. For chief executives like Vodafone’s Nick Read, hype can quickly lead to hyperventilation.

In numerical terms, this year’s gathering of 60,000 attendees was a pale imitation of its pre-pandemic self, attracting barely half the punters who poured through its doors in 2019. The enforcement of face masks and Russia’s unfolding invasion of Ukraine served as reminders of how the world has changed in the meantime. Not that the boffins squashed their exuberance about the fifth generation of mobile phone technology, which lets electronic devices exchange vast amounts of data with their surroundings at high speed. Spain’s Telefonica showcased a robotic barman, albeit one with a pour so slow his patrons risked dying of thirst; Sweden’s Ericsson deployed a holographic presenter to unveil its vision of seamlessly integrated real and digital worlds; South Korea’s SK Telecom took attendees on a virtual ride in Harry Potter’s flying car. For purists, however, 5G is less about consumer gimmicks and more about a high-tech industrial revolution. Cars that communicate with their surroundings will navigate cities safely without drivers at the wheel; robot-run production lines and warehouses hundreds of miles apart will synchronise supply chains in real time; the pandemic-era board meeting on Zoom will make way for “fully immersive” 3D-like experiences. All of which offers huge potential gains and efficiency savings.

How much of that accrues to the companies running the infrastructure remains to be seen, however. If previous advances in mobile phone technology are anything to go by, telecoms investors will largely miss out.

The previous generation of 4G mobile networks enabled online giants like Facebook owner Meta Platforms and China’s Tencent, which now have a combined market value of almost $1.1 trillion. Over the past decade, the pair delivered annualised returns to shareholders of 16% and 25%, respectively. The carriers whose networks helped fuel that growth fared less well. Over the same period, investors in AT&T had to make do with a 4% yearly return including dividends; China Mobile shareholders earned a tenth of that.

This discrepancy explains the latest push by telecoms operators to compel heavy data users like Netflix to pay a larger share of the cost of building and running mobile networks. In South Korea, for example, SK Telekom is suing the U.S. streaming giant because its wildly popular series “Squid Game” forced the operator to upgrade servers to prevent phone networks grinding to a halt.

In Europe, where competition regulators have kept a tight grip on how much telecoms operators can charge for data, the picture is even worse. Telefonica – one of the region’s four big carriers along with Britain’s Vodafone, Orange of France and Germany’s Deutsche Telekom has delivered a negative return to shareholders of 7.5% a year for a decade.

That leaves Telefonica CEO José María Álvarez-Pallete and his rivals with a huge problem. Installing 5G networks requires vast investments: consultancy Dell’Oro reckons the industry will have spent $250 billion between 2020 and 2025. But without a more compelling investment case, shareholders will be reluctant to finance it. JPMorgan reckons European telecoms companies earn an average return on investment of just 7%, below the industry’s cost of capital. The equivalent number in the United States is 11%.

One reason for the disparity is fierce competition. Most European countries are home to four rival operators; the larger United States and China have three each. More choice has been great for European consumers: downloading 1 gigabyte of data in America costs almost 10 times as much as in France. For operators, though, it’s been painful. Telefonica’s revenue from its home market is likely to be 5% lower this year than in 2017, largely due to price wars.

One potential fix is for European Commissioner Margrethe Vestager to relax her opposition to consolidation. But there is little evidence that the competition watchdog will bow to increasingly desperate entreaties from operators and their investors read more . With inflation soaring, no European consumer or politician wants a fatter phone bill.

Yet policymakers are also aware of the potential cost of falling behind in 5G while Chinese and American entrepreneurs build the next generation of Facebooks and Tencents. The GSMA, an industry body, estimates that two-thirds of South Koreans and half of Americans will have 5G devices by 2025, compared with less than a third of Europeans. China Mobile reckons a quarter of Chinese will be using the technology this year. With forecasts like that, it’s no surprise the Barcelona buzz left European telecoms executives short of breath.

Credit: Ed Cropley (Reuters)