Will the $853M investment in 5G spectrum be worth it?

Will the $853M investment in 5G spectrum be worth it?

Analysts weigh in on whether 5G will help - or harm - mobile carriers in the future

Credit: Dreamstime

When the results of the long-awaited 5G spectrum auction were announced this week, Telstra’s CEO Andrew Penn was unsurprisingly quite pleased with himself.

“This is also a significant investment in the nation’s future connectivity,” he gushed as the telco spent $386 million on 143 lots 5G-compatible spectrum, putting it ahead in the race to build Australia’s high-speed mobile network.

However, Telstra and rivals Mobile JV (a joint venture between Vodafone and TPG), Optus and Dense Air - which together spent $853 million - now face the uphill task of increasing revenues and recouping their investment amid rising competition from the National Broadband Network (NBN).

So will this spending splurge be worth it in the long-run?

For independent telecommunications analyst Paul Budde, the first hurdle will be convincing mobile consumers that 5G will be actually worth the inevitable price hike.

“The more I think about 5G, the more I ponder that it is a fabulous plot of the telecommunication equipment vendors to get the operators to buy a whole new set of gear worth billions and billions of dollars to them, while in all earnest there is very little the operators can do to increase their mobile revenues," Budde said.

“Users are very happy with their current 4G service and for them there would not be a reason to pay extra money to switch over to 5G.

“The only thing that is in it for the operators is a more efficient infrastructure, which while important, the question is if that is worth the large investment? On top of the spectrum they just bought, billions of dollars will need to be invested in 5G infrastructure.”

In contrast, Telsyte analyst and MD Foad Fadaghi shares the belief that, whatever the cost, 5G will be what secures carriers’ future profitability, especially concerning the much-lauded internet of things (IoT) industry.

“One school of thought it that 5G will present new opportunities for new business models and not only replace 4G, but allow carriers to bring in new services for their partners and customers,” he said.

“From a business perspective, the players will now be massively focused on IoT to enable applications that will help the digital transformation initiatives that many organisations are undertaking right now. 5G is the cornerstone to many of these activities. The ability to capture more data and process applications from the Edge will be all important.”

Globally it is estimated that the worldwide IoT market will increase by 133 per cent to $3.04 trillion in 2020, with the technology touted in Australian projects from utility services to Australia’s recently-unveiled space ambitions. As Fadaghi says, there is a lot at at stake in this industry.

From a consumer perspective meanwhile, Fadaghi argues this will be less of an issue if the 3G switch over is anything to go by.

“It’s fair to assume that customers who have experienced 5G services will not want to revert back to 4G. There is only so much capacity on the network. When that has been allocated to 5G, then the service level on 4G will reach a certain level that over time might lose capacity and make 5G a necessity for consumers,” said Fadaghi.

“4G will be an important supplementary service, but as carriers switch over, 4G services will reach a capacity point and that will encourage consumers to switch over. When 3G turned to 4G, consumers had little incentive because the services were comparable.”

Yet as both analysts agree, Telstra and its competitors could have ended up paying a lot more to the Australian Communications and Media Authority (ACMA) if it were not for the merger between Vodafone and TPG.

Instead of $800 million, the government could have cashed in more than a $1 billion, believes Budde.

“The overall price was subdued because of the announced merger between Vodafone and TPG, which further limited the level of competition that could have driven the price higher,” he says. “But the government correctly went for a more balanced approach.”

For Fadaghi, the lower-than-expected price forked out should serve as a better outcome for competition and consumers, describing it as a more level playing field. And ultimaltey, he believes, Telstra played its hand well as: "It could have paid a lot more than it did."

"This investment is critical," he adds. "The monetisation period will not be anything out of the ordinary, especially compared to 3G and 4G. They were pretty late the game with regards to 3G, but it could clearly pave the way for decades of profitability and it’s likely the 5G will be that kind of cornerstone as well.”

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