We expect The 5G Revolution will expand to materially affect telecommunications providers, but the impact on cable services is likely to be more limited.
Building the 5G networks
For the major national wireless carriers—AT&T, Sprint, T-Mobile and Verizon—building a 5G network will likely require a mix of strategic investments, but one essential component will be building-out a fiber network and/or leasing space on existing fiber networks in densely populated areas on which small cells can be located. While AT&T and Verizon are more focused on building their own fiber networks in certain regions, T-Mobile and Sprint have indicated their preference for leasing fiber, whether from a tower company, such as Crown Castle, or in Sprint's case, leasing space from cable providers like Altice USA and Cox Communications.
Regardless of whether a carrier builds or leases fiber, network requirements will result in the first 5G networks being located in large metro markets, with fixed wireless (i.e., small cell antennas sending a wireless signal directly to a consumer's home, facilitating in-home Wi-Fi) likely in late 2018. True mobile 5G networks are not likely to be available until after 2020.
Telecommunications: Pressuring credit fundamentals
Over the medium to long term, the use cases for 5G will likely provide incremental revenue opportunities for owners of wireless networks as more devices and products connect to the internet and consume network capacity, but not without notable expenses. In the short to medium term, a multi-year cycle of capital investment will be required to build true mobile 5G networks across the US. In addition, the need to license mid-to-high-band wireless spectrum over which cellular data is transmitted could result in significant, one-time outlays to the FCC for spectrum licenses.
From the carriers' perspective, the increase in capital investment will continue to pressure cash flow, while leasing networks from other fiber owners will increase the cost of providing cellular service, lowering margins. In addition, the capital outlay required for spectrum licenses could increase debt on the balance sheet, negatively impacting leverage ratios. Regardless of how the 5G networks are ultimately constructed, the network must be built before the incremental revenue opportunities can be realized, which will pressure credit metrics in the short term.
5G: Competition for cable? Likely limited
If 5G networks provide data download speeds comparable to existing fiber-based networks, it is fair to question whether consumers will require a Wi-Fi network within the home and whether fixed wireless networks will represent a meaningful competitor to cable's broadband product. For insight, it is helpful to compare average data usage within the home relative to current wireless data packages. Altice USA has reported that the typical household consumes close to 200 gigabytes of data per month. However, current wireless data prioritization caps range from 22 to 50 gigabytes per month. Given this mismatch, if a household transitions to a pure wireless connection, they would either need to pay significantly more, accept slower data speeds or consume less data. With the increasing pace of mobile data demand, it is unlikely in the near term that wireless networks will be able to close this gap at a cost comparable to cable's broadband product.
For cable companies to remain competitive with 5G, cable providers must invest in their networks to provide consumers with data speeds comparable to, and likely faster than, competing wireless networks. Similar to telecom, this investment will pressure cash flow, but may open additional revenue opportunities from telecom companies who wish to leverage cable's increasingly fiber-based networks.
While 5G may provide incremental competition for cable companies over the long term, we expect the ultimate impact to be limited as cable broadband is well-positioned to meet future data demand.
Read the first part in this series, The 5G Revolution: Part 1
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