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DBS Asian Insights

DBS Group Research • January 2017

The Push for 5G

Shaking Up the Landscape
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The Push for 5G

Shaking Up the Landscape

Sachin MITTAL
Telecom, Media and
Technology Analyst
DBS Group Research
sachinmittal@dbs.com

Daniel FOO
Analyst
DBS Group Research
danielsmfoo@dbs.com

Produced by:
Asian Insights Office • DBS Group Research

go.dbs.com/research
@dbsinsights
asianinsights@dbs.com

Chien Yen Goh Editor-in-Chief

Jean Chua Managing Editor
Geraldine Tan Editor
Martin Tacchi Art Director
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04 Investment Summary

07 Introduction to 5G
Why Develop 5G

10
5G Timeline: Asian Telcos Leading the Pack
What Can 5G Do?
High Costs a Hurdle
15 5G Single Network Implementation Model
Benefits of a Single Network
Shared Networks: Tried and Tested
Forms of Network Sharing

18
Regulatory Response a Key Determinant
5G’s Financial Implications
Leasing 5G network
Sharing 5G Network

23
Owning 5G Network
Strategic Responses to 5G
Telco Equipment Vendors Well Positioned
Telcos at a Critical Crossroad

34 Now Till 2020:

5G Implementation Roadmap
Asia: Ahead of the Pack
Europe Will Be Next
Interim Technologies

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Investment Summary

A
gainst the backdrop of rapidly growing data consumption and telecommunication
companies or telcos’ inexorable pursuit of network entrenchment opportunities,
Asian telcos are leading the charge in implementing Fifth-Generation (5G)
networks. Japan and South Korea’s KT have plans to launch trial 5G networks
by 2017; hot on their heels would be China Mobile, which intends to roll out a massive scale
network by end-2020.

Paradigm shift The allure of 5G’s enhanced capabilities and wide range of applications is, however, accompanied
by an unprecedented slew of highly demanding technical standards and specifications. We
believe the sheer intensity of 5G-related operational and capital requirements would set forth
a paradigm shift in telcos’ business models and financial returns.

While telcos might be drawn to retain network advantages by owning and individually
implementing 5G networks, they would be presented with major challenges and discover that
they would not be able to replicate the success of previous generations of networks under this
similar model. This beckons the consideration of alternative implementation models of sharing
or leasing access to a single 5G network as discussed below.

Intensive capital outlay Telcos which perpetuate the network ownership model would be presented with two main
challenges. Firstly, they would be laden with gargantuan capital outlays – required to enhance
current telecommunication infrastructure – estimated to be 2.5x of current levels over the next
five years. Their diminished cash flows might also hamper their ability to obtain financing for
these capital expenditures at a feasible cost. Secondly, additional expenditure from operating
the 5G equipment would cause a drag on their earnings. As a result, these telcos would
experience a reduced return on invested capital (ROIC) of 12%.
Asian telcos’ ROIC projections under various 5G implementation models in 2020

Source: DBS Bank

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Comparatively, under the 5G network-sharing model, where telcos would collectively

contribute towards the 5G infrastructure roll-out, there would be less additional capital
outlay and savings on operation costs from industry-wide economies of scale. This would
improve the ROIC to 15% from 12%.

Leasing – the preferred Under the leasing model, telcos would access 5G networks from a single network provider,
model and achieve a ROIC of 15%, comparable to that under the 5G network sharing model.
This occurs as the absence of additional capital outlays is mitigated by lease payments to
the single network provider. Under this structure, the single network provider – likely to be
a telco equipment provider – would take on the 5G infrastructure assets under favourable
financing conditions due to the stability of cash flows generated. The value from the lower
costs of financing of the single network provider underpins the difference between the 5G
network leasing and sharing models. Notably, even with the carve-out of 5G infrastructure
assets, telcos under the leasing model are capable of achieving comparable earnings as
telcos which possess their own 5G networks.

Opportunity to Leasing or sharing the 5G network will lead to the telcos’ loss of network differentiation.
transform However, we believe that this is a fair trade-off as they could then transform their business
models to differentiate themselves in the domain of digital services.

Asset-light telcos under the leasing model to differentiate themselves in digital services

Source: DBS Bank

We recommend that telcos under the 5G network-sharing and leasing models judiciously
manage their 5G-related capital expenditure (capex) savings by investing in fast-growing
and established digital businesses. This is preferred to small investments scattered across a
wide range of digital services, which tend to yield less favourable results. We also believe
that digital business should be the focus, as it represents approximately 7x the market size
of providing incremental connectivity services. This transformation toward digital businesses
as a diversified source of earnings could potentially elevate telcos’ ROIC further.
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Loss of network advantages with 5G roll-out to prompt differentiation through

digital services

Source: DBS Bank

5G-related operational and capital requirements

would set forth a paradigm shift
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Introduction to 5G

T
he Next Generation Mobile Networks (NGMN) Alliance defines 5G1 as “an end-
to-end ecosystem to enable a fully mobile and connected society. (5G) empowers
value creation towards customers and partners, through existing and emerging
use cases, delivered with consistent experience, and enabled by sustainable
business models”.

The futuristic vision of 5G is expected to fulfil a number of requirements including the

following2:
• 1 - 10 gigabit per second (Gbps) connections to end points in the field (i.e. not
theoretical maximum)
• 1 millisecond (ms) end-to-end round trip delay (measure of latency)
• 1000x bandwidth per unit area
• 10 - 100x number of connected devices
• (Perception of) 99.999% availability
• (Perception of) 100% coverage
• 90% reduction in network energy usage
• Up to ten-year battery life for low power, machine-type devices

How has 5G evolved from 4G

Fourth-generation (4G) telecommunications technology was implemented to enhance
data transfer speed and capacity by improving spectral efficiency. The focus of 5G,
however, will be to provide pervasive, low-latency connectivity that is reliable and
available, regardless of the user’s or the device’s location. Through which, 5G would be
able to support new applications that are incompatible with existing 4G networks.

Why Develop 5G
Explosion of data Global mobile data traffic will grow over 8x (or at a five-year compound annual growth rate or
consumption CAGR of 53%)3 from just 3.7 Exabytes (EB)* per month in 2015 to 30.6EB per month by 2020.
This is driven by i) the rising average data consumption (as more people use smartphones)
from 929MB to 4.4GB per month, and ii) the proliferation of connected devices to 11.6
billion4, exceeding the world’s population forecast of 7.8 billion people in 2020.
1 Exabyte = 1,024 Petabytes = 1,000,000 Gigabytes
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Rapid rise of global mobile data consumption

Source: CISCO, DBS Bank

Telco network providers would have to scale up their network capacities by several
times through the use of newer technology to ride on this rapidly rising wave of mobile
consumption. Those who do not will risk losing market share.

5G Timeline: Asian Telcos Leading the Pack

Research firm Ovum estimates 5G will be commercially available worldwide by 20205,
with global subscriptions to reach over 24 million by 2021. In anticipation of this, telcos
worldwide are already conducting experiments on 5G, with Asian telcos leading the pack.

5G implementation timeline in Asia

Source: Companies
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South Korea’s KT intends to launch 5G services at the 2018 Winter Olympics in

PyeongChang6. Additionally, the company has plans to launch its commercial 5G network
by 2019, a year earlier than previously planned. Japanese telco, NTT DoCoMo, has similar
plans to launch a trial network in Japan. The telco is also looking to meet the Japanese
government’s prescribed timeline for 5G’s commercial launch in 2020. In China, China
Mobile has unveiled plans for its commercial 5G network, encompassing a mass-scale
network roll-out by end-2020 and a subsequent commercial launch.

Standards not yet However, one stumbling block to the earlier launch of 5G is the timeframe for the
finalised finalisation of its standards. 5G standards are expected to be finalised only by 2020,
making it difficult for telcos to pursue an earlier commercial launch. Currently, only South
Korea’s KT is likely to launch a commercially viable network prior to the finalisation of 5G
standards.

5G standards are expected to be finalised only

by 2020, making it difficult for telcos to
pursue an earlier commercial launch
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What Can 5G Do?

T
From wearables to VR he functional attributes of 5G allow it to serve as the enabling infrastructure for many
upcoming technologies, such as the Internet of Things (IoT), connected wearables,
augmented and virtual reality, autonomous vehicles, etc. Unlike 4G, 5G would be
capable of handling a significantly larger number of devices and array of traffic types.
For example, 5G could provide extremely fast connectivity for applications, such as virtual reality
or ultra-high-definition video streaming, and simultaneously handle low-data transfer speeds
from numerous IoT sensors with high reliability. Hence, 5G would be the first network with
a focus on enabling commercial applications, while also catering to the incremental need of
better connectivity among consumers.

More applications require lower latency and higher capacity (bandwidth throughput) of 5G

Source: www.gsmaintelligence.com
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Lower latency critical

Of the many characteristics that are considered to be unique to 5G, one of the most critical,
and in some ways, one of the most challenging to fulfil, is its lower latency. Lower latency
is an essential component in a wide variety of applications, which require almost immediate
feedback for safe operations.

Autonomous vehicles
Autonomous cars, considered to be the next evolution of personal transportation, promise
improved safety levels, reduced travelling time, and higher traffic throughput. Intelligent traffic
management systems, coupled with embedded sensors in autonomous cars, enable better
coordination and eliminate human error. This allows vehicles to travel at higher speeds and
increased proximity. However, these traffic conditions demand a lower connection latency
between the traffic management system and cars than what is currently possible under the
current Long-Term Evolution (LTE) network.

With 4G’s latency at 50ms7, a car cruising at 100km/h would still move 1.4 metres from
between the time when it identifies an obstacle to that when it executes the braking command.
While 4G’s latency is already superior to the average human reaction time of 180ms8, this is
still insufficient in the context of high travelling speeds and proximity. In comparison, with 5G’s
lower latency of 1ms, that same car would only move forward by just slightly over an inch.

Lower latency could be the difference between a timely halt and a fatal collision

Source: DBS Bank

Remote medical procedures

Virtual reality technology could potentially enable surgeons to perform medical procedures
remotely in the future. However, for remote medical procedures to be a safe and effective
substitute for in-person procedures, 5G’s attributes of ultra-high reliability, connectivity, and
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low latency will be vital. This is a crucial requirement of 5G when looking to support mission
critical and life-dependant applications. A connection disruption during a critical juncture of a
medical procedure would be the difference between the patient’s life and death.

Lower latency crucial for time-sensitive medical and surgical procedures

Source: DBS Bank

High Costs a Hurdle

Proponents of 5G have advocated small cells, and closely located content servers, as the
solution to fulfil 5G requirements of high speed and throughput, low latency, full coverage,
and high reliability. Small cells are standalone base stations, which are capable of serving a
relatively small area and a few users simultaneously. To achieve gigabyte-level and low latency
connectivity for all base stations, the implementation of 5G will likely result in a stepped
increase in capex and operating costs (opex) for telcos.

Telco network providers would incur significantly higher capex and opex as they need to deploy:

1. Thousands of small cells densely located in a given area;

2. Link up with high bandwidth connections and keep them powered throughout the day;
and
3. The integrated fail safe mechanisms

required to achieve 5G’s higher data transfer speed, greater fidelity, and wider coverage.
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Significantly higher capex due to high concentration of 5G cells

Source: DBS Bank

Despite the ongoing advances in equipment and hardware, there remains a delay in signal
processing and transfer, as well as delays related to administrative functions, such as
authentication and security. Furthermore, transfer speeds on air and cable cannot be
improved further due to physical limitations.

Reducing distance To achieve 5G’s prescribed latency targets, telco network providers need to significantly
reduce the distance between the content servers and the end users’ devices to as low
as 1km according to GSMA. As a result, content servers would be closer to and possibly
integrated with the base stations. Correspondingly, there would be the proliferation of
content servers as the ancillary infrastructure to the thousands of small cell base stations
deployed, thus chalking up an ever greater amount of capex.

Enabling connectivity Data transfers between different telco network providers would have to occur at a
and collaboration similarly low latency of 1ms. Unprecedented levels of connectivity between network
providers at the base station level would be another crucial piece to realising the 1ms
low latency requirement. Compared to the few limited trunk connections present in
current networks, having such levels of connectivity would only exacerbate the capex
requirements of having individual networks.

Expanding spectral 5G aims to achieve data transfer rates of 1Gbps, which is usually associated with fibre
range and other high capacity wired connections. However, unlike fibre connections, data
throughput in wireless networks are substantially limited by available spectral resources.
Competing uses of the available spectrum such as broadcasting, satellite, etc., result in
mobile networks occupying only a fraction of that available to isolated fixed line or fibre
connections.
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To achieve higher data speeds, industry participants have therefore considered implementing
high density small cell networks (leading to more base station level units) and potentially
expanding the spectral range beyond 6 GHz. However, the higher frequency bands offer
limited cell radiuses and hence rely on a technique known as “beam-forming”. This occurs
by focusing radio waves to form a beam for transfer across greater distances, and achieve
wider coverage.

This technique is particularly challenging in forming sustained connections with mobile devices
as the beam would have to be directed at and track the end user’s device amid interferences
and distortions in the air. Hence, the small cells would be equipped with the technology to
emit hundreds, if not thousands, of beams to simultaneously connect and track the end users’
devices. Integrating this intensive technology would only augment the already high capex
from the large scale deployment of small cells.

High data speeds above 1Gbps and throughput rates of 5G are achieved by linking base
transreceiver station (BTS) level cells, with a high capacity core fibre-based network. Fibre
connectivity is extremely capital intensive, involving high installation costs, and has only been
used recently by telcos to support their heaviest data transfer needs. Inevitably, the deployment
of a 5G network that connects thousands of small cells would be a substantial capex burden.

Differing expectations on the cost of investment in 5G

Representatives from carriers such as Verizon and NTT DoCoMo, for over the past year
or so, have indicated that 5G will not result in a massive capital burden for telcos. Fran
Shammo, Verizon’s executive vice president and chief financial officer, noted that Verizon
is looking to maintain its capital expenses at relatively consistent levels between US$17.2-
17.7 billion. Similarly, Seizo Onoe, the Chief Technology Officer of NTT DoCoMo, has
indicated that 5G’s deployment is unlikely to require massive investment, and that capex
for telcos had actually decreased over the last 15 years.

Notably, these divergent views of low-capex 5G networks held by some telco network
providers stem from their vision of 5G networks with only limited improvements from
present LTE-A networks. Verizon views 5G as a fixed wireless broadband solution to the
home9; while Onoe recognises the need to develop a new generation of wireless networks,
he opined that these networks should not support such a broad range of applications.

Consequently, these low capex 5G networks are drastically different and might fall short
of meeting the low latency, high speed, reliability, and full coverage requirements as
described in the preceding paragraphs. For a network to support the IoT, autonomous
vehicles, remote medical procedures, and patient monitoring applications, it will inevitably
involve massive amounts of investments, regardless of who implements it.
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5G Single Network
Implementation Model

W
e believe the 2-3x capex burden of 5G will be prohibitively high for telcos,
the existing network providers, to bear individually. In addition, the greater
interconnectivity required to reduce latency between competitors’ networks
erodes network advantages and is therefore unlikely to sit well with telcos.
As a result, 5G will likely be implemented by leasing access from a single network. Under this
model, telcos would make regular lease payments for shared access to 5G, implemented by
a single network provider.

Benefits of a Single Network

Optimised capex and A single 5G network would eliminate duplicated equipment and installation costs, reducing
opex overall capex by several fold, while achieving similar levels of coverage and capacity of multiple
separate 5G networks. As 5G potentially represents a 2-3x increase in capex over 4G, these
savings will be crucial to 5G’s commercially viability in the medium term. In addition, overall
running costs of 5G networks can be reduced by removing duplicated administrative (staff,
maintenance, security, etc.) expenses.

According to GSMA, sharing part, or all, of the radio access network (RAN) could result in up
to 20% increase in free cash flows for a typical European operator10. According to TMG, a
consultancy specialising in telecommunications, RAN sharing can save 30-40% in costs11. In
addition, Ericsson estimated that 40% of savings on total assets and 31% improvement to
cash flows could be achieved (where all the network resources are shared)12. Consequently,
even with the massive capex spending involved under the single 5G network model, network
providers, telcos or otherwise, would be able to achieve double-digit or near double-digit ROIC.
Impact of network sharing on telcos’ capex

Network sharing model Asset savings Cash flow improvement

Roaming N/A N/A
Passive JV ~10% Up to 13%
TowerCo ~20% Up to 17%
Active and passive JV* ~20% Up to 23%
Wholesale* ~40% Up to 31%
* Models that include active sharing
Source: Ericsson13
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By maintaining a single network, the technical roadblock of maintaining interconnectivity

between telco networks of competing providers would be resolved.

Revenue and profit As the only network that is capable of supporting the demanding data needs of emerging
visibility smart solutions, the business of providing the single network will be a monopoly.
Therefore, 5G network providers will be able to generate predictable returns akin to other
infrastructure and utilities projects. The high visibility on the revenues and profits of the
single network is likely to attract funding at favourable rates, which will drive down the
cost of ownership of the network even further.

Shared Networks: Tried and Tested

Sharing active network infrastructure among operators has become more ubiquitous
in recent years. According to Analysys Mason, close to 36 active network sharing
arrangements had been reached by 2014. A number of telcos in Europe including Telenor,
Vodafone, and O2 have agreed to share active networks. Canadian telcos, Telus and
BCE, started sharing their networks as early as 2001, where BCE gained access to Telus’
wireless network in Western Canada while Telus gained access to BCE’s infrastructure in
Ontario and Quebec (Eastern Canada)14.

Sharing a single network laid out by a third party is also not a novel concept for telcos. The
Next Generation Broadband Network (NGNBN) in Singapore, for example, is owned by
the government and broadband capacity is made available to network operators for a fee.
Stockholm has a similar policy where Stokab, a company owned by the City of Stockholm,
lays out fibre optic networks in Stockholm, which are in turn lease it out to telcos.

Despite the structural similarity, it is worth noting that the key difference between
common networks mentioned above and 5G lies in 5G’s exclusivity. Unlike NGNBN in
Singapore or Stokab in Sweden, as existing players would need to pool their spectrum
portfolios when deploying 5G, access would only be to the original incumbent network
providers. New entrants to the telco industry are likely to experience significant barriers to
access the 5G networks e.g. significant upfront costs.

Forms of Network Sharing

Whilst it is too early to specify which elements of the network the telcos would retain control
over, the shared 5G network would resemble the network sharing standards in use today.

• Multi-Operator Radio Access Network (MORAN)

The simplest form of active network sharing where the operators share the RAN
– including towers and base stations that are responsible for connecting individual
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devices to the network. Spectrum and core networking infrastructure will not be
shared in this type of agreements and telcos would have greater control on the
network than other forms of active network sharing.

• Multi-Operator Core Network (MOCN)

Telcos pool their spectrum resources in addition to sharing the RAN. Each operator
would have its own component (Enhanced Packet Core) that separates the RAN
from the telco’s core network. MOCN offers greater flexibility for telcos though at a
relatively higher capex than GWCN, which in turn offers lower flexibility.

• Gateway Core Network (GWCN)

In addition to sharing the RAN, telcos will also share mobile switching centres, which
are responsible for routing calls and SMSes within the network and other components
(Serving GPRS Support Nodes and Mobility Management Entities) responsible for
packet data routing.

We believe the network sharing model for 5G will resemble GWCN with possibly better
integration such as the sharing of backhaul assets. As telcos lose their ability to compete
on network advantages with the deployment of a common network, they would be more
willing to share as many components of the network as possible in a bid to minimise their
investment on the network.

Regulatory Response a Key Determinant

Given the importance of having a single network, we believe regulators will need to play
a massive role to expedite the 5G network roll-out. A single network needs to be backed
and possibly even initiated by regulators to be viable. Furthermore, as a single network
will remove the network differentiation among telcos, we are likely to see some industry
pushback, especially from telcos with a superior network and stronger balance sheet.

As national telco regulators generally support efforts to increase network quality and
lower costs, we believe many regulators would be agreeable to a national 5G network, as
long as it improves service quality and lowers prices. This has already been seen in fixed
networks such as Singapore’s NGNBN.

However, in markets where regulators are not keen on playing an active role in 5G
network implementation, we are unlikely to see much progress in the segment. Telcos are
likely to invest selectively in areas with the best returns while ignoring certain aspects of
5G networks such as lowering latency, which would lower capex burdens, but also limit
the network’s usability.
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5G’s Financial Implications

F
2-3x jump in capex, or telco network providers to reap the economic benefits of 5G, they would
investments have to invest approximately US$4 trillion in R&D and capex by 202015. To put
this into perspective, the total mobile network provider capex for the same
period without 5G is estimated to be between US$200-250 billion annually16.
This represents a 2-3x increase in capex on 5G annually (from 2015 to 2020), compared
to the total ongoing 2G, 3G, and 4G investments around the globe.

Asset-light telcos under the leasing model to differentiate themselves in digital

services

Source: DBS Bank

Leasing 5G Network
Telcos as lessees of the single 5G network
Based on our projections, telcos would be inclined toward adopting the leasing model,
where they would obtain access to 5G networks from a single provider. Their ROICs would
stand to gain close to 300 basis points (bps) compared to telcos which implement their own
5G networks. This is largely due to their asset-light business model, coupled with buoyant
earnings from the savings in depreciation and 5G-related opex. While telcos would have to
make lease payments to a regulated 5G infrastructure provider, there are economies of scale
to be enjoyed under this model with multiple telcos utilising the infrastructure. Thus, this
would lead to a 15% ROIC upon the rollout of the 5G network in 2020.
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Based on our financial model, telcos under the leasing model would be able to achieve
comparable earnings as telcos that implement and own the 5G network. They would,
however, lose the competitive advantages from network differentiation. We believe that
this is a reasonable trade-off as telcos should progress to differentiate themselves in the
domain of digital services, which represents a market that is 7x larger than that offered by
connectivity services. The savings on 5G-related capex of telcos under the leasing model
would serve as a prime opportunity for them to invest in fast-growing and established
digital businesses, and achieve a transformation of their business model.

Single 5G network infrastructure provider

These are likely to be equipment vendors, given their technical expertise in rolling out
extensive and complex 5G infrastructure projects, and a desire to transit toward a utilities
business model with more stable cash flows.

In our analysis, we consider an equipment vendor as the lessor of the single 5G network
infrastructure assets, operating under a regulated ROIC of 15%. We assumed these assets
to have a useful life of ten years and would be leased out to three telcos. The absence of
competitive pressures as a single regulated network provider and accompanying stable cash
flows would positively contribute to the infrastructure provider’s credit positioning. Its ability
to raise debt at a lower cost (assumed to be at 5% per annum in our model) to finance the
5G network capex, as compared to telcos in the 5G sharing model, would create additional
economic value. The leasing model is therefore preferred to the sharing model.

The sensitivity analysis of the telcos which lease the 5G network reflect resilience of the leasing
model. Even with an 500bps increase of the infrastructure providers’ ROIC requirement to 20%,
there would be a less-than-proportionate fall in the telcos’ ROIC by approximately 120bps to
13.8%. On the other hand, telcos in general, regardless of which 5G implementation model
they adopt, would be highly sensitive toward growth rates of 5G-driven revenues. This further
emphasises the need for telcos to diversify their income and transform their business model
by investing in fast-growing and established digital businesses.

Sensitivity analysis of Asian telcos’ ROIC projections in 2020

5G infrastructure providers' ROIC

Telcos 5G-revenue growth

10.0% 12.0% 15.0% 18.0% 20.0%

5.0% 13.9% 13.4% 12.8% 12.1% 11.7%
7.0% 14.6% 14.2% 13.5% 12.8% 12.4%
8.0% 16.0% 15.6% 14.9% 14.2% 13.8%
9.0% 16.7% 16.3% 15.6% 14.9% 14.5%
10.0% 17.4% 17.0% 16.3% 15.7% 15.2%
Source: DBS Bank
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Sharing 5G Network
Telcos which share the 5G network would retain some network advantages over
customers within their area of coverage. They would, however, have to incur capex
on the 5G equipment in their coverage area. We have assumed this to be 60% of
the 5G infrastructure capex under the ownership model, consequently reflecting a
higher depreciation charge. We also expect that there would be some 40% savings on
5G-related opex from the network sharing agreements relating to operating co-located
cell base stations and content servers. Notably, the additional time taken to transmit
signals between networks owned by different telcos might jeopardise the achievement of
5G’s low latency requirements. It remains to be seen how telcos would overcome these
operational challenges.

Nevertheless, additional revenues brought by 5G would outweigh incremental expenses,

resulting in a rise in the telcos’ earnings. An enlarged capital base of some portion of the
5G infrastructure would, however, mitigate the improved earnings, resulting in a slight
decline from the current ROIC of 16% to 15% under the 5G network sharing model.

Owning 5G Network
Telcos which decide to retain all their network advantages would own and individually
implement the 5G network. This would incur the highest amount of capital outlay and
operational costs, which are expected to outweigh the incremental revenue brought by
5G, thus resulting in a significant reduction in earnings. Capex is expected to be at 2-3x
that of current levels, causing an enlargement of the capital employed by these telcos.
As a result, telcos which own and operate the 5G infrastructure would see the largest fall
from the current ROIC of 16% to 12% in 2020.
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Asian telcos’ ROIC projections under various 5G implementation models in 2020*

2017 5G Rollout in 2020

Telco without 5G Telco owns 5G Telco shares 5G Telco leases 5G Equipment vendor
network network network as 5G infrastructure
provider
Projected 16% 12% 15% 15% 15%
ROIC
Asian telco Lowest ROIC Reduced ROIC Similar ROIC as 5G Regulated ROIC
average over the due to extensive despite higher network-sharing
past five years capital outlay earnings due to despite smaller
and reduced greater capital capital base as
earnings outlay lease payments
weigh down on
earnings
Earnings $160 $147 $172 $147 $50
Based on ROIC Decline in Based on Decline in earnings Based on ROIC of
earnings as increased as lease payments 15%
depreciation revenues, 40% outweigh
charge on 5G savings on depreciation
capex exceeds opex & lower under sharing
revenue growth depreciation model
Capital $1,000 $1,213 $1,123 $996 $326
employed
Baseline figure Highest capital Reduced capital Savings from Deployed
employed employed capex may be towards capex
(adding cash flow used to invest
shortfall to 2017 in fast-growing
baseline) digital businesses
Capex $121 $326 $226 $77 $326
Asian telco 5G-related capex 40% savings on Maintenance Assumed to be
average at 17% at 43% (or 2.5x 5G-related capex capex based on on par with
of revenue over 17%) of revenue 10% of revenue telcos which
the past five based on GSMA implement their
years estimates own 5G networks

*We have based our analysis on a baseline capital of US$1,000.

Source: DBS Bank
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Pro-forma income statement of Asian telcos’ under various 5G implementation models in 2020*
2017 5G Rollout in 2020
Telco without 5G Telco owns 5G Telco shares 5G Telco leases 5G Equipment vendor
network network network as 5G infrastructure
provider
Revenue $710 $767 $767 $767 $185
Assumed 71% of Assumed 8% Similar to Similar to Assumed ~50%
capital employed revenue growth individual telco individual telco EBITDA margin
based on 2015 in 5G era: implementation implementation
Asian average 3% from IoT of 5G of 5G
connectivity & 5%
from data usage
in other areas
Opex ($470) ($507) ($492) ($477) ($34)
(excluding
5G lease & Baseline figure Opex growth at Sharing active Assume 80% Assume 10%
depreciation) 8% in line with networks savings from savings of
revenue growth generate 40% 5G-related opex 5G-related opex
savings in due to cost
5G-RAN opex synergies achieved
as a single
network provider
5G lease - - - ($62) -
payments
Assume three
telcos leasing 5G
infrastructure
EBITDA $240 $260 $275 $228 $93
Depreciation ($80) ($113) ($103) ($80) ($33)
Assumed to Ten-year useful From reduced Absence of Ten-year
be ~11% of life of 5G-related 5G-related capex 5G-related capex useful life of
revenues capex 5G-equipment
capex
Interest - - - - ($10)
expense
Assume 60% of
5G equipment
financed by debt
at 5% p.a.
Earnings $160 $147 $172 $147 $50

*We have based our analysis on a baseline capital of US$1,000.

Source: DBS Bank
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Strategic Responses to 5G

I
f telcos were to back down from the herculean task of rolling out the 5G network, there
would be two possible contenders to fill their shoes. The government could lay down
the network at its expense and lease it out to network operators. However, given the
immense scale, complexity, and administrative intricacies involved, we believe that the
government’s involvement would likely be limited to financial ownership and backing.

Telco Equipment Vendors Well Positioned

In our view, the most likely entity to deploy the network would be telecommunication-
equipment vendors, i.e the likes of Ericsson, Alcatel Lucent, and Huawei. These equipment
vendors are well-positioned to participate in 5G deployment as they possess the technical
know-how. We also expect these equipment and infrastructure providers to achieve
a 15% ROIC by operating under a regulated environment due to the likely monopoly
market structure. This gives the equipment vendors a large incentive to shift toward this
business model which provides greater operational stability than what they have now.

Technical know-how Given network equipment vendors’ prior experience in managing projects of comparable
scale, they would possess the core technical capabilities required to implement the single
5G network. Their superior expertise on 5G technology relative to telcos could translate
into the rollout of an optimised network.

Utilities model: Shift from challenging operating

environment toward stable cash flow
By leasing out the 5G network, network equipment vendors would gain visibility of their
future revenue streams, eliminating the volatility and seasonal effects inherent to their
top lines under their existing business model. By allowing multiple operators to access
and utilise the network, equipment vendors could also save on costs, largely driven by
improved network capacity utilisation, translating into better operating margins. This
would be reflected by the stable ROIC of 12% under a regulated operating environment.

While obtaining funding for a project of this scale could pose a problem to the equipment
vendors, securing project financing would not be an uphill battle, given the visible and
stable cash flow and likelihood of gaining regulatory support.

Volatile operating Major telecom equipment vendors such as Ericsson and Alcatel Lucent have witnessed
environment volatile earnings and depressing margins over the recent past. Intensifying competition
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from Asian equipment vendors, such as Huawei and ZTE, and seasonality attached to
major network deployment; these have been the primary reasons behind the vendors’
unpredictable top-line numbers.

Network equipment vendors’ revenues and operating margins over the past ten years

Source: Reuters

The volatile earnings and depressing margins attached to the telecom equipment
business have also taken a toll on the share prices of these equipment vendors. Hence,
we believe their entry into a business that provides stable cash flow and revenues would
be favourable to their success and survival.

Telcos at a Critical Crossroad

Telcos will arrive at an important crossroad that could change the whole structure of
the industry when 5G is rolled out. The single-network-operator model would erode the
network advantages they currently possess. In response, we believe telcos should invest in
fast-growing and established segments of digital businesses (beyond network ownership
and connectivity) to transform their business models.
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Loss of network advantages with 5G roll-out to prompt differentiation through digital services

Source: DBS Bank

Diminishing returns on improvements to network connectivity

The incremental revenues of rolling out 5G is likely to be relatively low for telcos, despite
the extremely high capex burden. The telcos’ revenue leakage points toward a larger trend
of network commoditisation, where telcos would not be able to differentiate themselves
by solely providing network services.

Leakage of revenue due to inability to fully monetise data usage

Source: Analysys Mason

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Aspects such as net neutrality laws being implemented around the globe also significantly
erode the advantage telcos gain through network ownership over the long term. As a
result, we believe telcos would shift away from their traditional role as network providers;
equipment vendors would take over as consolidated network providers, benefitting from
the stable but lower returns of network ownership.

Due to the protracted implementation of 5G (at least till 2020) and the relatively capex
efficient network deployments of alternative cellular solutions of Heterogeneous Networks
(HetNet) and Narrowband IoT (NB-IoT), telcos will be in a position to drive down their
network capex over the next five-year period. This occurs even as telcos under the leasing
model discussed before would be able to achieve comparable earnings as those under the
5G network infrastructure ownership model. As a result, telcos under the leasing model
should use the capex savings on network investments to develop new digital businesses
and pay out dividends, in our view.

Asset-light telcos under the leasing model to differentiate themselves in digital services

Source: DBS Bank

Digital businesses: More than network ownership and

connectivity
Major growth catalyst The advent of hyper-connectivity brought about by 5G would be a major growth catalyst
for digital businesses. 5G is expected to facilitate use cases in IoT, rich media, and other
initiatives to improve productivity in people’s daily lives. However, our previous studies have
shown that connectivity services, which telcos have been traditionally been entrenched in,
represent only the tip of the iceberg in the universe of digital businesses.

For example, Gartner’s forecasts suggest that IoT will support total services spending of
US$263 billion by 2020, and only US$32 billion of the total IoT service opportunity or
12.3% is attributable to connectivity services. As the revenue base of telcos’ fixed and
mobile revenue is large, it will translate to less than 3% of their total revenue. Conversely,
the revenues attributable to digital services and applications are approximately 7x that of
connectivity services, comparable to approximately 21% of the telco market.
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Capitalising on data In addition to IoT, there is an array of fast-growing digital segments that telcos are qualified
to establish themselves in. For example, telcos own a great deal of data such as customer
demographics, spending patterns, commonly visited locations, websites, all of which
could be used to provide targeted advertising solutions for digital advertisers. What’s
more exciting is that the mobile advertising market is set to grow at a CAGR of 32%
from 2015 to 2018, reaching US$114 billion by 2018, according to ZenithOptimedia17 .
The firm also predicts that mobile advertisements would account for 87% of all new ad
dollars added to the global market during these years.

Similarly, telcos could also potentially use the vast amounts of customer data and
techniques already used within the industry to establish themselves in the Big Data
analytics segment. Telcos naturally have an advantage in Big Data with the sheer amount
of data that they hold. Many telcos already use this data to customise their offerings to
reduce churn rates, analyse upcoming trends to offer proactive solutions, and so on.
Research firm Wikibon estimates the Big Data market to be worth US$50 billion by the
end of 2017, growing at a CAGR of 21% from 201418.

Acquisitions Telcos could also venture into not-so-obvious segments such as Big Data analytics or
production of virtual reality (VR) content. Whilst these segments may require the acquisition
of new capabilities, they would likely carry attractive return on investments, given the
rapid growth and expanding market. Acquiring VR content production capabilities could
also provide telcos with access to a market that is expected to exceed US$21 billion by
2020, according to research firm, Tractica19.

Telcos around the globe have already tested these waters. For example, in the mobile-
advertising segment, Verizon acquired Millennial Media, which specialises in mobile
advertisements, in 2015 for US$208 million. This was on top of the acquisition of AOL,
which also possessed mobile-advertising capabilities, among other things. Similarly,
Telefónica20 and Singtel21 have already made forays into the mobile-advertising segment.

Why telcos have not taken on a more dominant role in

digital businesses yet
Telcos have seen mixed results when they’ve invested in non-core, emerging services,
which in many cases has reinforced their attitudes towards focussing on their core
network business. Many of the non-core investments have been in areas with which
telcos are not familiar, and which require long periods to yield positive results. Telcos need
to build up human and intellectual capital to compete with digital-services companies
that have operated in those areas for years. However, with strict dividend commitments
and markets discounting non-core investments, telcos have only really dabbled in non-
core investments.
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Flat and positive ROIC of telcos worldwide

Source: Reuters

However, the environment of stable, positive returns from investing in network assets
is likely to change in a 5G world. According to ABI Research, 5G revenues are expected
to reach US$247 billion by 2025, mostly from North America, Asia-Pacific, and Western
Europe. Even after including non-IoT related revenue such as increased data usage from
Augmented Reality (AR) / VR, telcos are unlikely to see incremental revenues from 5G
connectivity that will justify sky-high capex commitments in 5G. Once we consider the
additional operational expenses of maintaining the 5G infrastructure and the capex
expectations of US$4 trillion, the ROIC of 5G is likely to deteriorate to the mid-single
digits even in the most optimistic scenarios.

The environment of stable, positive returns from

investing in network assets is likely to change in
a 5G world
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Telefónica realised that small scattered investments

don’t result in sufficient returns

Telefónica, one of the largest telco groups in the world, was one of the telcos to
aggressively move into the digital space. Telefónica Digital was created in 2011, functioning
independently from the core telco business, so it will have the speed and agility to push the
boundaries of digital service innovation. Telefónica believed that the unit would allow the
telco to bring benefits in areas such as entertainment, financial services, and advertising.

As part of its expansion into digital services, the company invested in various areas that
covered both telco-related and non-related areas such as hosting, cloud and enterprise
communications, over-the-top (OTT) communications, financial services, health, advertising,
and OTT content. Telefónica’s digital investments include Axismed, a Brazilian chronic-
care management firm; TokBox, a video-chat platform; Boku, a global mobile-payments
network; Everything.me, a service that adds contextual capabilities to mobile phones;
AddFleet, a mobility platform enabling users to track the location of transport units in real
time; and many more. Many of these services were invested at the start-up level and some,
including Everything.me, have folded.

However, despite Telefónica Digital’s annual revenue growth of over 20%, the unit was
closed down in 2014. The management believed the digital businesses needed to be
embedded more deeply in the main organisation for them to succeed, and reorganised
Telefónica Digital services into other existing telco units. This also meant that many products
and services formally provided by Telefónica Digital would be bundled with existing telco
services going forward.

We believe this is a clear example of telcos’ pursuit of a wide range of small investments
in relatively new and sometimes unrelated areas which do not yield expected results.
Telefónica only realised afterwards that its best strategy to grow new digital businesses is to
focus on synergies that their existing network and brand can have with the new services,
so they can be effectively bundled and sold as a more compelling product to customers.
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Recent notable acquisitions by telcos outside their core businesses

Acquirer Acquisition Deal Value Year of Industry of Description of the Target

Acquisition the Target
AT&T Time Warner US$85.41 2016 Content Provider of film and television
Cable billion Production entertainment services. Owns some
& Delivery major TV networks such as HBO, CNN,
and Warner Bros
Verizon Sensity N/A 2016 IoT Provider of remotely controllable
Systems light-emitting diode technology
Verizon Fleetmatics US$2.37 2016 Machine- Offers fleet-management solutions.
Group billion to-Machine Provides software-as-a-service (SaaS)
or M2M solutions for vehicle location, fuel
usage, speed and mileage, as well as
mobile-workforce solutions
Verizon Yahoo US$4.83 2016 Content Internet search engine and
billion and advertising business. The acquisition
Advertising includes Yahoo! Mail, Yahoo! Sports,
and Tumblr blogging services
Verizon Telogis Inc N/A 2016 M2M Provider of cloud-based fleet-
management software

Verizon RYOT Corp N/A 2016 Content Producer of motion pictures and
Producer videos. Operates a VR recording
studio
Verizon Volicon Inc N/A 2016 Media Provides solutions for compliance
Intelligence monitoring of videos, ad verification,
and competitive analysis, as well as
repurposing video for the web and
social media
Telefónica AxisMed N/A 2016 Healthcare Provision of chronic patient and
Gestao preventive health-management
Preventiva solutions
da Saude
Singtel Trustwave US$770 2015 Cyber- Leading provider of managed security
million Security services in the US
Telia Springworks N/A 2015 Mobile Developer of mobile games
Sonera Gaming
Verizon Millennial US$248 2015 Mobile Developer of mobile-advertising
Media million Advertising software
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Acquirer Acquisition Deal Value Year of Industry of Description of the Target

Acquisition the Target
Verizon AOL US$4.07 2015 Content Owner of online blogs: The
billion and Huffington Post, Engadget, and
Advertising TechCrunch. Operates several digital-
advertising platforms
Telefónica Synergic N/A 2015 Big Data Big Data consultancy services
Partners

Telefónica Weve Ltd N/A 2015 Digital Provides mobile-marketing and

Advertising commerce services; solutions include
marketing through mobile messaging
and data-matching concepts
Singtel Adconion US$209 2014 Digital Multi-Channel (mobile/social/
Media million Advertising video) digital-advertising firm with
operations in the US and Australia
Singtel Kontera US$150 2014 Digital Analysis of digital content to
Technologies million Advertising customise digital advertisements to
better suit users
AT&T Fullscreen N/A 2014 Content Multi-media company involved in
Production creating and sharing of videos
& Delivery
Telia Ipeer AB N/A 2014 Cloud Swedish provider of cloud and
Sonera Service hosting services
Provider
Telia Zound N/A 2014 Electronics Swedish manufacturer of electronic
Sonera Industries accessories

Vodafone Cobra €140.76 2014 Telematics Provides telematics software to

automotive million car manufacturers including Audi,
Bentley, Lamborghini, and Renault
Telefónica eyeOS SL N/A 2014 Cloud Operates a private-cloud application
services platform with a web-based desktop
interface
Singtel Gradient X US$15 2013 Mobile Mobile advertising and marketing
million Advertising platform with real-time bidding
capabilities

Source: DBS Bank

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Getting into fast-growing and established segments

could pay off
With much cash in their coffers, telcos should focus on the acquisition of capabilities in more
established segments that are of a strategic fit with their traditional role of a network provider.
Albeit more expensive, integrating acquisitions with the telcos’ existing operations would
be easier. Moreover, such acquisitions are likely to be viewed favourably by shareholders, as
opposed to investments in emerging, high-risk segments. The already established human and
intellectual capital would enable telcos to quickly show positive results.

How Verizon expanded into digital advertising

Verizon has long been very keen on expanding into segments that transcend its traditional
role as a network operator. The company has made several multibillion-dollar investments
in an array of businesses but its acquisition of AOL stands out.

Verizon acquired AOL, a digital-content producer and advertiser for US$4.4 billion in 2015,
establishing itself as a key player in digital advertising and online blogging. AOL owned a
range of digital-advertising platforms and adtech including “One by AOL”, an automated
platform for buying ads across different media, and “Pictela”, a high-definition global
content-marketing platform. According to comScore, AOL was also the owner of several
famous blogs including the Huffington Post, Engadget, Moviefone, and TechCrunch22.
Verizon supplemented the digital advertising business of AOL, by acquiring Millennial
Media, a developer of software for mobile advertisers.

The acquisition of an established digital advertiser and content developer allowed Verizon
to gain a strong foothold in the US digital advertising market, set to reach US$105 billion
by 2020, according to eMarketer23. The company gained access to the digital-advertising
platforms, customers, and adtech owned by AOL, which could now be cross-matched with
subscriber data of over 108 million wireless subscribers of Verizon, to offer marketers new
advertising options. The acquisition was also of a strategic fit for Verizon as the company
now owned the content it delivered through its networks.

Furthermore, the acquisition of AOL buttressed Verizon’s plans to develop its own OTT
video-streaming service to compete with the likes of Netflix and Hulu. AOL’s blogs,
including the Huffington Post and TechCrunch, were very popular among millennials and
offered attractive content-development platforms for Verizon to capitalise on. Soon after
the acquisition of AOL, Verizon announced the launch of its video-streaming mobile app,
Go9024. Whilst the platform has received mixed reviews, it has put Verizon in a position to
boost its mobile-video advertising business, poised to record strong growth in the future.
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Since the consolidation of AOL in 3Q15, the company has contributed over US$2.7 billion
to Verizon’s top line, accounting for about 2% of revenues each quarter. Verizon anticipates
that AOL will generate close to US$20 billion by 2020, according to a Bloomberg report25.
AOL’s capabilities, combined with the potential acquisition of Yahoo, would place Verizon
among the leaders of the global digital-advertising market.

Hence, despite the hefty price tags these acquisitions had carried, they have provided
Verizon with much-needed capabilities in growing segments that have helped mitigate the
declining appeal of its traditional telecom operations.
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Now Till 2020: 5G

Implementation Roadmap

T
The implementation of 5G will be initially driven by government and regulator
interest in improving connectivity and providing smart solutions. Telcos are also likely
to take part willingly in cases where there is regulatory support and financial benefit.
As a result, after looking at the three developed regional telco markets of the US,
Europe, and Asia, we believe that Asian markets would most likely be the pioneers of 5G. This
will be closely followed by developments in European markets.

Asia: Ahead of the Pack

Asia’s hyper-connected, politically committed, and financially sound nations, such as South
Korea, Japan, Hong Kong, and Singapore, as well as China, are the most likely candidates to
implement 5G.

South Korea has vowed to get 5G ready for the PyeongChang 2018 Winter Olympics, and has
even brought forward the commercial launch by a year to 2019. This is also observed in Japan,
where NTT DoCoMo intends to launch a 5G trial network in 2017 and plans to adhere to a
government-prescribed timeline for a commercial launch in 2020.

Internet Plus Underpinning China’s Internet Plus strategy – set in its 13th Five-Year Plan from 2016 to 2020 –
is the enabling infrastructure of an integrated mobile network and connected population. This
is evident in China Mobile’s efforts and plans to execute a commercially viable and mass 5G
network by end-2020. Chinese telecom equipment vendor, ZTE, also intends to conduct trials
of 5G equipment spanning over 100 cities in China26.

This dynamic is similarly seen in Singapore, where a nation-wide 5G network would be essential
to the successful implementation of the government’s Smart Nation plans. The 5G roll-out
would also be much easier in Singapore, given its relatively smaller size. The largest telecom
operator in Singapore, Singtel, has already joined hands with telecom equipment vendor,
Ericsson, to study this technology27. The two companies recently conducted a demonstration of
5G technology that achieved download speeds of 27.5Gbps28.

Asian markets would most likely be the pioneers of 5G

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Europe Will Be Next

European telcos have witnessed declining returns on their capital over the past six years amid
intense competition and tighter regulations. The European Telecommunications Network
Operators’ Association estimates that revenues of European operators have fallen 11% to
€248 billion from 2009 to 201529. According to the Wall Street Journal, most European Union
(EU) countries have at least four mobile operators30. Tightening regulatory conditions, such as
the abolition of roaming charges and adoption of net neutrality laws, may worsen operating
conditions for telcos.

ROIC dipping downwards

Source: Reuters

Against this backdrop, European telcos are more likely to collaborate to share their active
network infrastructure, which could be crucial to the successful deployment of a 5G network.
According to Analysys Mason, Europe accounted for 61%31 (or 22) of the active network-
sharing arrangements in the world in 2014.

Extensive support Furthermore, European telcos would have extensive support from regulators when rolling out
5G. After the delay in rolling out 4G services in the Eurozone, the EU is seemingly keen on
pioneering the deployment of 5G. The EU Commission has already set out an action plan
for the deployment of 5G32. The commission is also discussing supplementary regulations,
such as the sharing of radio-spectrum resources33 among telcos, which could ease the process
of sharing active infrastructure among telcos. According to the action plan, the commission
intends to host preliminary trials on 5G by 2017 and introduce the network by 2018. 2020
has been set as the deadline for large-scale commercial introduction of the technology among
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member-states. The EU Commission also established a €700-million public-private-partnership

in 2013 to ensure the availability of 5G technology in Europe by 2020.

Hence, we believe Europe would be the most likely region to commercialise 5G technology,
given the motivation of the telcos to share their network assets and extensive support
from regulators.

Interim Technologies
Given 5G’s massive capex burden, we are unlikely to see such networks being commercially
available in the immediate future. Of the current developments in mobile technology, we
believe there are a few that could be implemented in the interim to address uses that would
otherwise be addressed by 5G.

Narrowband IoT (NB IoT)

Narrowband IoT is an energy-efficient network built to connect a multitude of devices at low
data rates. Many IoT applications that need to connect a large number of devices with relatively
small bandwidth, such as the collection of sensory data, would be facilitated through this
network. As the narrowband IoT relies heavily on existing cellular infrastructure, the overall
additional capex required to implement the system would also be lower.

Heterogeneous networks (HetNet)

HetNet uses multiple wireless communication technologies to connect devices, thereby
boosting the overall capacity and data speeds of a given area. Some trials are currently looking
to supplement existing LTE network capacity using Wi-Fi. As the technique will be mostly
used to supplement existing networks, telcos are likely to roll out Wi-Fi and other supporting
technologies only in selected heavy-traffic areas where they need to improve data speeds and
capacities.

Europe would be the most likely region to

commercialise 5G technology
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Bibliography
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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd

(the “Company”). It is based on information obtained
from sources believed to be reliable, but the Company
does not make any representation or warranty, express
or implied, as to its accuracy, completeness, timeliness
or correctness for any particular purpose. Opinions
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situation and the particular needs of any specific
addressee.

The information herein is published for the information

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should obtain separate legal or financial advice. The
Company, or any of its related companies or any
individuals connected with the group accepts no
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any kind arising from any use of the information herein
(including any error, omission or misstatement herein,
negligent or otherwise) or further communication
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Company and its associates, their directors, officers
and/or employees may have positions or other interests
in, and may effect transactions in securities mentioned
herein and may also perform or seek to perform
broking, investment banking and other banking or
financial services for these companies.

The information herein is not intended for distribution

to, or use by, any person or entity in any jurisdiction
or country where such distribution or use would be
contrary to law or regulation.
 Living, Breathing Asia

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