Is the 5G Race Worth Winning? Amazon Laughs.

The winners of the 5G race won’t necessarily be the wireless carriers building America’s new high-speed networks — for them, it’s looking more like a race to the bottom. Instead, the technology giants already running laps around telecommunications stocks are the ones in line for another turbo boost.

AT&T Inc., T-Mobile US Inc. and Verizon Communications Inc. are competing to deliver 5G, a new generation of wireless internet that can handle faster speeds and more connections at once. Industry engineers and executives say what’s most exciting about the upgrade is all the things it could make possible but have yet to be invented. It’s that same undefined promise that’s kept consumers from getting too enthusiastic up to now. Consider, though, the profound effects past network upgrades have had on society: The evolution to 3G nearly two decades ago paved the way for Steve Jobs to create the iPhone, the most consequential tech innovation since the internet. Later, 4G LTE capabilities enabled smartphone services such as FaceTime, TikTok and Uber. Soon, 5G may unleash a whole new category of must-have consumer apps and gadgets. 

It’s been said that this race is crucial for the wireless carriers because whoever is perceived as the leader in 5G will retain that spot for at least a decade, a concept that has certainly rung true for the networks we use today. Thanks to a mix of truth and marketing, Verizon was considered the best wireless network throughout much of the 4G era, which roughly began in 2010. Still, Verizon shares didn’t keep pace with the broader market over that span, and AT&T’s did even worse, with dividends alone making up for a sour performance. T-Mobile, the underdog, ignited a price war and pushed the industry into offering unlimited-data packages, becoming the breakout star in terms of both subscriber and shareholder gains. Even so, its five-year return lags behind most of the FAANG stocks — Facebook Inc., Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. — and Microsoft Corp. 

History suggests there’s greater value in creating the next use cases for these powerful 5G signals rather than controlling the pipes that transmit them. For companies in the trillion-dollar-market-cap club, such as Apple and Amazon, as well as the next batch of tech unicorns, 5G will be a launchpad for new applications promising another decade-plus of digital device addictions, profit growth and market domination. (Cue more concerns over monopoly power.)

That hasn’t stopped AT&T and Verizon from eagerly borrowing and spending billions of dollars to catch up to T-Mobile, which has pulled ahead in 5G thanks to some spectrum it inherited from last year’s takeover of Sprint Corp. Both its rivals are now unloading any other lines of business that are sapping resources. AT&T announced last week the decision to spin off WarnerMedia, a Hollywood division it acquired just three years ago for $102 billion and upon which it built the HBO Max streaming service. (Those assets will now be merged with Discovery Inc.) Two weeks earlier, Verizon sold its own media brands, including AOL and Yahoo. AT&T is also divesting DirecTV. Meanwhile, Amazon is reportedly moving deeper into media with a $9 billion deal for MGM that’s said to be imminent. 

As tech giants embrace the entertainment business, the wireless carriers are ditching it to make room to bid in future wireless spectrum auctions. The last auction “left AT&T’s balance sheet in shambles” and pushed Verizon’s leverage ratio even higher, Craig Moffett, an analyst for MoffettNathanson LLC, wrote in a March report after the final bids were disclosed. Verizon was the biggest spender in that government sale for a total of $53 billion, while AT&T paid $28 billion. (The prize was licenses to C-band airwaves that are similar, if slightly inferior, to T-Mobile’s large swath of mid-band spectrum, the kind most ideal for 5G.)

AT&T is also boosting capital expenditures to $24 billion a year, up from what analysts expected to be $19 billion in 2022, and it just notably reduced its dividend. On top of that, AT&T and Verizon last year began giving away Apple’s 5G-enabled iPhone 12 to certain customers, leading T-Mobile to offer its own handset deals. Comcast Corp. has even entered the fray with reduced rates on some of its Xfinity Mobile plans.

Investors aren’t impressed by the carriers needing to resort to aggressive promotions on a service for which they’re also making such enormous outlays. Shares of AT&T dropped 7% in the past week, and Verizon is trading almost exactly where it was a year ago. T-Mobile’s stock chart has at least moved in the right direction as its shareholders count on future stock buybacks. But as long as the wireless market is in a pricing war, it’s hard to imagine any of the three being big a winner in the stock market.

These zero-sum competitive dynamics help explain why AT&T originally wanted to be in the TV-entertainment and streaming business. Its vision was that extra services such as HBO Max would drive revenue per user and discourage cancellations. That was better in theory than it worked out in practice. Wireless may long be a stable and very profitable business. It’s just not great to be reliant on another industry to prove your value. Until there’s some novel app that requires 5G, good luck convincing consumers or investors that they should pay more for it. 

You can almost see where this is going: Eventually, carriers may feel compelled to look in adjacent industries for integration advantages, or dare I say even more consolidation opportunities within the wireless market. And round we go. Meanwhile, the market will be giddy for whatever new app is invented, as 5G providers remain bland “dividend stocks.” That’s the difference between a trillion-dollar company and a $200 billion one — but the former should probably thank the latter.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.

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