Barcelona’s 5G hype is a recipe for hyperventilation

A logo is pictured during the GSMA’s Mobile World Congress (MWC) 2022 in Barcelona, ​​Spain, February 28, 2022. REUTERS/Nacho Doce

LONDON, March 4 (Reuters Breakingviews) – European telecoms bosses are on edge over 5G mobile networks, but not in a good way. Delegates to Mobile World Congress (MWC), the industry’s tech festival that kicked off again in Barcelona this week, were treated to dizzying visions of humanity’s digital and wired future. For CEOs like Vodafone’s Nick Read (VOD.L), 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 of the punters who passed through its doors in 2019. The enforcement of face masks and Russia’s ongoing invasion of Ukraine served as a reminder of how the world has changed in the meantime.

Not that the boffins have crushed their exuberance about fifth-generation mobile phone technology, which allows electronic devices to exchange large amounts of data with their surroundings at high speed. The Spanish company Telefonica (TEF.MC) presented a robotic bartender, but with a flow so slow that his customers risked dying of thirst; Sweden’s Ericsson (ERICb.ST) deployed a holographic presenter to unveil its vision of the seamlessly integrated real and digital worlds; South Korea’s SK Telecom (017670.KS) took attendees for 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 a driver behind the wheel; robotic production lines and warehouses hundreds of miles apart will synchronize supply chains in real time; the pandemic-era board meeting on Zoom will make way for “fully immersive” 3D-like experiences. All of this offers huge potential gains and efficiency savings.

However, it remains to be seen how much of this sum goes to the companies that manage the infrastructure. If past advances in mobile phone technology are any indication, telecom investors will be largely absent.

The previous generation of 4G mobile networks enabled online giants like Facebook owner Meta Platforms (FB.O) and China’s Tencent (0700.HK), which now have a combined market value of nearly $1.1 trillion. of dollars. Over the past decade, the pair has provided annualized returns to shareholders of 16% and 25%, respectively. Carriers whose networks have helped fuel this growth have fared less well. Over the same period, investors in AT&T (TN) had to make do with an annual return of 4% including dividends; China Mobile (0941.HK) shareholders gained a tenth.

This discrepancy explains the latest push by telcos to force big data users like Netflix to pay a greater share of the cost of building and operating mobile networks. In South Korea, for example, SK Telekom is suing the American streaming giant because its hugely popular “Squid Game” series forced the operator to upgrade its servers to prevent phone networks from going down.

In Europe, where competition regulators have kept tight control over how much telecom operators can charge for data, the situation is even worse. Telefonica – one of the four big operators in the region along with Britain’s Vodafone, Orange (ORAN.PA) France and Germany’s Deutsche Telekom (DTEGn.DE) – generated a negative shareholder return of 7.5% per year for a decade.

That leaves Telefonica CEO José María Álvarez-Pallete and his rivals with a huge problem. Installing 5G networks requires significant investment: consultancy Dell’Oro estimates the industry will have spent $250 billion between 2020 and 2025. But without a more convincing investment argument, shareholders will hesitate to finance it. JPMorgan estimates that European telecommunications companies achieve 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 competing operators; the larger United States and China have three each. More choice has been great for European consumers: downloading 1 gigabyte of data in the US costs almost 10 times more than in France. For the operators, however, it was painful. Telefonica’s revenue in its home market is expected to be 5% lower this year than in 2017, mainly due to the price war.

One potential solution would be for EU Commissioner Margrethe Vestager to soften her opposition to consolidation. But there is little evidence that the competition watchdog will bow to the increasingly desperate pleas of operators and their investors. With inflation soaring, no European consumer or politician wants a bigger phone bill.

Yet policymakers are also aware of the potential cost of a 5G delay as Chinese and American entrepreneurs build the next generation of Facebook 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 to less than a third of Europeans. China Mobile estimates that a quarter of Chinese will use this technology this year. With predictions like these, it’s no surprise that the Barcelona buzz has left Europe’s telecom executives breathless.

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BACKGROUND NEWS

– The Spanish city of Barcelona hosted the Mobile World Congress, the largest annual conference for the telecommunications industry, from February 28 to March 3. The 2020 and 2021 events have been canceled due to Covid-19.

Editing by Peter Thal Larsen and Oliver Taslic