S&P says 5G-related costs, spending could hit margins hard

  • 5G
  • Monday, 02 Dec 2019

FILE PHOTO: A sign for 5G is seen at the World 5G Exhibition in Beijing, China November 22, 2019. REUTERS/Jason Lee/File Photo

KUALA LUMPUR: While 5G will drive revenue growth for telecomminications companies, its related costs and spending and competition could hit margins hard in some countries, S&P Global Ratings said.

It pointed 5G was getting good reception in Asia-Pacific, with quick uptake in the few markets that have already launched.

Higher data consumption on advanced networks point to 5G as a potential source of faster revenue growth for telecommunications companies.

However, in some countries, 5G-related costs and spending could hit margins hard, ” according to its report "First movers In Asia-Pacific offer clues to 5G's future."

S&P Global Ratings credit analyst Park Jun Hong said: "We believe 5G's faster network speeds, combined with growing demand for high-quality video content, will drive up demand for data usage. However, the costs related to rollout and competition will hurt margins."

As a pioneer in the region, and the world, South Korea offers a good test case for the impact of 5G.

Within six months of its launch of commercial 5G services in April 2019 in South Korea, around 3.5 million subscribers (representing 5% of total wireless subscribers) adopted 5G services.

Moreover, they consumed triple the data of 4G LTE subscribers over the same period. As a result, average revenue per user (ARPU) has improved for Korea's three leading telcos: SK Telecom Co. Ltd., KT Corp., and LG Uplus Corp.

The downside was that all three operators reported declining margins, due to heavy expenses incurred on 5G marketing and deployment.

At least five Asia-Pacific countries will have rolled out 5G by next year. Besides South Korea since April 2019, thes are Australia (June 2019), China (November 2019), Japan (March 2020) and Singapore (late 2020).

In Australia, Telecom operators are very keen to deploy 5G-based fixed wireless access (5G FWA) broadband services.

Currently Australian telcos need to pay high fixed-line network access charges to the government-owned National Broadband Network (NBN), for its provision of home broadband services.

This continues to weigh on their earnings. As a result, mobile network operators are incentivised to bypass the NBN with their own 5G FWA networks.

“China's advanced-network construction is still at an early stage. However, we expect an aggressive buildout of infrastructure networks to support 5G in China.

“The country is in a hurry to get moving, in our view. Its three state-run telecom operators, China Mobile Ltd., China Telecom Corp. Ltd. And China Unicom Ltd. rolled out 5G mobile services on Nov. 1,2019, ahead of the country's initial timeline of a 2020 launch.

“The services have been launched in 50 major cities including Beijing, Shanghai, and Shenzhen. However, the country faces unique headaches due to technology-related trade tensions.

“Overall, we expect 5G development to be slightly credit negative due to high capital spending and marketing costs. This adds to burdens amid an already tough environment, as indicated by the negative outlooks on 25% of our rated portfolio of telecommunications companies in Asia-Pacific.

“Nonetheless, a few early signs point to a smaller hurdle compared with the 4G LTE rollout in some

countries. In the longer term, 5G has the potential to expand telcos' market size, because its applications could increase revenues from both consumer and commercial users, ” it said.

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