High up in the Swiss Alps in Davos last month it was clear – the big end of town is pessimistic because of trade and the economy, one worry should concern investors more – the splinternet.
It’s increasingly likely China, Russia and their allies will adopt one type of internet reinforcing the power of political regimes, removing data privacy for citizens under the guise of security and efficiency, a policy which would further mainland hardware and software sales while the rest of the world adopts a different set of common standards and principles reflecting western values on democracy, freedom of speech and privacy. Make no mistake, the U.S. is pitted against China in the race to tech supremacy and 5G is integral to that future. Given the high stakes, how do investors in Europe play?
5G equipment makers Nokia and Ericsson are the two big players for now but would need partners if Chinese giant Huawei is shut out of 5G development in the west and if extreme scenarios happen where governments order the replacement of previous 3G and 4G Huawei equipment because of security fears. Remember, many ordered Huawei equipment not just because of good technology but because it was cheaper. Watch for equipment pricing implications and additional costs for telecoms. That said, telecoms refuse to let history repeat itself.
GSMA, the body for telecommunications, is urging telecom operators to alter their DNA so they not only create value with 5G but actually benefit from that value, unlike the transition from 3G to 4G when they were saddled with investment and low returns. As operators launch early versions of 5G this year, we will begin to witness how 5G revenue is split between equipment makers, telecoms, software makers, tech giants, handset makers and new entrants.
European telecoms are still angling for scale to weather the changes and for good reason. Take the Chinese telecommunications market – a duopoly from the outside, yet internally a monopoly with two operators carving up the region – one dominant in the north, one in the south versus Europe with 3-4 operators in most countries. That means the likes of China Telecom has 300 million mobile users; Orange has 19 million in its home market of France, but 200 million thanks to other markets such as Africa and the Middle East; BT has about 29 million. European regulators must allow cross border and internal consolidation in 2019, telecom companies think the mood is friendlier at least in Brussels.
Investors will be watching the Mobile World Congress in Barcelona at the end of the month, where ARM will talk about being ready to connect to a trillion devices with the internet of things – scale matters.