Stig Zarle
Senior Secu­ri­ties Analyst

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This piece is the sec­ond in a series of occa­sional memos to inform our clients of trans­for­ma­tive, long-​term (sec­u­lar) themes that we exam­ine as part of our invest­ment process. A sec­u­lar theme typ­i­cally starts as a sub­tle change within a mar­ket that grad­u­ally gains momen­tum and plays out over an extended period of time, per­haps decades (think ecom­merce, mobile com­put­ing, and clean energy). We study these trends and the com­pa­nies that have spe­cific expo­sure to these themes for poten­tial invest­ment opportunities.

At this point, you have likely heard the term “5G” thrown around in sim­i­lar fash­ion to AI (arti­fi­cial intel­li­gence), autonomous dri­ving, and IoT (inter­net of things). The evo­lu­tion of fifth-​generation (hence, 5G) cellular/​mobile net­works will pro­vide a host of oppor­tu­ni­ties for busi­nesses, con­sumers, pub­lic enti­ties, and investors alike in the years ahead as the new mobile com­mu­ni­ca­tion super­high­way will facil­i­tate the faster trans­mis­sion of increas­ingly large data vol­umes. While increased data flow brings with it incre­men­tal cyber­se­cu­rity and per­sonal infor­ma­tion shar­ing chal­lenges, if man­aged respon­si­bly the ben­e­fits of 5G stand to out­weigh the risks.

More Data Faster

What 5G really means is that the newest ver­sion of the ubiq­ui­tous wire­less network—when fully implemented—will oper­ate on a super-​charged scale; data trans­fer speed will increase dra­mat­i­cally, net­work respon­sive­ness (also known as latency) will oper­ate with­out dis­cernible lags, and con­nec­tiv­ity will allow more devices to com­mu­ni­cate simul­ta­ne­ously. Con­sumers will ben­e­fit largely through improved data speeds (10–20x faster than cur­rent 4G net­works accord­ing to dif­fer­ent esti­mates), thus mak­ing cum­ber­some down­loads of data-​intensive appli­ca­tions (such as videos) more seam­less on mobile devices. Indus­trial and enter­prise cus­tomers, espe­cially those that are reliant upon high-​speed data trans­mis­sion and low latency, are the real ben­e­fi­cia­ries of 5G, how­ever. With 5G, near-​instantaneous wire­less data trans­mis­sion will pave the way for dra­mat­i­cally safer and more accu­rate appli­ca­tions of tech­nol­ogy. The autonomous car ecosys­tem, for exam­ple, will take a giant step toward full auton­omy under 5G as vehi­cles will be able to respond imme­di­ately to sud­den changes in their oper­at­ing envi­ron­ment (such as a truck swerv­ing into its path or an icy road beneath) thanks to the increased speed and low latency of the net­work. Another appli­ca­tion will be in healthcare/​telemedicine, as 5G will allow doc­tors to remotely diag­nose, treat and/​or mon­i­tor higher-​risk patients in real time from a dis­tance; it will also sup­port the trans­mis­sion of large time-​critical image files, such as MRIs, with­out delays that are com­mon today due to the lack of net­work band­width. In indus­trial set­tings the new tech­nol­ogy will allow “smart fac­to­ries” to develop wherein machines will be able to com­mu­ni­cate with one another, con­nect­ing dis­parate devices together in real time to pro­duce infor­ma­tion that can be used to improve safety, effi­ciency, and prod­uct quality.

A Long Runway

The mar­ket­place has yet to develop, but net­work ser­vice providers across the globe such as AT&T, China Mobile, Ver­i­zon, and Voda­fone are cur­rently deploy­ing lim­ited 5G-​related offer­ings as they con­tinue to build out these enhanced net­works by spend­ing tens of bil­lions of dol­lars each year. The real impact, finan­cial and oth­er­wise, will not be seen for another 3–4 years. At first, the fifth-​generation net­work will be rolled out in earnest to con­sumers in network-​ready loca­tions and, even then, only to those with 5G-​ready smartphones—which will hit the mar­ket later in 2019 with Apple likely wait­ing to offer a com­pat­i­ble iPhone in 2020. True scal­able pro­lif­er­a­tion of 5G capa­ble devices is a few years away. Geo­graph­i­cally, the US and China are both lead­ing the devel­op­ment of robust fifth-​generation net­works in order to gain com­pet­i­tive advan­tage in the devel­op­ment of new tech­nolo­gies, but over 60 other coun­tries have 5G projects under­way. The GSM Asso­ci­a­tion, a mobile com­mu­ni­ca­tion trade group, notes that “by 2025 … 5G net­works are likely to cover one-​third of the world’s pop­u­la­tion.” A typ­i­cal net­work cycle (as seen in pre­de­ces­sors 2G, 3G, and 4G) lasts well in excess of a decade, so it is fair to assume that 5G has many years of impact ahead.

Find­ing Invest­ment Opportunities

As we con­sider investable oppor­tu­ni­ties relat­ing to super-​fast wire­less net­works, we are look­ing beyond the obvi­ous ini­tial win­ners. The archi­tects of the new net­works, largely the incum­bent telecom­mu­ni­ca­tions ser­vices providers, are favor­ably posi­tioned as 5G begins to roll out. But the network’s devel­op­ment and ulti­mate suc­cess is depen­dent upon a broad array of prod­uct sup­pli­ers and ser­vice providers. We believe that sig­nif­i­cant oppor­tu­ni­ties lie out­side of the net­work providers in the bur­geon­ing 5G sup­ply chain. Wire­less net­work equip­ment mak­ers, fiber optic cable providers, cell tower com­pa­nies, spe­cial­ized semi­con­duc­tor pro­duc­ers, and mobile hand­set man­u­fac­tur­ers are among the likely ben­e­fi­cia­ries result­ing from the ascen­dance of the 5G net­work. Aside from the direct sup­pli­ers, 5G will cre­ate other oppor­tu­ni­ties via indi­rect sup­ply chain ben­e­fi­cia­ries such as data cen­ter own­ers and cloud ser­vices providers. Com­pa­nies that com­pete in areas of AI, virtual/​artificial real­ity, autonomous dri­ving, and e-commerce—where busi­ness mod­els are depen­dent on time-​sensitive flows of data—all rep­re­sent 5G sub­scribers for whom the enhanced net­work will pro­vide a strong tail­wind to oper­a­tions. We cur­rently main­tain expo­sure to the nascent, broad 5G theme through mul­ti­ple port­fo­lio hold­ings, but con­tinue pru­dently to research addi­tional opportunities.

ESG Con­sid­er­a­tions and 5G

A 5G data explo­sion would present a range of social oppor­tu­ni­ties and risks. Autonomous tech­nolo­gies enabled by 5G, such as self-​driving cars and deliv­ery drones, will make many areas of life eas­ier. For instance, these futur­is­tic tech­nolo­gies could improve access and mobil­ity for elders and peo­ple who are home­bound. Those tech­nolo­gies are impres­sive; how­ever, they may be vul­ner­a­ble to cyber­at­tacks, mal­func­tion, and other kinds of fail­ure. As we ana­lyze com­pa­nies involved in 5G, we will assess the cred­i­bil­ity of their cyber­se­cu­rity strate­gies and man­age­ment sys­tems. We will also encour­age com­pa­nies deploy­ing advanced robotic and autonomous tech­nolo­gies to adopt best prac­tices for oper­a­tor and cus­tomer safety.

Telecom­mu­ni­ca­tions com­pa­nies work­ing to pro­vide 5G net­works face data secu­rity and pri­vacy issues. As super-​fast con­nec­tions lead to more real-​time data shar­ing, such as high-​definition video and the loca­tions of autonomous cars, providers will be charged with han­dling more and more sen­si­tive per­sonal infor­ma­tion. We will con­tinue to probe the secu­rity and pri­vacy poli­cies of these companies.

Some invest­ment oppor­tu­ni­ties asso­ci­ated with 5G will rise anew, some will per­sist, while oth­ers will stum­ble as they are over­taken by the effects of com­pe­ti­tion and inno­va­tion. We believe that the mag­ni­tude of the changes will mean that all sec­tors across the invest­ment land­scape will be impacted, some more directly than oth­ers. As we care­fully con­sider ongo­ing sec­u­lar trends and the social ram­i­fi­ca­tions as part of our invest­ment process, we will con­tinue to look closely at 5G-​related devel­op­ments for investable opportunities.

Mr. Zarle ana­lyzes the finan­cial state­ments and com­pet­i­tive posi­tion­ing of pub­lic com­pa­nies in his role as a secu­ri­ties ana­lyst at Zevin. As a mem­ber of the Invest­ment Com­mit­tee, he per­forms fun­da­men­tal equity research across mul­ti­ple global sec­tors to sup­port invest­ment deci­sions for client port­fo­lios. Pre­vi­ously he worked as an equity ana­lyst for Pyra­mis Global Advi­sors (a divi­sion of Fidelity Invest­ments) and Pio­neer Invest­ments. Stig holds an MBA from The Uni­ver­sity of Chicago’s Booth School of Busi­ness and a BA in Eco­nom­ics from Bates College.