The next generation of wireless will be about a lot more than cell phones—and investors will need to think strategically to capitalize.

Imagine the world of on-demand entertainment, virtual reality, the “internet of things,” robotics, artificial intelligence and autonomous driving. It’s not hard to do, considering all the ink that’s been consumed contemplating the electronic future and its implications for humanity. The practical reality, however, is that you need massive capacity, transmission speed and connectivity to achieve any of those things. Trains without a track will just sit in the station.

Stepping into this breach is 5G, the latest generation of wireless infrastructure, which will enable the new wave of applications to take hold and transform entertainment, business and our day-to-day lives along the way.

Let’s quickly review what’s come before. The first wireless standard, 1G, brought us cell phones back in the 1980s; 2G introduced texting in the ’90s; 3G provided mobile access to the internet by the ’00s and 4G has offered faster speeds to make multifunction smartphones a practical necessity and introduce a wave of innovative business models (such as Uber, with ridesharing) to capitalize on the new mobile environment.

The Evolution to 5G

But there are already capacity restraints on the current system. Bandwidth is filling up even as people are demanding more and more data for video and other applications. And although much faster than its precursors, 4G doesn’t have what it takes to introduce a truly connected world.

What exactly is 5G? It’s an amalgam of technologies and strategies employed to capitalize on a broader range of wireless frequency. The current system involves sending signals to and from users via large cell towers along lower radio frequencies. But now, 5G will also draw on higher frequencies that have never been used for wireless. The shorter “millimeter” waves in this range open up significant bandwidth and have the potential to increase transmission speeds by 100 times. However, they have difficulty traveling through buildings and can get absorbed by rain and trees. So, rather than rely on fewer widely spaced cell towers, the new system will require the installation of more fiber and many “small cells”—on lampposts, buildings, etc.—that will transmit signals to each other at short distances. This idea leads to its own complications, and various additional technologies are being employed and further developed to deal with them—such as Massive “MIMO” (or multiple input/multiple output) antennas to expand capacity and extend coverage.

It’s important to note that the cloud will play a critical role in the 5G world. Given the need to shorten the distance from users and reduce the chances of interruption or delay, individual systems and devices will process and store some of the information at the cloud’s “edge.” Providers will be able to slice the network for user types, for example allocating faster downloads to some groups that need them, and especially brief latency (or online reaction time) to others.

All told, the move from 4G to 5G will require a significant multiyear upgrade and build-out of infrastructure. In December, the Third Generation Partnership Project, or 3GPP, introduced the first set of global 5G standards (updated in June, with more to come), allowing equipment manufacturers, telecom companies and software developers to move forward with development. Major carriers anticipate rolling out trial programs in a handful of cities in 2018, initially involving home service (fixed wireless), but introducing limited mobile offerings next year. Overall, the transition to 5G will last well into the next decade and depend partly on government auctions of more spectrum to open up capacity for carriers.

Once in Place, 5G Usage Is Likely to Soar

Estimated Subscriptions (millions)

Source: Ericsson.

Will all the effort and expense be worth it? We believe the answer is yes. Most basically, the upgrade should increase transmission speed, with the download time for a two-hour movie moving from many hours just a few years ago to less than a minute with 5G. Latency will also dramatically improve, along with the capacity to handle an ever-increasing volume of digital traffic. Most significantly, 5G will introduce a new era of network connectivity, moving beyond smartphones to connect practically everything within reach, introducing new devices, systems and services, and changing industry and consumer demand in ways we can’t even contemplate today.

When it comes to the internet of things, the numbers could be astronomical. As of 2016, there were some 15 billion connected IoT “end points” in electronics, sensors, cars and other objects. By 2021—still very early in the 5G timeline—that figure could rise to 35 billion end points, found across homes, businesses, infrastructure and transportation systems.

Growth of Internet of Things (IoT)

Worldwide IoT Installed Base (billions)

Source: IDC, Macquarie Research, March 2018.

Global IoT Spending by Industry (2018E)

Source: IDC, Macquarie Research, March 2018.

Applications that depend on faster networks continue to increase as well, whether involving high definition video, virtual reality, wearable health care devices, education or security/safety. Some high-profile examples:

  • Autonomous driving is heavily dependent on the successful rollout of 5G. To navigate successfully on the roadways, cars will need not only current mapping, but information about weather, driving conditions, fellow drivers and pedestrians, all delivered in real time to assure safe, event-free traveling. Here, reduced latency will be particularly important, so that cars can react successfully and safely.
  • Entertainment will likely undergo considerable change, particularly in the realm of augmented and virtual reality. For example, watching a sporting event could become a much more immersive experience. With the help of 5G, you’ll be able to view it from the perspective of a single player throughout an entire game, or any number of other ways depending on your preference. Like autonomous driving, virtual reality and gaming will require a high level of responsiveness to be effective.
  • Perhaps most significantly, 5G will enable an array of industrial applications, connecting devices in factories, oil rigs and distribution centers, among others, onto networks. As devices increasingly communicate with each other, this will likely contribute to changes in factory design and business methods as managements seek to capitalize on information flow to make processes more efficient. Artificial intelligence will enable robust real-time data analysis, and provide more actionable insights on ever-expanding data resources.

Uncertainty Includes M&A, Geopolitics

Despite its great potential, the extensive nature of the build-out, unresolved technical issues and a shifting regulatory backdrop could all have an impact on how next-generation connectivity plays out in the years ahead. Already, Sprint and T-Mobile have announced their intention to merge in order to gain the upper hand in building out 5G capabilities. Competition among rival nations will also be a key influence, given the economic, strategic and social impacts that next-generation technology could have in the coming years. Tensions between the U.S. and China have been simmering—to a large degree around tariffs and open markets, but also tied to the intellectual property and other building blocks needed to participate successfully in 5G. Hence, the U.S. decision to bar (then) Singapore-based Broadcom’s proposed acquisition of Qualcomm in the U.S., due to concerns that it would undermine the U.S. role in broadband and damage national security. And China telecom giant ZTE was recently allowed to resume U.S. business after a ban tied to its violations of sanctions, but also seemed like a pawn in jockeying over broader technology issues.

The friction is understandable—and likely to continue. The explosive growth of Amazon, Google and Alibaba, among others, has been a function of a healthy digital environment. And with the global economy increasingly centered around harnessing information, countries want to be in a position to harvest that valuable “natural resource” and set the table for the growth it could provide in the decades ahead.

Investment Perspective

Like any large-scale, long-term business trend, the question of how to capitalize within investment portfolios is a tricky one. The development of next-generation infrastructure will affect virtually every area of the economy, creating winners and losers based on business model, intellectual property, execution and a host of other factors, as players adapt to an information-driven and device-heavy economy. At a very minimum, we believe investors should be cognizant of companies’ digital battle plan and their ability to adapt to the fast-changing environment.

That said, there are specific industries that will be directly involved in the build-out of 5G or could particularly benefit from its progress and the availability of more rapid and voluminous data flow. We see more upside potential for the key enablers of 5G network infrastructure, internet of things devices and applications, and service providers supporting next-generation connectivity. Companies with differentiated technology or control of a strategic platform (or one that will become strategic) may be particularly attractive.

Potential Beneficiaries of Next-Generation Connectivity

Source: Neuberger Berman.

For example, let’s look at the public safety sector. When dealing with a crisis, police, firefighters and others value essentially flawless performance from their communications systems, and so they are designed to work rapidly, with many devices able to connect directly to each other—rather than just using a network—in case of a disruption to cell towers or other issues. However, the nature of emergency communications is changing. Many people are less likely to call 911 than they are to text, but most public safety answering points aren’t equipped to receive texts, or video for that matter. The ability to integrate both, along with social media and other sources, would make it easier for first responders to take advantage of the power of the public’s ubiquitous devices. Companies with the technology to serve these needs, as well as insights and relationships within public safety, will likely be able to capitalize on increased connectivity to grow their businesses.

Stories like this can be told across the industrial complex as companies look to capitalize on the benefits of connectivity. Providers that are enablers and can offer some or all the pieces—hardware, software, services—should be well positioned to take clients into the digital world. All the better if they can develop a platform or ecosystem to make their customers more productive—encouraging more use and innovation, and potentially creating a virtuous cycle around technology. As part of this, ensuring security and privacy will be crucial in order to build the confidence and trust of those who use the network.

For investors, it will be important to understand the differences among companies and sectors in relation to the new 5G environment, and seek to identify those that appear best poised to capitalize on disruption and change. Some companies may find that 5G will account for only a portion of earnings potential, requiring investors to consider their broad range of businesses in any assessment. Other firms may be specialized players, with revenues driven by acceptance of certain standards or technology niches—conceivably providing more upside potential, but also carrying more risk. Overall, the potential of 5G and its pervasive character suggest that the new standard, along with the broad complementary trends of artificial intelligence, data mining and the internet of things, should be part of investors’ thinking from here on out.