5G & South Korea: Beyond the hype

We expect memory chipmakers to be the early winners in the 5G revolution, although equipment suppliers and handset makers can also benefit if they play their cards right. Amid the new possibilities that 5G technology brings, existing business models will be challenged. The high costs associated with a 5G rollout means that telecom operators will need to forge stronger relationships with vendors, customers and even competitors.

Mar 2020 | 5 min read

South Korea launched the world’s first commercial 5G network in April last year, heralding the start of the much anticipated 5G era. By June 2019, South Korea accounted for 77% of the global population of 5G users.

Although the US and China have since rolled out their 5G networks at the point of writing, GSMA Intelligence forecasts that South Korea will remain the world leader in 5G mobile penetration in the near future. By 2025, 5G connections are expected to make up 66% of all mobile connections in South Korea, followed by 50% in the United States and 49% in Japan. See Fig. 1.

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Fig. 1. Forecast 5G penetration in 20251

Beyond the hype-01

The KT Economic and Management Research Institute forecasts that South Korea’s 5G network will inject at least USD 30.3 billion (or 1.51% of GDP) into the domestic economy by 2025. It does not stop there. The positive impact on the economy is predicted to grow to at least USD 47.8 billion (or 2.08% of GDP) by 2030.

5G dreams are made of these

Why is 5G expected to have such a positive impact on the economy? The availability of 5G networks is expected to spur innovation, boost demand for new products and services as well as benefit ancillary industries. 5G technology promises to revolutionise the way we work, live and play by offering high speed, low delay and hyper connectivity. It is expected to deliver immersive applications and help realise the full potential of the Internet of Things (IoT) services framework. While the possibilities are numerous, the new 5G services can potentially be grouped into three broad categories2. See Fig. 2.

Fig. 2. Some examples of 5G services3

Beyond the hype-02

Virtual experience and media

5G technology uses shorter wavelengths (millimetre waves) which enables it to carry substantial amounts of data at faster speeds. Data is transferred at 700 megabits/second (Mbps) or more on a 5G phone versus 30 to 50 Mbps on a 4G phone.

This will change the way content is viewed on mobile phones, allowing for ultra-high definition videos, including virtual (VR) and augmented reality (AR) experiences – AR typically requires 600 Mbp of data transferred for a one-minute video.

It is therefore no surprise that one of the first 5G services offered by mobile operators in Korea allow fans to watch sporting matches in real time as well as the freedom to watch from different angles and zoom in using their mobile devices. Users can also learn K-pop dances from their idols, virtually4.

On the back of 5G’s ability to deliver large amounts of content efficiently, Ericsson predicts that videos will account for more than 75% of mobile data traffic in 2024, up from 60% in 20185.

Massive-connectivity machine type communication

5G technology will be able to support millions of simultaneous connections per square metre, which will in turn allow intelligent devices to communicate with each other autonomously.

In smart offices, devices such as computers and printers will be able to detect user preferences – as such, materials for upcoming meetings will be available instantaneously, tasks updated automatically, and documents printed spontaneously. In smart homes, refrigerators would recommend recipes based on the ingredients in the refrigerator. Healthcare devices in the home can also send vital information to the hospital in real-time to prevent medical emergencies6. These elements, together with smart metering and smart environment management will bring to life the smart city concept.

Mission-critical machine type communication

A high performing and highly reliable communication network with near zero latency would enable mission critical services such as remote machinery, autonomous vehicles and public safety networks.

Such a communication network would need to be operational even in the event of large-scale natural disasters. Users would be able to control heavy industrial machines, or access hazardous sites from thousand of miles away. 5G mobile networks will also be able to collect data through sensors and cameras in cars and neighbouring vehicles so that real-time information can be provided to drivers and timely actions can be taken to enable safer driving. These operations can eventually be applied to self-driving cars.

Beyond the hype

The stakes are high for the different players – telecom operators, content providers, hardware suppliers and memory chipmakers etc - who would be affected by the 5G revolution. While 5G technology brings about new opportunities, it will also challenge existing business and operating models.

According to a McKinsey report7, telecom operators who are faced with rolling out expensive infrastructure amidst still unclear winning service propositions, will need to forge stronger relationships with vendors, business customers and even competitors.

Vendors today have multiple technology and bandwidth options. Telecom operators need to ensure that they are working on the winning technology and spectrum that ultimately becomes the industry standard. At the same time, operators would need to select the right vendors to work with. Choices have increased as software developers are not hampered by the high barriers to entry and prohibitive costs that characterise the hardware sector. Interestingly, McKinsey’s survey indicates that 57% of respondents believe that start-ups would win the lion’s share of the Radio Access Network (RAN) market, which is expected to account for a significant share of mobile operators’ costs as they upgrade and/or extend their networks.

At the same time, while much of the recent headlines has been focused on Business to Consumer (B2C) applications such as new ways of consuming video content, watching sports or playing games, 69% of executives in a CEO 5G survey expects Business to Business (B2B) applications to be the key driver for revenues. This implies that winning operators need to secure deep relationships with business customers who are willing to explore use cases.

Meanwhile, given the high costs associated with a 5G rollout, network sharing could be pivotal to success. In the McKinsey report, 93% of respondents indicated that they expect network sharing to increase with efforts to bring 5G to areas where it does not make sense to have multiple networks. Another 90% of respondents expect third-party neutral hosts to supply and run a part of the network for several operators.

As telecom operators mitigate the high costs of a 5G rollout by focusing on commercial applications that can drive revenues, infrastructure plays can be an alternative play to benefit from 5G given the need for more towers and fiber. Given the faster streaming experience, there are opportunities for online game, music and video developers. Faster networks can also increase demand for smart appliances while real time updates of traffic and sensor detection data improve user experience on autonomous driving. With the explosion in digital data which is generated from the millions of connected devices, companies that have the capabilities to analyse large amounts of data quickly will stand to benefit.

5G beneficiaries

Looking at the Korean market, we believe that memory chipmakers will emerge as winners in both the short and long run as 5G and the IoT drive strong revenue growth. Automation, electrification, digital connectivity and security will result in the addition of more semiconductor content to automotive electronics and subsystems in the next decade8. Ultimately, 5G technologies will lead to a surge in various semiconductor devices (microcontrollers, sensors and memory chips) which will be used in homes, offices, vehicles and machinery. DRAM spot prices are already up 10% in December after a year-long severe correction. 5G-related chip demand, on top of inventory rebuilding, could add further impetus to prices. See Fig. 3.

Fig. 3. DRAM spot prices9

Beyond the hype-03

South Korea after all is a world leader in the Dynamic Random-Access Memory (DRAM) and NAND market. In addition, it is increasingly difficult for new players to compete in the NAND market given the need to accumulate technical know-how. Korean chipmakers are also attractively priced compared to their global peers.

Although we are currently focused on Korean semiconductor companies, we are also actively seeking out other beneficiaries of the 5G revolution. One area of interest could be 5G equipment suppliers whose share prices rallied significantly in 2019 but have since corrected on the back of lower than expected earnings. Leading Korean handset makers could also see a lift from rising 5G phone shipments given upbeat subscriber numbers in North Asia, as well as consumers’ readiness to pay for a price premium for 5G handphones. Asia Pacific is forecasted to be the largest region for 5G adoption with a 44% share followed by North America with 32% by 202410.

Meanwhile, Korea has emerged as a global testbed for 5G cloud gaming given its high quality 5G network and mature mobile gaming population. If cloud gaming takes off, selected mobile operators could enjoy higher revenues from a greater acceptance of unlimited data plans as well as monthly subscription fees. Average monthly data usage of consumers in the region is expected to rise to 11GB in 2024, surpassing the global average monthly data usage of 9.98 GB11.

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