€200-300 billion? Mobile carriers' next challenge: finding the money for 5G

The next generation of smartphones promises to revolutionize communications for T-Mobile and other firms. But carriers are worried about the huge investment costs that will be needed first.
Great speed, but who will pay for it?

The next big thing in cellphones will be 5G technology. Not only is it 10 times faster than existing mobile systems, it will allow such innovations as self-driving cars, virtual reality headsets and doctors operating remotely with robotic arms. But the gear is very pricey.

“5G will revolutionize the way we support and promote our business customers,” said Dirk Wössener, who recently left Canadian mobile firm Rogers to join the management team at Deutsche Telekom, parent company of T-Mobile in North America. Mr. Wössener says 5G mobile offers 1,000 times the capacity and 100 times the connection density of current mobile systems.

Rolling out the next generation of cellphone systems is going to be extravagantly expensive for cellphone carriers like T-Mobile. Deutsche Telekom CEO Timotheus Höttges has estimated the cost of providing 5G networks in Europe alone at €300 billion to €500 billion ($370 billion to $615 billion). The cost of 5G is so huge that White House officials are even considering a plan for the US government to build the system to ensure that it is secure against Chinese hackers.

“No company is capable of building out Germany's network on its own,” said Mr. Wössener. He added that Deutsche Telekom, Europe’s biggest phone company, has signed cooperation agreements with four German companies and is in talks with 70 other telecommunications firms on forming alliances to pay for all the new infrastructure.

They are still looking for a killer app.

The heavy demand for infrastructure spending is already affecting Deutsche Telekom's outlook. Despite very good customer numbers last year from T-Mobile, which accounts for nearly half the parent company’s revenues, Deutsche Telekom on Thursday reported fourth-quarter 2017 earnings before interest, taxes, depreciation and amortization at €5 billion ($6.1 billion), a decline of 5 percent from the same period the year before.

Even after the company announced that it is boosting its dividend, the stock price sank 4 percent at one point. With €22 billion in operating profit last year, what’s spooking investors? The high cost of building networks.

Mr. Höttges said that the company spent €12 billion last year on technology investments, including €7 billion on the US to expand T-Mobile’s network and another €5 billion in Germany on its mobile network and broadband internet. Germany has one of the slowest internets in the developed world, according to the Organization for Economic Cooperation and Development. The network is so decrepit that it became a major issue in last year parliamentary elections.

The prize for 5G is enticing. GSMA, the global association of mobile service providers, says average telecoms revenue could increase by 2.5 percent to $1.3 trillion annually if they can find new business models to meet a growing demand for connectivity.

The problem is that just selling SIM cards and data services to cellphone owners won’t be sufficient to pay for the huge upfront costs of 5G infrastructure. “In the end-user consumer business, we are still looking for a killer app,” says one telecoms manager who asked not to be named.

“5G gives us the chance to develop new business models,” said Alexander Lautz, who is in charge of 5G development at Deutsche Telekom. “Private customers will have to experience the benefits of 5G themselves before they will be ready to pay for the service.”

Matthias Krömer, head of strategy at rival firm Vodafone, says that while the benefits to private customers is still unclear, the high speeds and capacity of the 5G technology has enabled telecommunications firms to map a clear strategy for business customers.

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Ina Karabasz covers telecommunications for Handelsblatt and Charles Wallace is an editor with Handelsblatt Global in New York. To contact the authors: [email protected] and [email protected].