T-Mobile 5G Plan Could Drive Capex to Record Highs
T-Mobile US could be looking at a bill of up to $25 billion to build a nationwide 5G network by the end of 2020, according to rough estimates from market research company Ovum.
Daryl Schoolar, an Ovum Ltd. analyst, reckons the cost of building a nationwide 5G network using 600MHz spectrum, which T-Mobile US Inc. picked up during a recent government auction, would be comparable to what AT&T Inc. (NYSE: T) spent on a 700MHz-based rollout of 4G.
He estimates that AT&T spent around $25 billion in total to provide nationwide 700MHz-based coverage.
Such figures may alarm the investment community, with T-Mobile aiming to complete a 5G rollout in less than two years, starting in 2019 and achieving "nationwide" coverage in 2020. (See Is T-Mobile's 5G Plan Just a Pipe Dream? and T-Mobile Promises 'Nationwide' 5G in 2020 With New Spectrum.)
That ambitious target could require T-Mobile to spend as much as $12.5 billion on the 5G project alone in each of 2019 and 2020.
T-Mobile plans to invest about $5 billion in capital expenditure this year after spending roughly $5.7 billion in 2016 -- a figure that equaled about 15.3% of its overall revenues that year.
Capital expenditure at T-Mobile reached its zenith in 2015, when it hit as much as $9.6 billion, or 29.8% of revenues.
But the 5G plan could drive capital intensity (or capital expenditure as a percentage of revenues) to an even higher level.
Even if T-Mobile can sustain its current pace of revenue growth, which looks doubtful, the budget implications are troubling.
Between 2012 and 2016, T-Mobile's revenues rose at a compound annual growth rate of 17.2%. Annual growth at that rate over the next few years would see T-Mobile generating as much as $60 billion in 2019.
In those circumstances, a $12.5 billion 5G bill that year would account for as much as a fifth of total sales, and T-Mobile will also need to continue investing in other parts of its business.
In all likelihood, moreover, T-Mobile's annual revenues will be much lower than $60 billion in 2019 as the business matures. Although T-Mobile does not provide revenue guidance, it does not expect to see any growth in EBITDA this year, having reported big annual increases between 2013 and 2016, and thinks postpaid customer additions will fall significantly (to between 2.4 million and 3.4 million, from about 4.1 million in 2016).
Concern about a rise in capital intensity has already put some pressure on T-Mobile's share price this week.
At the time of writing, a T-Mobile share was priced at $65.44 on the Nasdaq -- 4% lower than its level on May 1, before the 5G plan was known.
There are some big caveats on the capex front, however, as Schoolar and other analysts were quick to point out.
For starters, the 5G rollout will not be a "ground up" deployment to the same extent as the 4G one, and should allow T-Mobile to reuse a lot of 4G equipment, such as backhaul facilities.
The use of "software-configurable" radio technologies in combined 4G and 5G networks could also help to reduce spending.
"My expectation, at this stage, is that Ericsson and Nokia will upgrade their current state-of-the-art LTE base station platforms to support 5G NR [new radio]," says Heavy Reading principal analyst Gabriel Brown. "This is essentially the '5G-ready' network story."
On the other hand, the network will not be exclusively based on 600MHz spectrum but also make use of much higher frequency bands that require T-Mobile to install more site equipment.
While signals do not travel as far in these bands, they are much better for supporting higher-speed services, especially in the more densely populated communities where operators generate most of their revenues.
The "active antennas" that come with 5G technology are also likely to be very costly, according to Bengt Nordström, the CEO of the Northstream market research and consulting group.
A spokesperson for Deutsche Telekom AG (NYSE: DT), the parent company of T-Mobile, said it could not talk about "capex implications" until a 5G standard had taken shape, but Timotheus Höttges, the German operator's CEO, issued a stark warning about 5G costs at this year's Mobile World Congress.
"It is not just about putting new antennas on rooftops but lots of additional investments," he said during a press conference at the annual tradeshow.
Höttges reckons the bill for deploying 5G across Europe could be anything between €300 billion ($328 billion) and €500 billion ($547 billion).
— Iain Morris, , News Editor, Light Reading