Equities Diversified Telecoms September 2019 www.research.hsbc.com SPOTLIGHT 5G and the cloud Will it change your life? Cloud Radio Access Network (RAN) is a potential game-changer in mobile – lowering costs and enabling new services, particularly as the industry moves to 5G Rakuten Mobile is the global pioneer – we conclude it can disrupt the Japanese market. Challengers in the US or Germany face a much tougher task We have Buy ratings on Rakuten, Deutsche Telekom, and Vodafone; Reduce on DoCoMo, SoftBank Corp, and DISH Play video with Neale Anderson Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Equities ● Diversified Telecoms September 2019 Why read this report? Neale Anderson* Head of Telecoms Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 2996 6716 *Employed by a non-US affiliate of HSBC Securities (USA) Inc. and is not registered/ qualified pursuant to FINRA regulations  Cloud Radio Access Network promises lower costs and better services – it could be a game-changer for certain new entrants as well as for incumbents, especially once 5G reaches scale  Rakuten Mobile is the global pioneer with this technology, and we conclude it can use Cloud RAN to disrupt the Japanese market – challengers in the US or Germany face a much tougher task  We have Buy ratings on Rakuten, Deutsche Telekom, and Vodafone; Reduce on DoCoMo, SoftBank Corp, and DISH Cloud Radio Access Networks (Cloud RAN) promises to bring the flexibility of cloud computing to mobile. Mobile networks are both complex and time-sensitive, resulting in hardware and software that is tightly linked. ‘Cloud RAN’ promises to virtualise radio network functions, separating hardware from software and enabling operators to use off-the-shelf equipment. Capacity and processing power can be scaled up and down as required and allocated where needed. Services can be created, configured and adjusted on an ongoing basis, much as Netflix and other cloud-based leaders adjust their services and pricing. Near term, this approach promises to lower costs. For Rakuten, we model five-year capex of JPY542bn (USD5bn) compared with single-year spending by incumbents of JPY400-580bn (USD3.7-5.4bn). We estimate opex savings of 25% versus a standard network. 5G will gain scale in 2020, but some operators are better positioned than others. 5G services in 2020 will be based on Release 16 – the ‘full’ 5G standard. This will enable services that are substantially different – but operators with a 5G core network and Mobile Edge Compute (MEC) capabilities will have an advantage. Rakuten will launch 5G in mid-2020. It has a 5G ready core, and plans 4,000 Mobile Edge Compute (MEC) centres to lower network latency and bring processing power closer to consumers and businesses. We surveyed operators globally and found substantial differences in their approach to 5G network rollout – none was as aggressive as Rakuten in Mobile Edge Compute. The new entrant will likely be disruptive in Japan, but less so in the US and Germany. Our price analysis suggests that Rakuten can succeed in Japan, given high starting prices from incumbents. However, the ability of new entrants to undercut on price is much less clear in the US and Germany – where DISH and 1&1 Drillisch (Drillisch) both plan to launch network-based services. In the US, ARPU is higher than in Japan, but usage is even higher, meaning prices per GB are actually lower, whereas in Germany, although usage is low, ARPUs are only a third of those in Japan. We also highlight the importance of fibre in Rakuten’s Cloud RAN network. Fibre is widely available at a low cost in Japan – but less so in other markets. We have Buy ratings on Rakuten, Deutsche Telekom, and Vodafone; Reduce ratings on NTT DoCoMo, SoftBank Corp, and DISH. 1 Equities ● Diversified Telecoms September 2019 Contents 2 Why read this report? 1 Facts and figures 3 Key HSBC stock calls 4 Related research 5 Investment summary 6 Re-thinking radio 10 Rakuten Mobile – a test case 23 Assessing the costs 32 Implications for incumbents 42 New entrant plans: Germany and the US 53 5G: the hype and the reality 67 Valuation, ratings, risks 75 Disclosure appendix 81 Disclaimer 84 Equities ● Diversified Telecoms September 2019 Facts and figures Less than 10