The telecom industry saw yet another major acquisition on Monday as AT&T (T - Free Report) announced that it is buying Straight Path Communications for more than $95 per share, a 160% premium to its previous closing price.
So why did the nation’s second-largest wireless carrier shell out so much for this small firm? Well, Straight Path’s value lies in its portfolio of spectrum licenses that could help AT&T take the lead in the 5G network race (also read: Straight Path Communications Stock Skyrockets on AT&T Buyout).
5G testing will reach a global scale this year, and this next generation of mobile networks is expected to be fully rolled out by 2020. As the leaders of the telecom industry jostle for position in the 5G race, it’s important for investors to prepare their portfolios.
Here’s what you need to know in order to cash in on the 5G revolution.
What is 5G?
The term “5G” is short for “5th generation mobile networks,” and it refers to the proposed telecommunications standards that will replace the current 4G standards. These standards are set by units within the International Telecommunication Union, which works with other groups like the 3GPP to agree on the global standards for what can be marketed as 3G, 4G, and LTE networks.
One of the main goals of the 5G rollout will be to provide faster internet speeds for users, who have different wants and needs than during the implementation of past networks. For example, the advent of digital video streaming has clogged networks and slowed down customers who want to access Netflix (NFLX - Free Report) on the go.
The other objective of 5G is to help usher in the next wave of human-technology interaction. While past standards have primarily been based on human-to-human connection, 5G will need to power the growing Internet of Things (IoT) and other technologies that seek to bring people closer to the world around them (also read: How to Invest in the "Internet of Things").
And while the debate over what should be included in the 5G standards continues, it’s becoming clear that the new networks will be based on the use of millimeter wave bands. These bands, which include radio frequencies in the spectrum from 30 to 60 gigahertz, have previously not been used for wireless internet access.
According to IHS research, the global economic impact of 5G will be fully felt by 2035. By then, about $12.3 trillion worth of goods and services will be enabled by 5G networks, nearly 22 million jobs will be created by new demands in the labor force related to 5G, and the rollout of 5G will add approximately $3 trillion to the worldwide GDP.
Chipmakers at Work
Another interesting note from this IHS data is the estimation that chipmakers are spending a combined $200 billion a year on investments in 5G technologies.
One of the leaders in this front is Qualcomm (QCOM - Free Report) . In fact, Qualcomm released its initial 5G chip design in October, and this new “Snapdragon X50 5G” modem project promises to power early 5G networks by supporting operation in the 28 GHz millimeter wave band.
Of course, Qualcomm’s industry rivals are busy working on the 5G revolution too. Intel (INTC - Free Report) is forging its path through collaboration on standards protocols, as well as the development and deployment of new technologies, such as the Network Function Virtualization and Software-Defined Networking architectures.
Companies like Ericsson (ERIC - Free Report) and Nokia (NOK - Free Report) are also investing in 5G prototypes, and we should expect all of these brands—and more—to play an integral role within the governing bodies that will set the 5G standards.
As mentioned above, AT&T’s purchase of Straight Path was an obvious investment in its 5G future, and these types of acquisitions are becoming a trend throughout the broader telecom industry. In fact, this wasn’t even AT&T’s first 5G-inspired purchase.
Earlier this year, AT&T purchased FiberTower Corp., a small company that owns licenses in the 24 GHz and 39 GHz bands.
As a point of reference, telecom companies measure their networks’ reach with a figure called “megahertz-POP,” which is calculated by multiplying the amount of bandwidth by the potential number of people covered.
The FiberTower acquisition helped AT&T gain a valuable 8.1 billion Mhz-POP of 39 GHz spectrum, and Straight Path brings the company a whopping 39.7 billion Mhz-POP of 28 GHz spectrum and 175.9 billion Mhz-POP of 39 GHz spectrum.
Nevertheless, AT&T is not alone at the top of the ladder. Verizon (VZ - Free Report) owns nearly 200 million Mhz-POP of 28 GHz spectrum, while T-Mobile (TMUS - Free Report) owns about 100 million Mhz-POP of that spectrum. Sprint is trailing the pack with just about 9 billion Mhz-POP of 28 GHz spectrum.
The development of the 5th generation of mobile networks is a response to a changing world, and these changes are going to happen whether you are prepared for them or not.
In these cases, investors should follow the money in order to spot the trend. Throughout the tech sector, chipmakers and telecom giants are investing big money in 5G right now. That means smart investors should also be getting ready for 5G.
We may be a few years from a complete 5G rollout, and we likely won’t see the full economic impact of the switch for more than a decade, but this next generation of networks is going to start impacting the bottom lines of these companies incredibly soon. Don’t get left behind. Prepare for the 5G revolution now.
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