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Verizon Communications Inc. Set to Test 5G Wireless Networks Way Ahead of Schedule

By Chris Kuiper, CFA - Sep 22, 2015 at 10:12AM

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Big Red's latest announcement could put them ahead of competitors, but won't come without its share of risks.

Good news for speed freaks who find their current 4G LTE cellular connection too slow: Verizon Communications (VZ 1.78%) announced that it will begin field trials on fifth-generation, or 5G, technology next year, with some deployment expected by 2017. The announcement was a surprise to the rest of the wireless industry, which didn't expect 5G to be deployed until 2020 at the earliest. Is Verizon Communications getting a leg up on their competitors or are they pushing a technology that isn't ready yet?

It's not just about video download speeds
What is 5G, and why does it matter? Although the wireless industry talks about 4G, 3G, and 2G standards as if they're distinct upgrades, like upgrading your computer operating system from Windows 7 to Windows 8, the lines between wireless standards are actually quite fuzzy. There are continuous upgrades happening to the current 4G LTE standard, which will continue to take place, but most people agree that 5G will represent the next leap forward with higher speeds, faster response times and more bandwidth, or a "fatter pipe," which allows more people to connect at the same time.

The technology is still new, but early reports show 5G could be 30 to 50 times faster than 4G LTE. With these kinds of leaps in speed, entire movies could be downloaded in mere seconds -- not minutes -- over cellular connections. Of course, faster download speeds are always welcome and can be enough of a reason to upgrade networks, but this isn't the only reason.

Another improvement expected for 5G networks is faster response time, commonly referred to as latency -- the lower the latency, the faster data can be sent between devices. Verizon is already talking about how this will be crucial as the Internet of Things continues to grow. Examples of this technology could be road sensors sending real-time information to driverless cars, telling them to slow down because of an accident. Another application could be wirelessly operating heavy earth-moving machinery thousands of miles away, as was recently demonstrated at Mobile World Congress.

In other words, Verizon Communications could be positioning itself not only to be at the leading edge of wireless phone networks, but the wireless network for almost everything.

Is first-mover advantage always better?
Verizon Communications is one of the leading wireless networks in the U.S., if not the leading network, so continually upgrading its infrastructure is essential to being able to charge some of the highest prices, expand profit margins, and keep subscribers from switching. In a world where cellular and Internet connections are increasingly becoming more like a commodity, it's easy to see why Verizon wants to try to differentiate itself by being the first to 5G.

But could being the winner of the race to 5G be a curse? Potentially. Consider some of the hurdles Verizon will have to face. First, the industry hasn't even decided on standard protocols needed to make sure networks will work globally as well as be backward compatible with 4G and older standards.

Second, 5G will require large bands of spectrum. Verizon already has enough spectrum for testing purposes but will need to acquire or venture into unused spectrum for 5G. Further, 5G will likely have to operate at higher frequencies, which is better for higher speeds, but faces the trade-off of signals that are not as strong and can't travel as far. This means Verizon will have to build more base stations for adequate coverage.

Finally, Verizon has taken the initiative of partnering with many of the largest network and wireless equipment suppliers, something that could strengthen supplier relationships and be a good thing. But this also means Verizon will be the one putting in all of the resources and ironing out the bugs, something that will benefit competitors such as AT&T (NYSE: T) once they decide to adopt the technology. The biggest risk to all of these challenges will be massive capital expenditure and R&D expenses that could eat into the bottom line -- investors should watch these figures carefully over the next few years to make sure they aren't getting out of control.

Verizon has been here before
Investors should cheer the Verizon announcement. Verizon caters to some of the most profitable wireless customers by offering superior network coverage and quality. Remember, Verizon was the first to offer 4G LTE technology to subscribers, so it's done this kind of next-gen network deployment before. The differentiation and superior speeds will allow it to hold subscribers and margins, while potentially putting it at the center of the Internet of Things revolution.

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