5G promises to be a game changer in mobile networking. It will vastly expand wireless data capacity and create greater possibilities for autonomous vehicles, smart factories, remote surgery, and much more. But first, an intricate ecosystem of hardware, applications, and services must be built out. Fueling that build-out will mean opportunities for both strategic and PE investors.
The move to 5G is well underway and heating up quickly. The number of 5G subscribers in the U.S. is expected to increase by 161 percent by the end of 2021 to 41.3 million (from 15.8 million in 2020). This uptake will power the deployment of 5G wireless spectrum capacity. The Department of Energy announced in August 2021 that it will provide $6 billion in funding to develop advanced 5G networking solutions.
These trends are expected to fuel M&A in the sector as telecom companies look to strengthen and expand their 5G capabilities. Notable deals in Q3’21 included Japanese e-commerce giant Rakuten’s acquisition of 5G software company Altiostar for more than $1 billion and 5G infrastructure services provider QualTek’s takeover of Broken Arrow Communications for an undisclosed sum to bolster its West Coast presence.
Some of the 5G rollout will simply require updating existing capabilities (e.g., adding towers and base stations), but other features will require further development of still-evolving technologies and standards such as network function virtualization, software-defined networking, edge computing, and Open RAN (radio access network).
Open RAN is one tool attracting a lot of interest from investors. Open RAN architectures use open standards to enable interoperability of hardware/software and interfaces for wireless networks, allowing their rollout using hardware and software from multiple infrastructure vendors. By allowing the “mixing” of interfaces and devices, Open RAN helps mobile operators break free from locked-in relationships with vendors and their proprietary technology stacks. It also allows new, emerging vendors to overlay additional use cases, applications and services on top of existing 5G and core network infrastructure, opening up the market to innovators and other vendors that may not traditionally play in the telecom space. This drives competition among vendors and should lower costs for mobile operators as RAN expenses are the largest part of their overall network cost (up to 80 percent).
We expect the Open RAN market to expand rapidly. Between 2021 and 2030, it is expected to grow by a CAGR of 38.4 percent to $39 billion globally. As consumer and business demand for new connectivity services increases, Open RAN will allow more flexible deployment options compared to legacy RAN architecture because operators can launch new applications and services without being dependent on previous vendors.
Investment opportunities abound in Open RAN, in particular for PE firms and tech companies that are eager to capture growth with 5G. Three areas within the Open RAN ecosystem have garnered the most interest—accelerated edge computing, vRAN, and mMIMO—which are all in early stages of commercialization but show a lot of promise for high returns:
- Accelerated edge computing: The increasing need for low-latency, data-heavy computing power at the edge of the network will spawn innovation in processing architectures, data platforms and applications, and hardware.
- vRAN: Virtualized RAN applies the principles of network function virtualization by virtualizing RAN network functions and deploying them on cloud platforms, making the RAN much more flexible.
- mMIMO: Massive multiple-input, multiple-output adds a much higher number of antennas on the base station and is a key enabler of higher throughput and capacity gains promised by 5G.
Investors need to evaluate components in the 5G value chain—covering core servers to radio units to antennas—for potential deals. We expect to see the whole ecosystem flourish but believe that players in vRAN or those integrated across the value chain may offer superior investment opportunities. For example, in acquiring Altiostar, an Open vRAN software provider, Rakuten touted the latter’s “passion” for “disruptive innovation … and highly agile technology.” For investors willing to bet on these technologies in the 5G ecosystem, now may be the time.
Read our KPMG Q3 report from M&A Trends in TMT summarizing recent developments in the TMT deal market.