The telecommunications industry has emerged as a key driver of
the global economic recovery. The unprecedented growth of
high-speed mobile Internet traffic, particularly for wireless
data and video, has transformed the industry into the most
evolving, inventive and keenly contested space.
In addition, the emergence of mobile broadband technology has
created several new service areas, which potentially offer huge
growth potential. This includes IPTV, collaboration and cloud
computing, videoconferencing and mobile payments, to name a few.
Research firm Ovum reported that worldwide revenues of telecom
sector were more than $2 trillion in 2012, an improvement of 2%
year over year. Mobile service providers account for nearly 60%
of the total revenue.
A major characteristic of the telecommunications industry is the
high barriers to entry due to scarcity of public airwaves
(spectrum). The U.S. telecom market is controlled by just four
ational players, as regional low-cost operators are not eligible
to compete with these large carriers.
Furthermore, it is not easy to establish a new telecom carrier
since it will require government permissions to transmit voice,
data and video on public airwaves. Spectrum licenses are limited
and therefore quite expensive. Moreover, deployment of network
infrastructure, whether high-speed wireless (3G/4G) or wireline
(fiber optic), requires significant capital expenditure, which
very few entities can afford.
We remain of the view that the overall economic dynamic will
remain favorable to telecommunications industry, primarily due to
its key attribute of being a major infrastructure product for
both the emerging and the developed nations.
The telecommunications industry encompasses myriad
technology-related businesses. Besides the legacy local and
long-distance phone services, the telecommunications industry
also includes wireless communications, Internet services, fiber
optics networks, cable TV networks and commercial satellite
Telecommunications is one of the very few industries which
witnessed massive technological improvement even under recession.
The major thrust of the telecommunications sector is backed by
continuous network and product upgrade and invention by the
For the last 15 years, the U.S. wireless sector had been
investing an enormous $300 billion to install the most efficient
seamless communications networks in the world. The
telecommunications industry as a whole generates over 2.6 million
jobs in the U.S., which is expected to continue its momentum in
2013 due to increasing adoption of next-generation 4G LTE
According to ABI Research, 103 million LTE-compatible handsets
were shipped globally in 2012. Matured markets of North America
and emerging Asia-Pacific markets purchased 95% of those phones.
Moreover, growing demand for technically superior products has
been the silver lining for the telecommunication industry in an
otherwise tough environment. Metro Ethernet, IPTV, cloud
computing, managed IP services are some of the major innovation
in recent times. These developments are also helping telecom
equipment manufacturers, infrastructure solutions providers, and
mobile phone makers to consolidate their finances.
Wireless Is the Key
Despite the massive growth in fiber-to-the-home networks, we
believe wireless networks will be the key player in the telecom
industry growth story. In addition, the sector is witnessing a
fundamental change. Earlier, it was voice calls that brought
money to the operators. Currently, data and video have become the
focus. New network standards aim at faster data connectivity,
quick video streaming with high resolution, and rich multimedia
Currently, the U.S. has approximately 300 million wireless
subscribers. Mobile broadband has become the most lucrative
source of revenue for the wireless operators. Massive growth of
data buoyed by smartphone revolution is the main reason for this
favorable scenario. Global revenue from mobile broadband is
expected to reach $123-$125 billion in 2016.
Spectrum Crunch & Market Saturation
The U.S. wireless industry is facing acute spectrum shortages,
sometime resulting in data packet dropping. Carriers are
investing heavily for more effective utilization of their
existing spectrum holding and are trying hard to add more
spectrums to their portfolio. In addition to the four nationwide
carriers, all the smaller pre-paid wireless operators are also
opting for a sound LTE network to offer hassle free broadband
video streaming and data transmission.
Meanwhile, smartphone penetration has crossed more or less half
of the total U.S. post-paid wireless subscribers. Recently,
pre-paid carriers have decided to offer high-end smartphones,
such as iPhone 5.
Severe spectrum crunch coupled with gradual smartphone market
saturation is forcing the wireless operators to look for other
options to raise revenue. These include new pricing plan, a shift
from unlimited data usage to tier-based data usage, and higher
upgrade fees for smartphones in order to offset handset
subsidies. In fact, the average revenue per user for most of the
wireless carriers is rising over the last two years and is
expected to grow in the long term primarily due to massive growth
in mobile data usage.
As smartphone users are now increasingly downloading multimedia
contents, video has become the primary network traffic. What is
more interesting, in addition to download, the smartphone and
tablet users are up-linking more and more video content and, in
turn, becoming broadcasters in their own right. Several industry
researchers predicted that video may account for 60% of total
network traffic by the end of 2012.
Mergers and Acquisitions to Continue
Despite the failed merger agreement between
) and T-Mobile USA, we believe the U.S. telecom industry will
witness more M&A deals in 2013. AT&T needs spectrum to
compete with its bigger rival,
Verizon bought spectrum from major cable MSOs including
Time Warner Cable Inc.
) and Bright House Networks. Prepaid wireless operator
) is currently undergoing FCC review for a merger deal with
Softbank of Japan has decided to buy a majority stake in
Sprint Nextel Corp.
DISH Network Corp.
), which holds a large wireless spectrum, has already declared
that it is not averse to a deal as an acquirer or an acquired
The telecommunications industry as a whole offers a number of
attributes that are difficult to ignore from the standpoint of
Telecom is a necessary utility:
The need for telecom in both rural and urban areas, and its
role in the infrastructure of both developed and developing
markets, will continue to grow. In addition, economic stimulus
plans in the U.S. and throughout the world should boost select
service providers and equipment manufacturers.
On September 28, 2012, the FCC decided to free up spectrum
currently used by TV broadcasters for commercial wireless
networks and to deploy a nationwide interoperable public-safety
broadband network. Huge proliferation of smartphones, tablets,
and several other pocket-sized mobile devices significantly
raised the demand for bandwidth for seamless wireless
connectivity. The spectrum auction is expected to shore up $15
billion in the U.S. government exchequer.
A recovering economy speeds up the demand for real-time voice,
data and video manifold. The FCC has estimated that within the
next five years, mobile-data demand will grow 25-50-fold from
its current level. These latest developments are enabling the
telecom service providers to undertake large network extension
while upgrading plans.
The companies that match well with the aforementioned
Verizon Communications Inc.
MetroPCS Communications Inc.
Generally, telecommunications companies that were under pressure
have high debt levels and large financial leverage ratios, or are
unable to cope with the recent market trends. Other risks that
remain are as follows:
Potential business slowdown:
Lower overall top-line sales among carriers are expected to
continue to weigh on capital spending decisions -- a major
problem faced by equipment vendors. The companies are expected
to remain focused on improving their balance sheet, financial
discipline and free cash-flow generation.
We may see more product sharing deals between telecom, cable TV
and satellite TV operators as each of these players are trying
to get a foothold into another's territory. Even pay-TV
services, offerings to business enterprises and mobile backhaul
and metro-Ethernet segments may witness more convergence.
Mobile phone makers are now gradually offering tablets (small
laptops); chipset manufacturers are offering personal computers
and mobile phones are frequently interchanging their areas of
Technological upgrades and breakthroughs have resulted in a cut
throat price competition. Product life-cycle and upgrade-cycle
have been reduced drastically as several firms are coming out
with new types of products and services within a short span of
time. Increasing competition is actually forcing each and every
player to offer heterogeneous and bundled services.
Showing signs of the abovementioned weaknesses include
SK Telecom Co. Ltd.
Telefonica Brasil S.A.
NII Holdings Inc.
COMCAST CORP A (CMCSA): Free Stock Analysis
DISH NETWORK CP (DISH): Free Stock Analysis
NII HLDGS-CL B (NIHD): Free Stock Analysis
METROPCS COMMUN (PCS): Free Stock Analysis
SPRINT NEXTEL (S): Free Stock Analysis Report
SK TELECOM CO (SKM): Free Stock Analysis
AT&T INC (T): Free Stock Analysis Report
TIME WARNER CAB (TWC): Free Stock Analysis
TELEF BRASIL SA (VIV): Free Stock Analysis
VERIZON COMM (VZ): Free Stock Analysis Report
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