Unprecedented growth in high-speed mobile Internet traffic, in
particular for wireless data and video, has transformed the
telecommunications industry into the most evolving, inventive, and
keenly contested space. In addition, the emergence of wireless
broadband technology has created several new service areas, which
offer huge growth potential.
According to a report by Infonetics Research, telecom operators
globally generated approximately $2 trillion in revenues in 2013.
This is a slight improvement from $1.9 trillion revenues recorded
in 2012. Notably, the report also stated that telecom carriers are
increasingly spending on capital expenditures in order to update
their networks with the latest technologies. In 2013, carriers'
expenditures rose 6% year over year and are expected to rise at a
CAGR of 2% from 2012 to 2017, most likely to reach a significant
$355 billion by that time.
While the telecom growth momentum is expected to be maintained in
the U.S. over the near term, the major impetus is likely to come
from emerging markets of China, India, Brazil and Russia. Carrier
expenditures have increased in Japan and even major telecom
operators in Western Europe, the most vulnerable region
economically, have raised their budget.
Currently, the U.S. Telecommunications Industry is evolving around
5 broad factors. These include wireless gradually becoming the
future of the telecom industry and the consequent popularity of
spectrum. High-speed fiber-based network is projected to expand
more aggressively, especially for video/TV offerings.
In addition, consolidation within the industry will continue mainly
due to shortage of airwaves and attaining economies of scale.
Innovative products will be launched in areas of m-Commerce,
virtualization and cloud-based technology, high-speed metro
Ethernet, to name a few. Apart from these, there still remains
ample scope for expansion in the U.S. According to the
Federal Communications Commission (FCC), nearly a fifth of rural
American households lack broadband access.
Wireless is the Key
Despite the massive growth in fiber-to-the-home networks, we
believe that wireless networks will boost growth in the telecom
industry. Moreover, the sector is witnessing a fundamental change.
The focus of the operators has shifted from voice calls to data and
video. Any new network standard aims at faster data connectivity,
quick video streaming with high resolution and rich multimedia
The GSM Association's research wing, GMSA Intelligence, recently
revealed its estimation that there will be more than 1 billion LTE
connections globally by 2017. Currently, there are approximately
176 million LTE connections worldwide. By 2017, the number is
likely to reach around 465 LTE networks across 128 countries.
GSMA Intelligence further reported that LTE users consume an
average of 1.5GB data per month, twofold of what is consumed by
non-LTE users. In the developing countries, LTE users can generate
20 times higher average revenue per user (ARPU) to carriers than
non-LTE users, whereas in the developed countries, ARPU can be
10-40% higher for LTE users instead of non-LTE users. Apart from
the terrestrial wireless network, the U.S. has an advanced
satellite broadband network, mobile satellite radio systems and
extensive WiFi networks.
Mergers and Acquisitions to Continue
We believe that the U.S. telecom industry will witness more mergers
and acquisitions in 2014. Owing to the rising popularity and demand
for the scarce and valuable wireless spectrum, mergers and
acquisitions have increased exponentially. While the strong
established players need more spectrums to gain competitiveness,
small players prefer to merge with strong rivals rather than trying
to establish a nationwide foothold which is extremely capital
Verizon Communications Inc.
) bought spectrums from major cable MSOs including
Time Warner Cable Inc.
) and Bright House Networks. Recently, Verizon announced the
largest acquisition proposal of the wireless industry. The company
has decided to acquire the remaining 45% stake of Verizon Wireless
Vodafone Group plc.
). Verizon currently holds the majority 55% of this venture.
Charter Communications Inc.
) has offerd a bid to acquire Time Warner Cable.
Pre-paid wireless operator MetroPCS has been acquired by
T-Mobile US Inc.
) and another pre-paid operator
Leap Wireless International Inc.
) is awaiting regulatory approval to be acquired by
). Softbank of Japan recently acquired a 78% stake in
(S) for $21.6 billion. Satellite TV operator
DISH Network Corp.
) currently has a lucrative portfolio of spectrums (an estimated
value of $10 billion) and is looking for a suitable merger option
to develop a nationwide wireless network.
Severe spectrum crunch coupled with gradual smartphone adoption is
forcing the wireless operators to look for other options to raise
revenues. These include new pricing plans, a shift from unlimited
data usage to tier-based data usage, and higher upgrade fees for
smartphones and tablets in order to offset handset subsidies. In
fact, the average revenue per user for most of the wireless
carriers has been rising over the last two years. It is also
expected to grow in the long term primarily due to massive growth
in mobile data usage. Smartphone and tablet users are progressively
uploading video content and are becoming broadcasters in their own
Another growth area for the telecom industry is the fiber-based
video service. According to Infonetics, video service revenues, in
the first half of 2013, were approximately $110 billion globally,
up 2% from the corresponding period of the previous year. The
global pay-TV market size may reach up to $270 billion by 2017.
Similarly, for the cable TV operators, a new growth area is the
small and medium sized business (SMB) segment. Currently, the
market size of the U.S. Business Services segment is approximately
$8 billion. Various industry researches estimate that the SMB
segment is expected to offer a market opportunity worth $20 billion
to $30 billion in the long term.
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, m-commerce, m-banking, telematics services are
some of the major innovations in recent times. These developments
are also helping telecom equipment manufacturers, infrastructure
solutions providers, and mobile phone makers to consolidate
Zacks Industry Rank
Within the Zacks Industry classification, Telecommunications is
broadly grouped in the Computer and Technology sector (one of the
16 Zacks sectors) and are further sub-divided into seven industries
at the expanded level: Communications Infrastructure,
Communications Components, Satellite Communications, Communications
Semiconductor, Wireless Equipment Supplier, National Wireless
Service Provider and Non-U.S. Wireless Operator. The level of
sensitivity and exposure to different stages of the economic cycle
vary for each industry.
We rank all the 260 plus industries in the 16 Zacks sectors based
on the earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit: About Zacks
Industry Rank. As a guideline, the outlook for industries with a
Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and
#176 is 'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank for Communications Infrastructure is #34,
Communications Component is #110, Satellite Communications is #110,
Communications Semiconductor is #110, Wireless Equipment Supplier
is #67, National Wireless Service providers is #165 and Non-U.S.
Wireless Operators is #179. Looking at the Zacks Industry Rank of
the seven telecommunications industries, we derive that the
near-term outlook for the group is tending toward 'Neutral.'
Earnings Trend of the Sector
The broader Technology sector, of which the Telecommunications
industry is part, remains weak with respect to earnings. So far,
only 10.8% of the sector participants have reported fourth-quarter
2013 results, which have been strong in terms of beat ratios
(percentage of companies coming out with positive surprises) and
generated a positive growth.
Both earnings and revenues beat ratios were pretty robust at 71.4%
and 85.7%, respectively. Additionally, total earnings for the
reported companies have shown a significant 23.2% year-over-year
increase on an 8.7% growth in revenues. This compares with a
substantially lower earnings growth of 5.9% on a much lower 3.2%
growth in revenues in the third quarter of 2013.
The consensus earnings expectations for full year 2014 also depict
a fairly strong trend. Earnings growth is expected to grow at 1.8%
in the first quarter and is expected to improve further to 11.2% in
the second quarter. Overall, the sector is expected to register
full-year earnings growth of 9.4%.
For a detailed look at the earnings outlook for this sector and
others, please read our weekly Earnings Trends reports.
The telecommunications industry as a whole offers a number of
attributes that are difficult to ignore from the standpoint of
Telecommunications 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.
Barriers to Entry:
The lack of public airwaves (spectrum) in the telecommunications
industry creates a high barrier to entry. The U.S. telecom market
is controlled by just four national players, as regional low-cost
operators are not eligible to compete with large carriers.
Furthermore, it is not easy to establish a new telecom carrier
since it will require government approval to transmit voice,
data, and video on public airwaves. Spectrum licenses are limited
and therefore quite expensive. Moreover, the deployment of
network infrastructure requires significant capital expenditure,
which very few entities can afford.
A recovering economy speeds up the demand for real-time voice,
data, and video manifold. The escalation in demand has encouraged
telecom service providers to undertake large network extensions
while upgrading plans. Moreover, the FCC projects mobile data
demand to grow 25-50 fold over the next five years.
The companies that match well with the aforementioned
Arris Enterprises Inc.
China Unicom Ltd.
Liberty Global plc.
). Arris currently has a Zacks Rank #1 (Strong Buy) and the
rest of these stocks currently have a Zacks Rank #2 (Buy).
In general, the telecommunications companies that are 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:
Sales fluctuations of 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 sheets, financial discipline and free
We may see more product sharing deals between telecom, cable TV
and satellite TV operators as each of these players are trying to
gain a foothold in each other'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 who are offering chips for personal
computers and mobile phones are frequently interchanging their
areas of operations.
Technological upgrades and breakthroughs have resulted in
cutthroat price competition. Product life-cycle and upgrade-cycle
have been reduced drastically as several firms are introducing
new products and services within a short span of time. Increasing
competition is forcing every player to offer heterogeneous and
Signs of the above-mentioned weaknesses can be seen in
Rogers Communications Inc.
NII Holdings Inc.
Grupo Televisa S.A.
). All these stocks currently have a Zacks Rank #4 (Sell).
ARRIS GROUP INC (ARRS): Free Stock Analysis
CHELSEA THERAP (CHTP): Free Stock Analysis
SPRINT CORP (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
T-MOBILE US INC (TMUS): Free Stock Analysis
VERIZON COMM (VZ): Free Stock Analysis Report
To read this article on Zacks.com click here.