The telecommunications Industry is identified as a major driver
of global economic recovery. An 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 industry.
In addition, the emergence of mobile broadband technology has
created several new service areas, which potentially offers huge
growth potential. This includes IPTV, collaboration and cloud
computing, videoconferencing and mobile payment, to name a few.
Research firm Ovum recently reported that global revenue of telecom
service providers exceeded $1.91 trillion in 2011, an improvement
of 6.7% year over year. The momentum is expected to remain high in
The U.S. telecommunications industry is witnessing consistent
growth despite experiencing a slow moving U.S. economy. This is
evident from the stock price movement of the large nationwide
carriers. Year to date, the stock price of
) was up 9.64%, the stock price of
) up 17.04%, and that of
) was up 27.35%. However, during the same time period, the
benchmark S&P 500 index was marginally up by 3.81%.
Most of the large national telecom service providers together
with the regional prepaid telecom operators generated net
subscriber addition in the first quarter of 2012. Verizon Wireless,
a joint venture between Verizon Communications Inc. and
Vodafone Group plc.
), added 501,000 post-paid subscribers out of total net addition of
734,000. AT&T Inc. added a net 187,000 post-paid subscribers
out of total net addition of 726,000. Sprint Nextel Corp. gained a
net 263,000 postpaid subscribers out of total net addition of 1.1
MetroPCS Communications Inc
Leap Wireless International Inc.
) added net 131,654 and 258,000 wireless subscribers, respectively,
in the previous quarter.
The telecommunications industry encompasses a lot of
technology-related businesses. The legacy local and long-distance
wireline phone services, telecommunications industry also includes
wireless communications, Internet services, fiber optics networks,
cable TV networks and commercial satellite communications.
A major characteristic of the telecommunications industry is the
huge barriers to entry due to scarcity of public airwaves
(spectrum). The U.S. telecom market is controlled by just four
national 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
permission 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 believe that the overall economic dynamics may shift in favor
of telecommunications industry, primarily due to its key attribute
of being a major infrastructure product for both the emerging and
developed nations. 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 industry players.
For the last 15 years, the U.S. wireless sector invested no less
than $300 billion to install seamless communications networks
throughout the world. The telecommunications industry as a whole
generates over 2.4 million jobs in the U.S., which is expected to
grow by another 200,000 in 2012 due to increasing adoption of
next-generation super-fast 4G LTE networks. Growing demand for
technically superior products has been the silver lining for the
telecommunication industry in an otherwise tough environment. 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. 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. Any new
network standard aims at faster data connectivity, quick video
streaming with high resolution and rich multimedia applications.
Growing demand for wireless products has been the silver lining for
the telecommunication industry in an otherwise tough
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
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 4S in the near future.
Spectrum crunch coupled with gradual smartphone market
saturation are 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.
Nevertheless, the average revenue per user for most of the wireless
carriers are rising over the last two years and are expected to
grow in the long term, primarily due to a massive growth of mobile
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 uplinking more and more video content, and in
turn, becoming broadcasters on their own. Several industry
researchers predicted that video may account for 60% of total
network traffic by the end of 2012.
The U.S. telecommunications industry is likely to be benefited
in the near future from two ways: (1) recent approval of the U.S.
Congress to initiate a fresh round of spectrum auction for the
wireless industry (2) significant technological inventions and
innovations that make even a mature market like the U.S. highly
lucrative for the telecom operators.
In February 2012, the U.S. Congress has 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 generate $25 -$30 billion from the
Furthermore, as the global economy recovers slowly, demand for
real-time voice, data and video increases by leaps and bounds. The
FCC has estimated that within the next 5 years, mobile-data demand
will grow 25-50 folds from its current level. These latest
developments are enabling the telecom service providers to
undertake large network extension while upgrading plans. The
decision of Congress is mainly aimed to solve growing consumer
demand for efficient wireless networks.
Merger and Acquisition to Continue
Despite the failed merger agreement between AT&T and
T-Mobile USA, we believe the U.S. telecom industry will witness
more M&A in 2012. AT&T needs spectrum to compete with its
bigger rival Verizon Wireless. Verizon has entered into a spectrum
buying deal with major cable MSOs including
Time Warner Cable Inc.
) and Bright House Networks. The deal is currently under FCC
Similarly, small prepaid operators like MetroPCS and Leap
Wireless may also join hands or merge with a nationwide carrier in
order to attain economies of scale and pricing power.
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
Competition Looms Large
Massive technology invention and innovation have resulted in
significant competitive atmosphere within the telecommunications
industry. Product life-cycle and upgrade-cycle have been reduced
drastically since 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.
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 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 are offering personal computers and mobile phones are
frequently interchanging their areas of operations.
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.
- Structural Subsidies: The Broadband Stimulus Program of the
U.S. government has received significant acceptance among rural
carriers. President Obama has endorsed a wireless spectrum hike
plan proposed by the FCC, which will nearly double the currently
available spectrum for wireless broadband services while
increasing Internet connectivity. FCC together with the U.S.
Department of Commerce will identify unused airwaves to raise the
available spectrum size to 500 MHz in the next 10 years.
- International diversification: Though diversification within
a country offers only limited protection in the current
highly-correlated world equity markets, it offers hedging
opportunities from local economic weakness and associated
currency exchange differentials.
The companies that match well with the aforementioned
considerations include AT&T Inc., Verizon Communications Inc.
and Sprint Nextel Corp.
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 for equipment vendors. The
companies are expected to remain focused on improving balance
sheet, financial discipline and free cash-flow generation.
Unfortunately, for the equipment vendors, the method of choice
for improving free cash flows remains disciplined capital
- Weak credit profiles: Over the near term, telecom companies
may be exposed to high debt levels and limited liquidity, which
puts a premium on sustainable cash flow to service debt
obligations. As a result, telecom companies may have free cash
flow on the back of a slowdown in demand.
- Increased competition: The markets for broadband
wireless solutions are emerging rapidly in terms of technological
innovation. The pure wireless/wireline service providers started
entering the video services market for cable operators, while the
cable MSOs are entering the telephone business for the small
& medium sized business enterprises.
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The companies that match well with the aforementioned
considerations include SK Telecom Co. Ltd. (
), Telefonica Brasil S.A. (
) and NII Holdings Inc. (