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 this industry into the most evolving, inventive,
and keenly contested industry.
In addition, 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. Several
industry researchers estimated that the market size of the global
telecommunications industry may reach $1.8 trillion - $2 trillion
in the next three years. The U.S. telecommunications industry will
hold the largest share of it.
Structure
The telecommunications industry encompasses a lot of
technology-related businesses. Besides the legacy local and
long-distance wireline phone services, the 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; 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 would 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 expenditures, which
very few entities can afford.
Key Attribute
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 the
developed nations. Telecommunications is one of the very few
industries, which witnessed massive technological improvement even
during the recession. The major thrust for the telecommunications
sector is coming from the industry due to continuous network and
product upgrade and invention by the industry players.
In last 15 years, the U.S. wireless industry invested an enormous
$300 billion to install most efficient seamless communications
networks in 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 gowning 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. At present, 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 environment.
Recent Performance
Telecommunications industry is witnessing consistent growth despite
experiencing a slow moving U.S. economy. Most of the large national
telecom service providers together with the regional prepaid
telecom operators generated net subscriber addition in the fourth
quarter of 2011.
Verizon Wireless, a joint venture between
Verizon Communications Inc.
(
VZ
) and
Vodafone Group plc.
(
VOD
), added 1.2 million post paid subscribers, its second best result
in last two years.
AT&T Inc.
(
T
) added a net 717,000 wireless subscribers, its historic high
quarterly figure.
Sprint Nextel Corp.
(
S
) gained a net 161,000 postpaid subscribers.
MetroPCS Communications Inc.
(
PCS
) and
Leap Wireless International Inc.
(
LEAP
) added net 197,410 and 175,000 wireless subscribers, respectively,
in the previous quarter.
Near-term Catalysts
The U.S. telecommunications industry is likely to be benefited in
the near future two ways: (1) recent approval of the U.S. Congress
to initiate a fresh round of spectrum auction for the wireless
industry, and (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 billion - $30 billion in the
U.S. government exchequer.
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.
Technological Innovations
Smartphones and tablets have become the next-generation choice and
are increasingly taking over market share from the basic mobile
handsets. Although the economy is under recovery phase, and we are
not completely out of the woods, the growth in the smartphone
market maintains its impressive trend.
This reflects a shift in consumer preference toward
application-rich devices from ordinary mobile handsets used
primarily for voice telephony. Smartphones are generally
characterized by very powerful operating systems capable of
supporting a variety of services and applications that need very
high-speed network infrastructures.
GSM Association has forecasted that within the next 5 years,
telecom operators will invest approximately $100 billion to upgrade
their respective networks for accommodating hassle free
transmission of mobile data and video traffic. The major technical
areas will be High-Speed Packet Access (HSPA), 3G mobile broadband,
and next-generation (4G) LTE. One simple example of this
significant rate of growth is that LTE network, which was globally
first deployed in late 2009, at present provides over 2 million
connections.
As smartphone users are now downloading increasing 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.
Mergers & Acquisitions 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. Similarly, small prepaid operators like MetroPCS
and Leap Wireless may also join or merge with a nationwide carrier
in order to attain economies of scale and pricing power.
DISH Network Corp.
(
DISH
), which holds a large wireless spectrum, has already declared that
it is not averse to a deal as an acquirer or an acquired entity.
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 the 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 for personal computers and mobile phones are
frequently interchanging their areas of operations.
OPPORTUNITIES
The telecommunications industry as a whole offers a number of
attributes that are difficult to ignore from the standpoint of
investors.
-
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, continues 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.
(
T
),
Verizon Communications Inc.
(
VZ
),
MetroPCS Communications Inc.
(
PCS
) and
CenturyLink Inc.
(
CTL
).
WEAKNESSES
Generally, telecommunications companies that were under pressure in
the recession have high debt levels and large financial leverage
ratios or are unable to cope with the recent market trend. 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 outlays.
-
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.
The companies that match well with the aforementioned
considerations include
France Telecom
(
FTE
),
United States Cellular Corp.
(
USM
) and
NII Holdings Inc.
(
NIHD
).
CENTURYLINK INC (
CTL
): Free Stock Analysis Report
FRANCE TELE-ADR (
FTE
): Free Stock Analysis Report
LEAP WIRELESS (
LEAP
): Free Stock Analysis Report
NII HLDGS-CL B (
NIHD
): Free Stock Analysis Report
METROPCS COMMUN (
PCS
): Free Stock Analysis Report
SPRINT NEXTEL (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
US CELLULAR (USM): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis
Report
VERIZON COMM (VZ): Free Stock Analysis Report
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