The unprecedented growth of high-speed Internet traffic,
particularly for wireless data and video, has transformed the
Telecommunications 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 offers huge growth potential. This includes IPTV,
collaboration and cloud computing, videoconferencing and mobile
payment, to name a few.
Research firm Gartner reports that worldwide revenue of telecom
service providers is expected to reach $1.686 trillion in 2012, an
improvement of 1.4% year over year. Similarly, worldwide revenue of
telecom equipment manufacturers is expected to reach $377 billion
in 2012, improving 10.8% year over year.
Despite the slow moving U.S. economy, the outlook for the U.S.
telecommunications industry remains favorable. This is evident from
the stock price movement of the large nationwide carriers.
During the first three quarters of 2012, the stock price of
Verizon Communications Inc.
) was up a respective 19.1% and 29.3%, while the stock price of
Sprint Nextel Corp.
) shot up 135.9%. In comparison, over the same time period, the
benchmark S&P 500 index was up by just 12.8%.
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
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
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 the
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 an
enormous $300 billion to install the 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
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. Besides, 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. Currently, the U.S. has approximately 300 million
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
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.
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 plans, 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
As smartphone users are now increasingly downloading multimedia
contents, video has become the primary driver of 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 in their own right. Several industry
researchers expect video to account for 60% of total network
traffic by the end of 2012.
The U.S. telecommunications industry is likely to be benefit in the
near future from two developments: (1) recent approval of the FCC
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.
On September 28, 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
Moreover, 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 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
The failed merger between AT&T and T-Mobile USA appears to have
propelled the latter to get together with
MetroPCS Communications Inc.
) to improve its competitive position. AT&T needs spectrum to
compete with its bigger rival Verizon Wireless. Verizon recently
bought spectrum from major cable MSOs including
Time Warner Cable Inc.
) and Bright House Networks.
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 entity.
Competition Looms Large
Technological upgrades and breakthroughs have resulted in a
cut-throat telecommunications industry. 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.
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 operations.
The telecommunications industry as a whole offers a number of
attributes that are difficult to ignore from the standpoint of
Telecommunications - 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.
The Broadband Stimulus Program of the U.S. government has
received significant acceptance among rural carriers. President
Barack 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. The 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.
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
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. Unfortunately, for the
equipment vendors, the method of choice for improving free cash
flows remains disciplined capital outlays.
Slow growth of the postpaid wireless subscribers in the second
quarter of 2012 indicates potential market saturation. The four
major U.S wireless carriers added a net 405,000 postpaid
subscribers, which is less than half of the net subscribers these
companies together added in the year-ago quarter.
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- and medium-sized business
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 Report
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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