The United States is quickly moving towards a world where a
fixed telephone only functions as a buzzer to your apartment.
Wireless subscriptions have grown 165% from 2000 to 2011 at 290
million subscribers. This structural change has serious
ramifications to the revenues of telecom carriers as a few of them
have significant exposure to the wireline segment and a further
decline in this segment would add significant pressure on the
wireless segment to make up for revenue losses. In this article we
will examine AT&T ( T ), Verizon ( VZ ) and Sprint's (
S ) exposure to
the wireline business and potential impact on revenues.
See our complete analysis for AT&T
Rapidly Changing Industry Landscape
From 1990 to 2000, wireless penetration in America experienced
rapid growth while wireline subscriptions grew steadily. However,
from 2000 on, fast evolving cellular technology contributed to
lower cost of cellphone ownership resulting in a decline in
wireline subscriptions at the expense of new wireless
subscriptions. The table below illustrates the trajectory of
subscriber penetration for wireless and wireline from 1984 to 2011.
As evident, the growth rate for wireless is slowing, and we believe
the US market will hit saturation in the next few years.
Source: International Telecommunication Union
The industry wide decline in wireline subscriptions will
continue and if the current trend persists, by 2020 wireline
penetration will lower to less than 30 subscribers per 100 people.
As a reference point, the last time wireline penetration was under
30% was in 1966. This decline will have differing impacts on the
carriers as each of their revenue exposures to this segment are
Sprint: Limited Impact
Among the three largest carriers, Sprint has the least exposure
to wireline. In 2012, only 8.5% of its revenue came from wireline
subscriptions down from 14.6% in 2008. The limited exposure to
wireline can help turn around the fortunes for the industry laggard
or at least not serve as a drag on growth.
Verizon: Moderate Impact
Verizon has a fairly significant exposure to wireline. In 2012,
the company generated over 34% of its revenues from wireline versus
47% in 2008. Verizon has done a tremendous job of growing its
wireless revenue and thus has more than compensated for the loss in
wireline. The chart below shows steady growth in wireless revenues
from 2008 and we expect this growth to continue. There will be
further decline in wireline revenues, but we are confident the
wireless growth will more than make up for that decline.
AT&T: Severe Impact
Among the three carriers, AT&T has the largest exposure to
wireline. This is not surprisingly considering its original
business was wireline and is the largest wireline provider in the
United States. However, with rapidly changing consumer preference
for wireless devices, AT&T faces the biggest risk with the
decreasing wireline trend. In 2012, over 47% of the revenues came
from wireline, and while this is down from 58% in 2008, it
is significant considering AT&T's wireless business is
facing stiff competition from Verizon. Unless AT&T can make up
for the accelerated wireline revenue losses that the industry will
experience, AT&T investors will experience long term risks on
the company's valuation.
Sprint due to its limited exposure and Verizon due to its fast
growing wireless business have these least risks to revenue growth
over the next few years from the wireline business. However,
AT&T will be under immense pressure for its wireless business
to compensate for its wireless business decline. Given the stiff
competition from Verizon in this area, the next few years will be
crucial for the telecom sector in the United States.
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