The U.S. telecommunications industry is currently faced with
pressing concerns like intense pricing competition and severe
spectrum crunch. Also saturation level adoption rates for
smartphone and tablet are compelling wireless operators to seek
other options for revenue generation. Massive promotional
expenditures and cut-throat pricing competition are major concerns
presently plaguing the industry.
In addition, the U.S. telecom regulator, Federal Communications
Commission (FCC) has adopted net neutrality laws and also increased
the upload and download speeds of Internet to be called as
broadband adding to the woes of many ISPs (Internet Service
Net Neutrality: A Major Concern
The net neutrality law adoption by FCC was announced on Feb 26,
2015, per which high-speed broadband (Internet) will now be
classified as a public utility under Title II of the 1934
Communications Act instead of section 706 of the 1996 Telecom Act.
Importantly, the latest regulations will be applicable to both
mobile and fixed broadband networks. The reclassification of
Internet makes a radical change in the way the government treats
high-speed broadband service and ISP. The FCC can now strongly
regulate the ISPs.
Net neutrality implies an open-Internet atmosphere which will
prohibit ISPs, especially the telecom and cable TV operators, from
discriminating against applications. In order to control the flow
of bandwidth-consuming applications such as video streaming, the
ISPs have been discriminating against several web-based content and
applications. Content developers have to expend heavy sums to ISPs
for accelerated data transfer.
The implementation of the new law will ban common ISP practices
such as data traffic blocking, slowing any data traffic and paid
prioritization. Notably, paid prioritization is a method through
which content developers strike deals with ISPs for quick and
smooth transmission of their data traffic. The FCC will closely
monitor and put a check on all such deals in the future. Moreover,
the FCC will also supervise interconnection deals, in which content
developers pay ISPs to connect with their networks.
Cable MSOs Maintain Broadband Lead
The high-speed data (broadband) market has become a near-term
concern for telecom operators as cable MSOs have taken over the
lion's share of the market in 2014. Cable MSOs currently command
more than 60% of the U.S. broadband market.
With the deployment of next-generation DOCSIS 3.0 technology, cable
TV operators have extensively penetrated into the broadband
(high-speed data) market. At present, cable MSOs are facing severe
threat for their core video offerings. At this juncture, a strong
momentum in the high-speed data market bodes well for them.
Notably, on Jan 29, 2015, the FCC increased the download and upload
speeds of the Internet to be deemed as broadband (high-speed data).
In a majority voting, the FCC raised the new threshold download
speed to 25 Mbps from existing 4 Mbps while the upload threshold
speed boosted to 3 Mbps from the current 1 Mbps.
In general, the telecommunications companies under pressure have
high debt levels and large financial leverage ratios or are unable
to cope with the recent market trends. Other risks that pose a
threat 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 vying to
grab a sizeable share in each other's territory. Even pay-TV
services, offerings to business enterprises, mobile backhaul and
metro-Ethernet segments may witness more convergence. While
mobile phone makers are now gradually offering tablets (small
laptops), chipset manufacturers - who provide chips for
personal computers and mobile phones -- frequently interchange
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 coming up with
new products and services within a short span of time. Increasing
competition is compelling every player to offer heterogeneous and
Signs of the above-mentioned weaknesses can be seen in Shaw
Communications Inc. (
), China Unicom Ltd. (
), Telefonica S.A. (
), Arris Group Inc. (
) and ADTRAN Inc. (
). While Shaw Communications and Telefonica carry a Zacks Rank #5
(Strong Sell), all other stocks have a Zacks Rank #4 (Sell).
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TELEFONICA S.A. (TEF): Free Stock Analysis
SHAW COMMS-CL B (SJR): Free Stock Analysis
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ARRIS GROUP INC (ARRS): Free Stock Analysis
ADTRAN INC (ADTN): Free Stock Analysis Report
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