U.S. Telecom: Pricing War, Net Neutrality Woes
Technological invention and innovation at a rapid clip have resulted in significant competition within the telecommunications industry. Product life-cycle and upgrade-cycle have gone down drastically with several firms coming out with new versions of products and services, back to back, within a short span of time. To combat competition, firms are thus increasingly looking at consolidation. This has resulted in an array of mergers and acquisitions in the telecom space.
To add to that, the Federal Communications Commission's (FCC) net neutrality laws have made matters worse for telecom operators. Besides, several ISPs (Internet Service Providers) are in a tight spot over the FCC's orders pertaining to increased upload and download speeds of Internet service termed "broadband."
In the meantime, the U.S. telecom market continues to witness intense pricing competition. The two industry behemoths, Verizon Communications Inc. ( VZ ) and AT&T Inc. ( T ), at present command around 68% of the U.S. wireless market, whereas Sprint Corp. ( S ) and T-Mobile US Inc. ( TMUS ) jointly control the remaining 32%. These two relatively smaller firms are now bringing on board several low-priced value-added products to lure customers away from their larger peers. In 2015, both Sprint and T-Mobile US added a substantial number to its customer base.
On the video services front, the pay-TV industry is facing severe competitive threats from low-cost online video streaming service providers. Cord-cutting has become a regular phenomenon in the country with over-the-top video operators offering smaller packages of channels, designed according to a customer's need, at dirt cheap prices. Established pay-TV operators are now opting for the more customer-friendly Internet TV service in order to counter the threat.
Companies in the telecommunications industry continue with mergers and acquisitions. Consolidation among the largest telecommunication services-focused companies has created an environment where equipment-focused companies have to contend with fewer customers and reduced selling opportunities. This has prompted consolidation among equipment companies as well to enhance their marketing value by broadening product offerings for converged fixed-mobile networks.
Net Neutrality: A Major Concern
The net neutrality law adoption mandate by the 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 services and ISPs. The FCC can now strongly regulate the ISPs.
Net neutrality implies an open-Internet atmosphere which will prohibit ISPs, especially 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 thus have to pay heavy sums to ISPs for accelerated data transfer.
The implementation of the new law will ban common ISP malpractices such as data traffic blocking, slowing down 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 to their networks.
Notably, on Jan 29, 2015, the FCC increased the download and upload speeds of Internet services to be deemed as broadband (high-speed data). In a majority vote, the FCC raised the new threshold download speed to 25 Mbps from the existing 4 Mbps while the same for upload has been boosted to 3 Mbps from the current 1 Mbps.
In general, telecommunications companies under pressure have high debt levels and large financial leverage ratios. Moreover, they are often unable to cope with recent market trends. Other risks that pose threats 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 retain focus on improving their balance sheets, financial discipline and free cash-flow generation.
- Product Overlapping: 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. Mobile phone makers are now gradually offering tablets and chipset manufacturers are providing chips for personal computers as well as mobile devices - thus frequently interchanging their areas of operations.
- Intensified Competition: 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 players to offer heterogeneous and bundled services to retain their position in the space.