Telecom Stock Outlook ? Oct. 2012 | Industry News

The unprecedented growth of high-speed Internet traffic, particularly for wireless data and video, has transformed the Telecommunications industry into the foremost evolving, inventive and keenly contested space. Similarly, 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 call a couple of.

Research firm Gartner reports that worldwide revenue of telecom service providers is anticipated to achieve $1.686 trillion in 2012, an improvement of one.4% year over year. Similarly, worldwide revenue of telecom equipment manufacturers is anticipated to achieve $377 billion in 2012, improving 10.8% year over year.

Recent Performance

Despite the slow moving U.S. economy, the outlook for the U.S. telecommunications industry remains favorable. It really is evident from the stock price movement of the big nationwide carriers.

During the primary three quarters of 2012, the stock price of verizon Communications Inc. (VZ) and AT&T Inc. (T) was up a respective 19.1% and 29.3%, while the stock price of Sprint Nextel Corp. (S) shot up 135.9%. Compared, over a similar period of time, the benchmark S&P 500 index was up by just 12.8%.

Structure

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 communications.

A major characteristic of the telecommunications industry is the high barriers to entry as a consequence of scarcity of public airwaves (spectrum). The U.S. telecom market is controlled by just four national players, as regional low-cost operators don?t seem to be eligible to compete with these large carriers.

Furthermore, it?s not easy to determine a brand new telecom carrier because 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 expenditure, which only a few entities can afford.

Key Attribute

We believe that the whole economic dynamics may shift in favor of telecommunications industry, primarily because of its key attribute of being a tremendous infrastructure product for both the emerging and the developed nations. Telecommunications is probably the only a few industries which witnessed massive technological improvement even under recession. The key 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 a major $300 billion to put in the best seamless communications networks on the earth. The telecommunications industry as an entire generates over 2.4 million jobs within the U.S., that is expected to grow by another 200,000 in 2012 attributable to increasing adoption of next-generation super-fast 4G LTE networks.

Growing demand for technically superior products was the silver lining for the telecommunication industry in an otherwise tough environment. These developments also are helping telecom equipment manufacturers, infrastructure solutions providers, and cellphone makers to consolidate their finances.

Wireless is the Key

Despite the big growth in fiber-to-the-home networks, we believe wireless networks would be the key player inside the telecom industry growth story. Besides, the arena is witnessing a fundamental change. Earlier, it was voice calls that brought money to the operators. Currently, data and video became the focal point.

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 wireless subscribers.

Spectrum Crunch & Market Saturation

The U.S. wireless industry is facing acute spectrum shortages, sometime leading to data packet dropping. Carriers are investing heavily for more beneficial utilization in their existing spectrum holding and try hard to feature more spectrums to their portfolio.

In addition to the four nationwide carriers, each of the smaller pre-paid wireless operators also are picking a valid LTE network to supply hassle free broadband video streaming and knowledge transmission. Meanwhile, smartphone penetration has crossed kind of 1/2 the entire U.S. post-paid wireless subscribers.

Severe spectrum crunch coupled with gradual smartphone market saturation is forcing the wireless operators to seem for other options to elevate revenue. These include new pricing plans, a shift from unlimited data usage to tier-based data usage, and better upgrade fees for smartphones so that you can offset handset subsidies. As a matter of fact, the common revenue per user for many of the wireless carriers is rising over the past two years and is anticipated to grow within the long time primarily because of massive growth in mobile data usage.

As smartphone users at the moment are increasingly downloading multimedia contents, video has become the main driver of network traffic. What?s more interesting, as well as download, the smartphone and tablet users are uplinking an increasing number of video content and, in turn, becoming broadcasters of their own right. Several industry researchers expect video to account for 60% of total network traffic by the tip of 2012.

Near-term Catalysts

The U.S. telecommunications industry might be benefit within 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 just like the U.S. highly lucrative for the telecom operators.

On September 28, the FCC decided to disencumber spectrum currently utilized by TV broadcasters for commercial wireless networks and to deploy a nationwide interoperable public-safety broadband network. Huge proliferation of smartphones, tablets, and a number of other pocket-sized mobile devices significantly raised the demand for bandwidth for seamless wireless connectivity. The spectrum auction is anticipated to shore up $15 billion within the U.S. government exchequer.

Moreover, a recovering economy hurries up the demand for real-time voice, data, and video manifold. The FCC has estimated that inside 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 call of Congress is principally aimed to resolve 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 social gathering with MetroPCS Communications Inc. (PCS) to enhance its competitive position. AT&T needs spectrum to compete with its bigger rival verizon Wireless. Verizon recently bought spectrum from major cable MSOs including Comcast Corp. (CMCSA), time warner Cable Inc. (TWC) and Bright House Networks. dish network Corp. (DISH), which holds an outsized wireless spectrum, has already declared that it isn?t averse to a deal as an acquirer or an acquired entity.

Competition Looms Large

Technological upgrades and breakthroughs have led to a cut-throat telecommunications industry. Product life-cycle and upgrade-cycle had been reduced drastically as several firms are popping out with new kinds of services and products within a brief span of time. Increasing competition is essentially forcing each player to supply heterogeneous and bundled services.

We might even see more product sharing deals between telecom, cable TV, and satellite TV operators as each of those players are attempting 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. Cellphone makers at the moment are gradually offering tablets (small laptops); chipset manufacturers are offering personal computers and cellphones are often interchanging their areas of operations.

OPPORTUNITIES

The telecommunications industry as a complete offers various attributes which can be difficult to disregard from the standpoint of investors.

• Telecommunications ? an important utility: The will for telecom in both rural and concrete areas, and its role within the infrastructure of both developed and developing markets, will keep growing. Similarly, economic stimulus plans within the U.S. and within the world should boost select service providers and kit manufacturers.
• Structural subsidies: 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, so one can nearly double the currently available spectrum for wireless broadband services while increasing Internet connectivity. The FCC including the U.S. Department of Commerce will identify unused airwaves to boost the available spectrum size to 500 MHz within the next 10 years.
• International diversification: Though diversification within a rustic offers only limited protection within the current highly-correlated world equity markets, it offers hedging opportunities from local economic weakness and associated foreign exchange differentials.

The corporations that match well with the aforementioned considerations include AT&T Inc. (T), Verizon Communications Inc. (VZ) and MetroPCS Communications Inc. (PCS).

WEAKNESSES

Generally telecommunications companies that were stressed have high debt levels and massive financial leverage ratios or are unable to deal with the hot 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 main problem faced by equipment vendors. The firms are expected to stay concerned about improving their balance sheet, financial discipline and free cash-flow generation. Unfortunately, for the equipment vendors, the process of choice for bettering free cash flows remains disciplined capital outlays.
• Market saturation: Slow growth of the postpaid wireless subscribers within the second quarter of 2012 indicates potential market saturation. The four major U.S wireless carriers added a net 405,000 postpaid subscribers, that?s under 1/2 the internet subscribers these companies together added within the year-ago quarter.
• Increased competition: The markets for broadband wireless solutions are emerging rapidly by way of technological innovation. The pure wireless/wireline service providers started entering the video services marketplace for cable operators, while the cable MSOs are entering the phone business for the small- and medium-sized business enterprises.

Showing signs of the abovementioned weaknesses include SK Telecom Co. Ltd. (SKM), Telefonica Brasil S.A. (VIV) and NII Holdings Inc. (NIHD).

Read the analyst report on VZ

Read the analyst report on T

Read the analyst report on S

Read the analyst report on PCS

Read the analyst report on CMCSA

Read the analyst report on TWC

Read the analyst report on DISH

Read the analyst report on SKM

Read the analyst report on VIV

Read the analyst report on NIHD

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1. Telecom Stock Outlook ? Nov. 2011
2. Telecom Industry Outlook ? March 2011
3. Telecommunications Stock Outlook ? June 2011
4. Zacks Industry Outlook Highlights: AT&T, Verizon Communications and MetroPCS Communications
5. The Future of Wireless and Telecom Expense Managed Services

Source: http://www.newtelecomblogs.com/2012/10/11/telecom-stock-outlook-oct-2012/

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