Across the country in rural and urban geographies, consumer demand for high-speed connectivity remains first and foremost, and with the number of data-hungry smart devices exceeding the number of U.S. citizens, capacity is a looming concern. In an effort to improve the spectrum for over-the-air transmission, the Federal Communications Commission (FCC) launched a proprietary spectrum auction on March 29. The FCC began placing offers to broadcast television providers for their spectrum and is listing the spectrum for sale to wireless broadband companies. This effort should benefit consumers by creating faster data and WiFi speeds by easing congestion of wireless networks, laying the groundwork for 5G and spurring job creation. Broadcast television providers that choose not to part with their spectrum may be required to change channels once it has been redistributed. The auction results are highly coveted since the distribution of spectrum will have a large impact on the industry moving forward; however, the FCC may take several months to release the results.
Two days later, the FCC voted on a notice of rulemaking on proposed framework for new privacy and data security rules for Broadband Internet Access Service (BIAS) providers. Chairman Wheeler stated that this is focused on respect around customer data. The item would require operators to obtain consumers’ opt-in consent before using their data for third-party advertising and many other cases. As it relates to operator performance and M&A, demand for security businesses is rising. Cisco’s CEO Charles Robbins stated that its security branch grew 11% over the last year. Potential acquisition targets may have the following cybersecurity revenue streams: vulnerability assessments and audits, policy review/creation, network behavior analytics, threat visibility, security intelligence, and on premise and cloud-based file-sharing software. Cisco also stated that, in order to augment internal innovation, the company will focus on M&A in key growth areas like data analytics and a cloud-based video platform designed to launch live and on-demand OTT video services.
Big players are continuing to push fiber optics and to expand Fiber to the Premise (FTTP) in efforts to reach ground-breaking 1GB Internet speeds. For example, Verizon agreed to purchase the fiber-optic network business of OX Communications for approximately $1.8 billion, and Videotron acquired Fibrenoire, which will dramatically boost the amount Videotron’s resource of dark fiber. Looking forward through 2016, the major trends that SDR is noting align with consumer demand for privacy and high connectivity speeds.
The Telecom industry has been increasing its network capacity in order to keep up with the growing consumer demand for high-speed connectivity, a direct result of technological advancements in personal internet devices. Specifically, telecom equipment providers have focused on the “fiber everywhere” front. These infrastructure providers have been installing fiber infrastructure for years, much of which has been left dark and remained a large capital expense. However, Level 3 Communications’ CFO Sunit Patel is optimistic that content providers interested in network expansion will utilize this dark fiber to meet customer demand for high-speed connectivity as the use of high-definition video, 4G, video streaming and other broadband services increases. Major players such as AT&T are also rolling out Fiber to the Premise (FTTP) for consumers and businesses in major metro markets to offer industry-leading speeds of up to 1 Gbps. The focus on offering premium speeds at lower prices aligns with the effort to mitigate customer churn. Major players have also been looking toward acquisitions as the best means of attaining new customers and territories, specifically within wireless and subscription TV. American Tower (NYSE: AMT), for example, closed a deal to acquire over 11,000 wireless towers. Nelnet, Inc.’s (NYSE: NNI) move on Allo Communications also aligns with this trend. Nelnet believes that Allo’s pure fiber-optic service, which extends directly to the premise and provides top internet speeds, will increase Nelnet’s ability to meet consumer connectivity demands.
Less-traditional business models have also been gaining positive traction in the consumer markets. A good example is T-Mobile, which has been breaking from the norm and recognizing repeated growth with its unique “Un-carrier” branding. This business model challenges traditional carriers by eliminating annual contracts and allowing consumers to upgrade their smart phone devices more often and at a lower cost. Smart phone penetration in the U.S. and Europe reached nearly 80% in 2015. This saturation is expected to increase competition for new customers. The opportunity remains for carriers that are able to meet consumer demand, reach developing regions and implement new lines of service.
Moving into 2016, SDR is closely watching technological trends including mobile broadband, M2M, cloud computing, OTT services and big data management, which are all expected to propel the broader telecom industry ahead. In addition, further advancements in wireless technologies are expected, and attention will turn towards 5G infrastructure. Mobile broadband access using 3G and 4G/LTE networks is straining to keep pace, as users increase connection to cloud-based services. In fact, the increase in the availability of connected mobile devices and data usage is likely to double in the next few years. Due to the lack of fragmentation of the industry and high capital requirements to enter, top-coverage providers have controlled the wireless market and thus SDR expects that major providers will continue to make considerable investments in their tower infrastructure.
The Telecom industry continues to shift as the convergence of content, devices and high-speed data service becomes even more ubiquitous and mobile. Responding to these customer expectations of “anytime, anywhere” content and service, the Telecom industry is continuing to evolve products and services. Major wireless, broadband and satellite service providers are implementing new methods to increase customer retention. In addition to price reductions, major Telecom players are expanding territory and network capacity as well as expanding product and service offerings through acquisition.
Underlying recent developments is the rise of the “quad play,” in which customers receive from one provider a bundle of four including broadband internet, TV, landline and mobile services. Transactions including AT&T’s recent acquisition of DIRECTTV are indicative of this trend. Additional pressure will be felt from “over-the-top” video streaming services such as Netflix, HBOGO and Hulu. Leading cable and satellite providers are responding with a-la-cart packages that include select top-rated channels and add-on packages for lower fees.
The consumer-penetration rate of smart phones is increasing year over year with expectations to close 2015 at 80-85%. In an effort to keep and/or pick up the growing user base, wireless carriers such as T-Mobile are strengthening their offerings in the form of more competitive pricing, diverse product lines, non-contract binding plans and expanded LTE coverage. However, with the concept of cell phone annual contracts fading and “jump” programs increasing, even wireless-service providers that provide the fastest download speeds and connectivity are seeing pressure in generating lifetime value of their customers beyond their initial customer acquisition costs.
The Telecommunications industry experienced a slight downturn in Q2 2015, heavily driven by the decreasing performance of wired services. The revenues for wireless services, such as voice and data, have continued to increase in Q2. As a result, consolidation trends for wireless service providers continue to increase. TV provider Dish Network is reportedly in discussion to acquire T-Mobile and Sierra Wireless is looking to acquire 4G LTE provider AccelNetworks. An apparent trend in Q2 was that Companies with towers in place offering significant broadband and cloud services are in high demand and have been most prevalent in M&A this quarter. Because of the industry’s high barriers to entry, legal and regulatory restrictions have been enforced to prevent monopolization, hindering recent deals like Comcast acquiring Time Warner.
Geographical expansion is an additional key driver in recent M&A. Several emerging nations are rapidly installing 3G and 4G networks. Sprint Corp. has launched connectivity between the U.S. and Cuba allowing for unlimited call and text. Comcast and Liberty Global have formed an alliance offering WiFi connectivity to subscribers in the U.S. and Europe. Additionally, outsourcing of telecommunication equipment manufacturing is leading to a drop in U.S. production. Huawei Technology Co., ZTE Corp. and Ericsson are amongst the largest foreign competitors.
We anticipate to see active M&A within the Telecom industry as larger players continue consolidation efforts.
The telecommunications industry exhibited modest performance last quarter. This sector is largely driven by factors including the number of broadband connections, disposable personal income and technological change. In the past year, telecommunications equipment manufacturers have seen demand growth in high-end networking and data processing equipment, increasing levels of broadband connections and increasing capital expenditures from wired communication carriers. Telecommunication resellers, wireless carriers and satellite communications providers are projected to have 6%, 2% and 4% annual revenue growth over the next five years, respectively.
Despite the observed positive economic forces, many challenges remain for the telecom industry. Although capital expenditures are increasing by users of communications equipment, many of those companies are turning to cheaper foreign imports. Thus, domestic telecom equipment revenue is expected to decrease at an annualized rate of 0.8% per year. Similarly, pricing pressure in the wireless telecommunication services sector is squeezing profit margins and motivating M&A activity. Additionally, telecom struggles to battle concerns over Open Internet Rules (aka “net neutrality”) and fierce competition in the bundling of video, data and voice services. Finally, transmission companies continue to be negatively impacted by strapped federal budgets and landline abandonment, both of which lead to a reduction in telecom infrastructure investments.
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