Major Trends In The Telecom Industry

The urge to remain connected is a human need, with technology playing its role in meeting this need in the current digital world. It is here that telecommunications comes to the fore as a necessary utility.

The need for telecommunications in both rural and urban areas as well as its role in the infrastructure development of an economy is of vital importance. Telecommunications is one of the few industries to have seen rapid technological improvement even during recessions. Owing to the significance of this service as an infrastructure product, we expect the overall economic dynamics to continue shifting in the industry’s favor.

Unprecedented growth in high-speed mobile Internet traffic, in particular with respect to wireless data and video, has transformed the industry into the most evolving, inventive and keenly contested space. Any new network standard that emerges aims at providing faster data connectivity, quick video streaming with high resolution and rich multimedia applications.

Multi-Gigabit Fiber-Optic Race Intensifies

The fiber optic network is increasingly becoming the most sought-after technology for secure and fastest data transmission over long distances. Going forward, the wireline industry will largely evolve around fiber-based superfast gigabit data transmission network.

Lately, Verizon successfully completed a trial run of a new technology on its state-of-the-art fiber-to-the-premises (FTTP) network for both residential and business customers. Popularly known as next-generation passive optical network (NG-PON2), this technology can deliver an exceptional 10 Gbps (gigabit per second) of upload and download speeds. Verizon’s entry into the multi-gigabit Internet race is likely to pose a major threat to Google Inc. (GOOGL) and Comcast. Google-fiber currently offers 1 Gbps of speed while Comcast’s “Gigabit Pro” provides 2 Gbps of residential broadband Internet speed.

Internet TV - Gains Traction

Internet TV is gradually gaining market traction in the U.S. Of late, the legacy pay-TV industry in the country has been facing severe competition from online video streaming service providers. The low-cost over-the-top video streaming service has resulted in massive cord cutting that is currently threatening the pay-TV business model. Internet TV has emerged as a strong alternative to counter this competitive threat.

In Feb 2015, DISH Network Corp. (DISH - Analyst Report) commercially launched its Internet TV service called “Sling TV” across the U.S. The Sling TV service is available for $20 a month and offers several top-rated channels. Customers can also enjoy add-on packages for an additional $5 per month. In the same league, the U.S. division of Sony Corp. (SNE​ - Snapshot Report) recently launched its new PlayStation Vue Internet TV service in New York, Chicago and Philadelphia. The service is set for a national rollout later this year.

Verizon, which is currently the sixth largest pay-TV operator in the U.S., meanwhile, seeks to focus on two different categories of viewers through its Internet TV service and fiber-based FiOS TV offerings. Comcast plans to launch its Internet TV service later this year while AT&T has entered into a partnership with Chernin Group to offer similar services.

Momentum to Continue

The U.S. telecommunications industry is presently comfortably settled on the growth trajectory and the momentum is likely to continue through 2015. The rising demand for technologically superior products has been a silver lining for the telecommunication industry in an otherwise tough environment. Uninterrupted advancement in telecom technologies helped telecom operators adopt newer business models in order to boost revenues.

Opportunities

The telecommunications industry as a whole offers a number of positives that are difficult to disregard from the standpoint of investors.

• Immune to External Disturbances: A major characteristic of the telecommunications industry is that it is immune to any international geopolitical disturbance even when it leads to economic fluctuations. Thus, the ongoing sovereign debt crisis in Europe, the slowdown in China or other non-U.S. economic volatility is not expected to have any immediate impact on the industry.   
• Barrier to Entry: The lack of public airwaves (spectrum) in the telecommunications industry creates a high barrier to entry. The U.S. telecom market is controlled by just four national players, as regional low-cost operators are not eligible to compete with large carriers. Furthermore, it is not easy for a new telecom carrier to establish itself in the market as it requires government approval to transmit voice, data, and video on public airwaves. Spectrum licenses are limited and therefore quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which very few entities can afford. Thus, this barrier protects the profits of incumbents.
• Strong Demand: A recovering economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans. Moreover, the FCC projects mobile data demand to grow 25-50 folds over the next five years.

Much of the above-mentioned positives have benefited the likes of AT&T Inc. (T - Analyst Report), T-Mobile US Inc. (TMUS - Analyst Report), Sprint Corp. (S - Analyst Report), Ericsson LM (ERIC - Analyst Report) and Motorola Solutions Inc. (MSI - Analyst Report). Currently, all these stocks carry a Zacks Rank #2 (Buy).