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 Provider).     

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.

Weaknesses

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 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 sizable 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.
• 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 every player to offer heterogeneous and bundled services.

Signs of the above-mentioned weaknesses can be seen in Shaw Communications Inc. (SJR - Analyst Report), China Unicom Ltd. (CHU - Analyst Report), Telefonica S.A. (TEF - Analyst Report), Arris Group Inc. (ARRS - Analyst Report) and ADTRAN Inc. (ADTN - Analyst Report). While Shaw Communications and Telefonica carry a Zacks Rank #5 (Strong Sell), all other stocks have a Zacks Rank #4 (Sell).