The last week looked like a bad spell for the telecom sector as most of the major telecom stocks lost value. Although we did not find any sector specific reason for the downtrend in stock price was in line with the broader market movement as S&P 500 index was also down 2.25% in the same time frame. The Federal Open Market Committee policy meeting and concerns regarding “Brexit” vote continued to weigh on investor sentiment. Despite this, the sector witnessed a number of important events.

In a landmark judgment last week, the federal appeals court in Washington D.C. upheld the net neutrality rules proposed by the FCC (Federal Communications Commission). This came as a major setback for the U.S. Internet service provider (ISP) industry. Several large ISPs and industry groups questioned the legal validity of the newly adopted net neutrality rules.

Immediately after the court ruling, major ISPs including AT&T Inc. (T Quick QuoteT - Free Report) , Verizon Communications Inc. (VZ Quick QuoteVZ - Free Report) , Comcast Corp. (CMCSA Quick QuoteCMCSA - Free Report) and CenturyLink Inc. together with leading ISP industry groups, such as, National Cable & Telecommunications Association and United States Telecom Association made it clear that the next round of legal battle will be fought in the U.S. Supreme Court.

Notably, the FCC had approved net neutrality rules, on Feb 26, 2015, after a majority vote. The new laws reclassified high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act.

Importantly, these regulations will be applicable to both mobile and fixed broadband networks. The reclassification of the Internet called for a radical change in the way the government treats high-speed broadband service. This will now give the FCC stronger control over the ISPs.

In the meantime, U.S. telecom behemoths Verizon and AT&T have reportedly submitted bids for the third time for the struggling web-portal operator Yahoo! Inc. .

In addition, a consortium led by Quicken Loans Inc. founder Dan Gilbert and backed by Berkshire Hathaway Inc. Chairman Warren Buffett, TPG Capital LP, Advent International Corp. and a partnership of Sycamore Partners and Vector Capital Management are also reported to have submitted bids for Yahoo. All of the offers value Yahoo from about $4 billion to $6 billion except for Verizon. Verizon’s bid was lower -- from $3.75 billion to $4 billion -- because it doesn’t include Yahoo’s non-core assets of patents and real estate.

According to a recent report by Light Reading, leading cable MSO (multi service operator) and media company Comcast is seriously thinking of acquiring certain useful assets of Icontrol Networks Inc., a major developer of smart-home products. The report stated that Comcast is eyeing Icontrol’s Zigbee-based smart home products and the majority of its patents. Moreover, Alarm.Com Inc., a competitor of Icontrol, also has an eye on a minor part of the Z-wave product portfolio together with a handful of patents and the Piper home monitoring assets that Icontrol acquired in 2014.

Meanwhile, soon after its launch of the Sling TV app for Apple Inc.’s (AAPL Quick QuoteAAPL - Free Report) Apple TV, DISH Network Corp. announced the addition of 12 Viacom, Inc. channels to the Sling TV portfolio. The satellite TV giant has been focused on expanding its Internet TV service ever since its core pay TV business started suffering due to cord cutting. The newly added 12 channels include popular ones like Comedy Central, Nick Jr., BET, NickToons, TeenNick, MTV, Spike, MTV2, Logo, CMT, TV Land and VH1. All these channels were launched a la carte at $5 per month. This will allow Sling TV subscribers to choose and pay as per their needs.

From a macro perspective, a recent research report published by the Global Mobile Suppliers Association (GSA) stated that the number of LTE (Long Term-Evolution) subscribers worldwide has crossed 1.29 billion in the first quarter of 2016. In the first quarter alone LTE subscriptions grew around 182 million. At this rate, 4G LTE is set to outnumber 3G (all forms of 3G technologies) subscribers globally by 2020. GSA further stated that in the last one year, 4G LTE generated over 645 million subscriptions worldwide, reflecting a whopping 100% improvement year over year.

The GSA report in May 2016 stated that 503 operators have commercially activated LTE networks across 167 countries.  The LTE networks are expected to reach 550 by the end of 2016. Currently, there are approximately 168 LTE-A (LTE – Advanced) active networks, which constitute more than 30% of total LTE networks worldwide.

Read the last Telecom Stock Roundup for Jun 9, 2016.

Recap of the Week’s Most Important Stories

1.    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 had been discriminating against several web-based contents and applications. In such a scenario, content developers have had to pay heavy sums to ISPs for accelerated data transfer. The new law, if implemented, will ban common ISP practices such as data traffic blocking, slowing any data traffic and paid prioritization. (read more: FCC Wins First Round of Legal Battle on Net Neutrality Rules.)

2.    Yahoo has reportedly received more than 10 initial bids including several private equity firms. At present, Verizon and AT&T appear to be best suited to merge Yahoo into their online platforms. Internet-based information service provider giant Yahoo is currently struggling with its core businesses namely mail service, online sports, financial and general news sections and its vital online advertising technology, which includes the video advertising platform, BrightRoll. (read more: Will Verizon and AT&T Submit Third-Round Bids for Yahoo?)

3.    Icontrol’s smart-home product platform has a strong clientele in the North American cable MSO market. However, in recent years, the company has been facing a lack of demand for its products. There are two reasons for this setback. Firstly, competition in the market has intensified and, secondly, Comcast, its major customer, has decided to develop some of the smart-home products in-house. Hence, Comcast’s acquisition of the core assets of Icontrol will boost the existing product portfolio of the company. (read more: Is Comcast Mulling to Partially Acquire Icontrol Networks?)

4.    Over the last couple of years, internal dynamics of the U.S. pay-TV industry have been gradually shifting from cable and satellite TV operators to low-cost, Over-the-Top (OTT) service providers. Moreover, a growing presence of online video streaming providers like Netflix and Hulu is posing a significant threat to the existing pay-TV business model. In order to check customer churn, DISH Network forayed into the OTT video delivery market with the commercial launch of Sling TV across the U.S. (read more :DISH Network Adds New Viacom Channels to Sling TV Service.)

5.     LTE, the most sought after, next-generation (4G) super-fast wireless communications technology, is gaining rapid momentum worldwide. 4G wireless networks primarily aim to cope with the substantial rise in demand for high-speed wireless data services and mobile video. Wireless network standards are continuously evolving around the globe to offer faster speed. Following significant deployment of 4G LTE networks, LTE-A wireless networks are gradually finding a solid foothold globally.  (read more: 4G LTE & LTE-A Network Deployment Gain Strong Momentum.)

Price Performance

The following table shows the price movement of the major telecom players over the past week and the last six months.

Over the last five trading sessions, share price movement of the major telecom stocks was negative. In particular, America Movil (8.69%) and Vodafone Group Plc. (7.86%) depreciated substantially. However, over the last six months, the price performance of most of the key telecom stocks showed a mixed trend. Among the stocks that gained significantly were AT&T (22.35%) and Verizon (18.66%). On the contrary, America Movil (20.64%) and DISH Network (9.38%) saw their shares depreciating in value.

What’s Next in the Telecom Sector?

Neither do we foresee any significant change in the telecom industry, nor do we see any macroeconomic factors affecting the industry in the coming week. Therefore, we expect stocks to trade in line with the broader market.

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