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Telecommunications is one of the very few industries that witnessed massive technological improvement during the recession. An unprecedented growth of high-speed mobile Internet traffic, particularly for wireless data and video, has transformed this industry into the most evolving, inventive and keenly contested industry. The telecommunications industry is identified as a major driver of the global economic recovery.
The world economy is currently going through a recovery phase. The momentum is expected to remain strong in 2011. Several industry researchers have predicted that 2011 may witness telecommunications spending even more than the pre-recession periods.
In the last few years, capital spending constraints among telecom operators due to severe recessionary conditions were the main hindrance to growth of this industry. However, with the economic recovery underway, large telecom service providers are gradually expanding their network coverage on the back of significant subscriber growth.
The telecommunications industry encompasses a lot of technology-related businesses. Besides the legacy local and long-distance wireline phone services, the industry also includes wireless communications, Internet services, fiber optics networks, cable TV networks and commercial satellite communications.
Increasing competition is actually forcing each and every player to offer heterogeneous and bundled services. For example, big telecom operators, which were predominantly providing voice transmission are now offering video services, whereas cable operators are now providing both Internet and telephony services.
Online Internet video streaming companies are also becoming major competitors to the existing players of the telecom industry. Mobile phone makers are now gradually offering tablets (small laptops), chipset manufacturers for personal computers and mobile phones are frequently interchanging their areas of operations.
In addition, the emergence of mobile broadband technology has created several new service areas, which potentially offer huge growth potential. This includes IPTV, collaboration and cloud computing, videoconferencing, and mobile payment, to name a few.
We believe that the overall economic dynamic may shift in favor of telecommunications industry, primarily due to its key attribute of being a major infrastructure product for both the emerging and the developed nations. In fact, the global telecommunications industry is witnessing a fundamental change. Earlier it was voice calls that brought money to the operators leading the equipment manufactures to concentrate on voice-enabled devices.
At present, voice is taking a backseat, while data and video have become the core focus area. Any new network standard aims at faster data connectivity, quick video streaming with high resolution, and rich multimedia applications.
The major thrust for the telecommunications sector is coming from the industry due to continuous network and product upgrade and invention by the industry players. Fabulous demand for technically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. These developments are also helping telecom equipment manufacturers, infrastructure solutions providers, and mobile phone makers to consolidate their finances.
The telecommunications industry benefits from: (1) an improving global economy, which makes the overall macro-outlook buoyant (2) significant technological inventions that make even a mature market like the U.S. highly lucrative for the telecom operators.
Several countries throughout the world implemented economic stimulus plans as a way to get out of the recession. Huge government expenditures -- including the U.S. broadband infrastructure development program and similar structural subsidies in China and India -- became a boon for telecom service providers and equipment manufacturers.
Furthermore, as the global economy continues to recover, demand for real-time voice, data and video increases by leaps and bounds. These developments are enabling the telecom service providers to undertake large network extension and upgrade plans.
Smartphones and tablets have become the next-generation products of choice and are increasingly taking over market share from the basic mobile handsets. Although the economy in a recovery phase and we are not completely out of the woods yet, the growth in the smartphone market maintains its impressive trend.
This reflects a shift in consumer preference toward application-rich devices from ordinary mobile handsets used primarily for voice telephony. Smartphones are generally characterized by very powerful operating systems capable of supporting a variety of services and applications that need very high-speed network infrastructures.
Various industry sources estimate that smartphone shipments as a percentage of total mobile handset shipment are expected to increase by 58% in 2011 over last year. This opportunity provides scope for telecom service providers, equipment developers, chipset manufacturers and wireless tower operators to retain new users and grow revenues moving forward.
Less than a decade ago, the telecom operators in the U.S., Western Europe and Japan were upgrading their existing networks to high-speed 3G technologies. At present, the world telecommunications industry is talking about the installation of next-generation super-fast 4G technologies.
Several giant telecom operators globally are funding projects to deploy super-fast 4G networks of WiMAX and LTE (Long-Term Evolution). As of now, 19 LTE networks are commercially operational throughout the world. Cable TV operators are also upgrading their networks with high-speed DOCSIS 3.0 architecture.
The GSM Association forecasts that within the next 5 years, telecom service providers will invest approximately $100 billion to upgrade their respective networks to accommodate hassle free transmission of mobile data and video traffic. The major technical areas will be High-Speed Packet Access (HSPA), 3G mobile broadband, and next-generation (4G) LTE. One simple example of this significant rate of growth is the LTE network, which was globally first deployed in late 2009, and which now provides over 1 million connections.
As smartphone users are now downloading increasing multimedia content, video has become the primary network traffic. What is more interesting, in addition to download, the smartphone and tablet users are uplinking more and more video content and in turn becoming broadcasters on their own. Several industry researchers predict that video may account for 60% of total network traffic by the end of 2012.
Competition and Consolidation
Massive technology invention and innovation have resulted in the creation of competitive atmosphere within the telecommunications industry. Product life-cycles and upgrade-cycles have been reduced drastically since several firms are coming out with new types of products and services within a short span of time. As a result, we are witnessing hectic merger and acquisition activities to consolidate the market share.
The biggest of the merger and acquisition activity is AT&T’s ([url=http://www.zacks.com/stock/quote/t]T[/url]) proposed buyout of T-Mobile U.S. If this deal gets regulatory approval, it might become the largest acquisition in this industry in the post-recession period. In other major deals, CenturyLink Inc. ([url=http://www.zacks.com/stock/quote/ctl]CTL[/url]) has acquired Quest Communication, Qualcomm Inc. ([url=http://www.zacks.com/stock/quote/qcom]QCOM[/url]) has acquired Atheros Communications, and Comcast Corp. ([url=http://www.zacks.com/stock/quote/cmcsa]CMCSA[/url]) has purchased NBC Universal’s 51% stake.
The telecommunications industry as a whole offers a number of attributes that are difficult to ignore from the standpoint of investors. The stocks of many industry players offer attractive defensive attributes as well, which become particularly attractive in times of market turmoil, like at present. Stable and growing dividend payouts with attractive yields are not uncommon in this industry, particularly among the major carriers.
- Telecommunications is a necessary utility: The need for telecom in both rural and urban areas, and its role in the infrastructure of both developed and developing markets continues to grow. In addition, economic stimulus plans in the U.S. and throughout the world should boost select service providers and equipment manufacturers.
- Structural Subsidies: The Broadband Stimulus Program of the U.S. government has received significant acceptance among rural carriers. President Obama has endorsed a wireless spectrum hike plan proposed by the FCC (Federal Communications Commission), which will nearly double the currently available spectrum for wireless broadband services and increase Internet connectivity. The FCC together with the U.S. Department of Commerce will identify unused airwaves to raise the available spectrum size to 500 MHz in the next 10 years.
- International diversification: While diversification within a country offers only limited protection in the current highly-correlated world equity markets, it offers hedging opportunities from local economic weakness and associated currency exchange differentials.
The companies that match well with the aforementioned considerations include Telus Corp.
([url=http://www.zacks.com/stock/quote/tu]TU[/url]), Qualcomm Inc., Verizon Communications Inc.
([url=http://www.zacks.com/stock/quote/vz]VZ[/url]), Rogers Communications Inc.
([url=http://www.zacks.com/stock/quote/rci]RCI[/url]) and Polycom Inc.
Generally, telecommunications companies that were under pressure during the recession have high debt levels and large financial leverage ratios or are unable to cope with recent 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 major problem for equipment vendors. The companies are expected to remain focused on balance sheet improvements, financial discipline and free cash-flow generation. Unfortunately for the equipment vendors, the method of choice for improving free cash flows remains disciplined capital outlays.
- Weak credit profiles: Over the near term, telecom companies may be exposed to high debt levels and limited liquidity, which puts a premium on sustainable cash flow to service debt obligations. As a result, telecom companies may have free cash flow impacted by a slowdown in demand.
- Increased competition: The markets for broadband wireless solutions are emerging rapidly in terms of technological innovation. While the pure wireless/wireline service providers started entering the video services market for cable operators, the cable MSOs, in turn, started entering the telephone business for the small & medium sized business enterprises. Even among the handset manufacturers, competition is intense. The woes of players like Nokia ([url=http://www.zacks.com/stock/quote/nok]NOK[/url]) and Research In Motion ([url=http://www.zacks.com/stock/quote/rimm]RIMM[/url]) is mostly due to these competitive pressures.
The companies that match well with the aforementioned considerations include Nokia, Research In Motion, JDS Uniphase Corp.
([url=http://www.zacks.com/stock/quote/jdsu]JDSU[/url]) and RadioShack Corp.