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Wireless spectrum crunch has become the major issue in the U.S. telecom industry. Carriers are finding it increasingly difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become even more acute with the growing popularity of Apple Inc.’s (AAPL - Analyst Report) iPhone and Google Inc.’s (GOOG - Analyst Report) Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services.
According to a recent study from Cisco Systems Inc. (CSCO - Analyst Report), global mobile data traffic is expected to grow 18-fold by 2016. About two-thirds of the growth will stem from video streaming.
Despite significant investments made by carriers in network upgrades and efficiency, the demand will likely outstrip the supply in the short term, which would lead to dropped connections, rising prices and lousy service.
Since the new spectrum auction by the FCC will not be available before the new decade, carriers are looking for new profound technology solutions to avoid network congestion. The new solutions range from accelerating the roll out of more efficient 4G LTE networks to building a new cell technology known as “small cells.”
Small Cells the Next 'Big' Thing?
The small cells are the mini versions of the gigantic wireless broadcast towers that send and receive networks for all cell phone calls. These cells are more compact than traditional ones and are easy to install anywhere in buildings, or streets.
The carriers can offer enhanced wireless services with better data speeds and fewer problems by creating a dense network of small cell stations (a mix of microcells, piocells or femtocells). The revolution of these cells will change the overall dynamics of the wireless industry in the coming years.
The upcoming small cell technology will be a boon to the entire wireless industry, stimulating strong growth prospects in the years ahead. The third-largest U.S. wireless provider, Sprint Nextel Corp. (S - Analyst Report), will be the first carrier to take advantage of this technology, as it plans to install small cell stations later this year. AT&T Inc. (T - Analyst Report), the second-largest wireless carrier, is planning to deploy the new network, though thetiming remains unclear.
Wireless leader Verizon Communications Inc. (VZ - Analyst Report) and the fourth-place wireless provider T-Mobile USA, a unit of Deutsche Telekom (DTEGY), are currently eyeing the prospects of small cell technology.
The deployment will also boost equipment manufacturers such as Ericsson (ERIC - Analyst Report), Alcatel-Lucent, S.A. (ALU - Analyst Report) and Nokia Siemens, a joint venture of Nokia Corporation (NOK - Analyst Report) and Siemens (SI - Analyst Report). We expect the deployment to take larger market share over the next few years.
Since the deployment of small cell stations is in the initial stages, the costs cannot be determined currently. As a result, we stay on the sidelines and carefully watch the cost and the synergies derived from the deployment.
We are maintaining our long-term Neutral recommendation on Sprint, AT&T and Verizon. For the short term, the stocks retain the Zacks #3 (Hold) Rank. Deutsche Telekom holds the Zacks #5 (Strong Sell) Rank.