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U.S. Telecom: Pricing War, Regulatory Control Major Concerns

VZ TMUS T S

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Technological invention and innovation at a rapid pace have resulted in significant competition within the telecommunications industry. Product life-cycle and upgrade-cycle have gone down drastically with several firms coming out with new versions of products and services, back to back, within a short span of time. To combat competition, firms are thus increasingly looking at consolidation. This has resulted in an array of mergers and acquisitions in the telecom space.

To add to that, the Federal Communications Commission’s (FCC) net neutrality laws have made matters worse for telecom operators. Besides, several ISPs (Internet Service Providers) are in a tight spot over the FCC’s orders pertaining to increased upload and download speeds of Internet service termed “broadband.”

Stiff Competition

In the meantime, the U.S. telecom market continues to witness intense pricing competition. The two industry behemoths, namely, Verizon Communications Inc. (VZ - Free Report) and AT&T Inc. (T - Free Report) , at present, command around 68% of the U.S. wireless market whereas Sprint Corp. (S - Free Report) and T-Mobile US Inc. (TMUS - Free Report) jointly control the remaining 32%. These two relatively smaller firms are now bringing on board several low-priced value-added products to entice customers away from their larger peers. In 2015, both Sprint and T-Mobile US added a substantial number to its customer base.

On the video services front, the pay-TV industry is facing severe competitive threats from low-cost online video streaming service providers. Cord-cutting has become a regular phenomenon in the country with over-the-top video operators offering smaller packages of channels, designed according to a customer’s need, at dirt cheap prices. Established pay-TV operators are now opting for the more customer-friendly Internet TV service in order to counter the threat.

Net Neutrality: A Major Concern

Net neutrality implies an open-Internet atmosphere which will prohibit ISPs, especially 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 thus have to pay heavy sums to ISPs for accelerated data transfer.

Notably, the latest regulations will be applicable to both mobile and fixed broadband networks. The enforcement of the new law will ban common ISP malpractices such as data traffic blocking, slowing down 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 to their networks.

Notably, on Jan 29, 2015, the FCC increased the download and upload speeds of Internet services to be deemed as broadband (high-speed data). In a majority voting, the FCC raised the new threshold download speed to 25 Mbps from the existing 4 Mbps while the same for upload has been boosted to 3 Mbps from the current 1 Mbps.

FCC to Control BDS Market Pricing

The Business Data Services (BDS) market, where telecom and cable MSOs provide host of different network related services to business entities of different sizes, have been a lucrative source of revenues in the recent years for telecoms and cable MSO’s. More significantly, these service providers have been making handsome revenues from the small and medium businesses by often charging them high price.

As per Consumer Federation of America, such trend has led to overcharging of services to the tune of $75 billion in the past five years. Consequently, the FCC has proposed rules to regulate pricing in the market, citing low competition.  However, such proposals have been criticized by the industry players and several industry organizations.

Weaknesses

In general, telecommunications companies under pressure have high debt levels and large financial leverage ratios. Moreover, they are often unable to cope with recent market trends. Other risks that pose threats 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 retain focus 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 sizeable share in each other’s territory. Even pay-TV services, offerings to business enterprises, mobile backhaul and metro-Ethernet segments may observe more convergence. Mobile phone makers are now progressively offering tablets and chipset manufacturers are providing chips for personal computers as well as mobile devices – thus frequently interchanging 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 players to offer heterogeneous and bundled services to retain their position in the space.

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