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Telecom Faces Price Competition and Net Neutrality Issues

The U.S. telecommunications industry is currently facing intense pricing competition. Severe spectrum crunch coupled with gradual smartphone and tablet adoption are compelling wireless operators to seek other options to raise revenues. Massive promotional expenditures and cut-throat pricing competition are major concerns presently plaguing the industry.

While Sprint Corp. (S - Analyst Report) has come up with a same data plan, as offered by Verizon (VZ - Analyst Report) and AT&T, at 50% discount in perpetuity, T-Mobile US Inc. (TMUS) has introduced “Data Stash” which will allow customers to roll over unused data for a year even after the expiry of the billing period. To remain in the league, AT&T Inc. (T - Analyst Report) has also introduced a new data plan which will allow its Mobile Share Value customers to roll over their unused data limits to the next month. Meanwhile, both Verizon and AT&T recently provided disappointing financial outlook for the fourth quarter of 2014.

Net Neutrality: A Major Concern

The Federal Communications Commission (FCC) has announced plans to vote on the much-debated rules concerning net neutrality in Feb 2015. On Nov 10, 2014, President Barack Obama called on the FCC to make a radical change in the way the government treats high-speed broadband service and Internet Service Providers (ISP). The proposed regulations can drastically alter the entire business model of the ISP industry.

Further, the U.S. government has asked the FCC to reclassify high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of treating Internet under section 706 of the 1996 Telecom Act. The reclassification will allow the government to strongly regulate ISPs.

Net neutrality implies an open-Internet atmosphere which will prohibit ISPs, especially telecom and cable TV operators, from discriminating against applications. As of now, these companies can restrict any device, application, service, or content from running on their respective networks.

In order to control the flow of bandwidth-consuming applications such as video streaming, the ISPs have been discriminating against several web-based contents and applications. Content developers have to pay heavy sums to ISPs for accelerated data transfer. The FCC recommendation will prohibit this discriminatory practice by wireless, wireline and cable TV operators from either blocking or slowing access to any video services. Disallowing discriminatory pricing policy will significantly impact ISPs revenues and margins.

Internet TV: A Threat to Cable/Satellite TV Operators

Availability of Internet TV at an exceptionally low price along with the accessibility to some top-rated TV channels like ESPN may become a game changer for the pay-TV industry while posing significant threat to cable MSOs (multi service operators). This is in sharp contrast to an average cable TV connection which costs almost 3-4 times more.  Recently, DISH Network Corp. (DISH) unveiled Internet TvV called “Sling TV” while Sony Corp. (SNE) launched the beta version of its Internet TV called “Playstation Vue.”

Moreover, Verizon of late has been focusing on strengthening its Internet TV and online content delivery business while AT&T has entered into a partnership with Chernin Group to offer such services. Internet TV offers a TV Everywhere experience to subscribers. The growing deployment of super-fast 4G LTE wireless technology and significant adoption of portable mobile devices are the primary reasons behind the popularity of Internet TV.

Broadband (High-Speed Data) Market: Cable MSOs Maintain Lead

The high-speed data (broadband) market has become a near-term concern for the telecom operators as cable MSOs dethroned them from this market in 2014. According to LRG report stated that 17 large cable TV and telecom operators together had around 85.6 million high-speed Internet subscribers at the end of the third quarter of 2014. Of this, cable MSOs command 60% while the remaining 40% were serviced by telecom operators.  

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.

Weaknesses

In general, the telecommunications companies that are 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 trying to gain a foothold 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 Sprint Corp., DISH Network Corp., Comcast Corp. (CMCSA - Analyst Report), BCE Inc. (BCE) and Telefonica S.A. (TEF). While Sprint currently carries a Zacks Rank #5 (Strong Sell), the rest of the stocks have a Zacks Rank #4 (Sell).