The Telecom Industry Is Changing: Play or Stay Away?

The U.S. telecom industry is dominated by two major players, Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) . Both of these companies have more than 100 million subscribers each and are followed by two comparatively smaller players, namely T-Mobile (NYSE: TMUS  ) and Sprint (NYSE: S  ) , which have around 35 million and 40 million subscribers, respectively. The big players have a hold on the market because of their differentiated coverage and network reliability. As the telecom industry is in the maturity stage of the business life cycle, differentiation or price cuts are the only ways to stay competitive.

T-Mobile's aggressive price reduction/un-carrier strategy enabled the company to make net additions to its subscriber base in 2013. This resulted in price wars, as AT&T and Sprint also had to cut prices, but neither player has been able to match T-Mobile's prices to date. Looking at the market more closely, Verizon and AT&T hold a major chunk of the low-band 700MHz spectrum, which has facilitated their dominance of the telecom industry.

Low-band spectrum share will continue to be a key success factor for telecom companies in the future, and spectrum auctions will change the competitive scenario of the industry.

The low-band advantage
According to several white papers, propagation loss of radio waves increases with frequency, meaning that waves in low bands will travel farther due to less propagation loss.

Source: ZTE

Propagation loss for a given distance is higher at 2.6GHz, as compared to the 700MHz band. For the same propagation loss of 130dB, the propagation distance for 2.6GHz is about 500 meters, whereas it is roughly 1.6 kilometers for the 700 MHz band. Moreover, to cover the same area, the number of cell sites used for 2.6GHz will be seven to eight times more than 700MHz. The figure below illustrates the coverage area of a single site utilizing different frequency bands (dense urban scenario is assumed):

Source: ZTE research paper

Lower frequency waves are also believed to penetrate thick walls and, hence, reach areas like basements. Therefore, the signal is more uniform over a given area for the low-band spectrum. According to Verizon, LTE (4G) deployed at 700MHz is almost five times more efficient than the company's 3G.

To review, lower frequency waves can travel farther, they have uniform signal distribution, and less equipment and cell sites will be required for deployment. This will result in reliable and extended coverage at lower costs.

Current competitive positioning
Verizon and AT&T hold almost two-thirds of the low-band spectrum, whereas T-Mobile and Sprint hold approximately 10%. This is good evidence of better coverage and quality from Verizon and AT&T over the other two. Sprint holds some 800MHz, and T-Mobile recently purchased 700MHz in a swap agreement with Verizon.

However, this will not help these companies compete on an equal footing with Verizon and AT&T. They can set up comparable coverage on high-frequency bands, but that will result in high deployment and, in the long run, high operating costs. So, even if they are able to deploy comparable coverage, high operating costs will continue to affect the performance of these companies going forward.

FCC intervention and the future outlook
Despite four players in the industry, two are dominating, and the Federal Communications Commission wants to change that. FCC chairman Tom Wheeler, in a letter to representative John barrow, reaffirmed his plans to restrict the amount of spectrum Verizon and AT&T could buy in the spectrum auction next year. Wheeler wrote, "The Incentive Auction offers the opportunity, possibly the last for years to come, to make low-band spectrum available to any mobile wireless provider, in any market, that is willing and able to compete at auction."

The 600MHz band auction is expected in mid-2015, and the FCC is expected to set aside 30MHz for companies with a smaller share of the low-band spectrum. 6MHz television stations will be converted to 5MHz LTE, which is a significant development for the telecom industry. By enabling companies like T-Mobile and Sprint to buy low-band spectrum, the FCC is leveling the playing field. The acquisition of 600MHz will assist the above-mentioned companies in deploying larger networks at lower costs. The bandwidth will be lower than 700MHz, but comparable speeds can be achieved through carrier aggregation.


Source: Qualcomm

In short, both T-Mobile and Sprint will offer approximately the same quality of service as Verizon and AT&T. The differentiation of networks will disappear, making price competition the key success factor over the next couple of years.

AT&T has threatened to boycott the auction because of the proposed restrictions. As the note from the FCC chairman was released after AT&T's threat, it seems that the FCC is quite serious about these restrictions, and the probability of the restrictions remaining intact is quite high. However, if AT&T and Verizon are somehow able to get them removed, the FCC can consider a potential merger between Sprint and T-Mobile, which would effectively result in the same outcomes as the auction. One way or another, a level playing field awaits players in the telecom industry, and the inevitable price war bodes ill for industry margins and profit generation. On the brighter side, consumers will likely enjoy cheaper packages going forward.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2932706, ~/Articles/ArticleHandler.aspx, 8/28/2015 8:37:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Muhammad Saeed

Today's Market

updated Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
S $5.19 Up +0.12 +2.37%
Sprint CAPS Rating: **
T $33.29 Down -0.15 -0.45%
AT&T CAPS Rating: ****
TMUS $40.00 Up +0.06 +0.15%
T-Mobile US CAPS Rating: ***
VZ $46.07 Down -0.12 -0.26%
Verizon Communicat… CAPS Rating: ****