The United States is quickly moving towards a world where a fixed telephone only functions as a buzzer to your apartment. Wireless subscriptions have grown 165% from 2000 to 2011 at 290 million subscribers. This structural change has serious ramifications to the revenues of telecom carriers as a few of them have significant exposure to the wireline segment and a further decline in this segment would add significant pressure on the wireless segment to make up for revenue losses. In this article we will examine AT&T (NYSE:T), Verizon (NYSE:VZ) and Sprint’s (NYSE:S) exposure to the wireline business and potential impact on revenues.
Rapidly Changing Industry Landscape
From 1990 to 2000, wireless penetration in America experienced rapid growth while wireline subscriptions grew steadily. However, from 2000 on, fast evolving cellular technology contributed to lower cost of cellphone ownership resulting in a decline in wireline subscriptions at the expense of new wireless subscriptions. The table below illustrates the trajectory of subscriber penetration for wireless and wireline from 1984 to 2011. As evident, the growth rate for wireless is slowing, and we believe the US market will hit saturation in the next few years.
Source: International Telecommunication Union
The industry wide decline in wireline subscriptions will continue and if the current trend persists, by 2020 wireline penetration will lower to less than 30 subscribers per 100 people. As a reference point, the last time wireline penetration was under 30% was in 1966. This decline will have differing impacts on the carriers as each of their revenue exposures to this segment are different.
Sprint: Limited Impact
Among the three largest carriers, Sprint has the least exposure to wireline. In 2012, only 8.5% of its revenue came from wireline subscriptions down from 14.6% in 2008. The limited exposure to wireline can help turn around the fortunes for the industry laggard or at least not serve as a drag on growth.
Verizon: Moderate Impact
Verizon has a fairly significant exposure to wireline. In 2012, the company generated over 34% of its revenues from wireline versus 47% in 2008. Verizon has done a tremendous job of growing its wireless revenue and thus has more than compensated for the loss in wireline. The chart below shows steady growth in wireless revenues from 2008 and we expect this growth to continue. There will be further decline in wireline revenues, but we are confident the wireless growth will more than make up for that decline.
AT&T: Severe Impact
Among the three carriers, AT&T has the largest exposure to wireline. This is not surprisingly considering its original business was wireline and is the largest wireline provider in the United States. However, with rapidly changing consumer preference for wireless devices, AT&T faces the biggest risk with the decreasing wireline trend. In 2012, over 47% of the revenues came from wireline, and while this is down from 58% in 2008, it is significant considering AT&T’s wireless business is facing stiff competition from Verizon. Unless AT&T can make up for the accelerated wireline revenue losses that the industry will experience, AT&T investors will experience long term risks on the company’s valuation.
Sprint due to its limited exposure and Verizon due to its fast growing wireless business have these least risks to revenue growth over the next few years from the wireline business. However, AT&T will be under immense pressure for its wireless business to compensate for its wireless business decline. Given the stiff competition from Verizon in this area, the next few years will be crucial for the telecom sector in the United States.
Disclosure: No Positions