4 Key Telecom Trends

The world is seeing a move to on-demand information and mobile computing, evident by the explosion of smartphones in recent years. Furthermore, bandwidth demand has increased drastically as more people are emailing, texting, downloading applications and watching YouTube on their cell phones, thus requiring networks to be upgraded accordingly. Mobile networks have been upgraded both domestically and internationally to 3G and will eventually be revamped up to 4G. In the home, cable networks have been upgraded from coaxial cables to fiber optics by companies like AT&T (T) and Verizon (VZ) to gain access to more HD channels and faster, more reliable internet connections. There has also been a shift on the consumer front as wireless companies have been rolling out unlimited prepaid plans favoring consumers looking to trade down and cut costs in this tumultuous economic environment. I’ll give a brief overview of four recent trends in Telecom:

1. 3G to 4G/LTE
2. Fiber Optics
3. Voice Over Internet Protocol (VoIP)
4. The Postpaid to Prepaid Shift

3G to 4G/LTE

3G has been rolled out domestically for several years and received substantial hype last summer when Apple released the new 3G iPhone. Internationally, 3G has begun to take shape with substantial growth potential in China with telecom giant China Mobile (CHL) leading the way with the largest wireless subscriber base of 415 million subscribers as of 2008; that’s more people than the whole U.S. population of 306 million people! Even though China Mobile has such a large subscriber base, it has huge growth potential in rural China, which the Chinese stimulus plan should help. The Chinese government has allocated $40 billion to build out the wireless network into rural areas as well as upgrade to 3G.

The new hyped up technology is Long-Term-Evolution (LTE), which is in direct competition with WiMax to become the universal 4G network. An upgrade to 4G is essential in the next half decade as consumers demand videos and high-tech games on their cell phones. Also, enterprise users will require lightning fast speed and high carrying capacity to access corporate data centers full of information to work on the go. Domestically, WiMax is supported by Sprint-Nextel (S) and a fairly new company called Clearwire (CLWR), which is backed by IT bellwethers like Google (GOOG), Cisco (CSCO) and Intel (INTC).

WiMax has already been deployed ahead of LTE, but has had dismal results thus far. WiMax has been tested in the U.S. Northwest and feedback stated it was slow and ineffective. However, Clearwire maintains its goal of WiMax availability to 120 million people by the end of 2010. On the other hand, LTE has shown more support from GSM network carriers, both domestic (AT&T) and internationally (Vodafone); and according to Gartner research, GSM carriers will make up 89% of all global wireless networks by 2011.

“LTE is the natural upgrade path for GSM, and that leads me to conclude that LTE will be one tough cookie for WiMax to beat.”
-Craig Mathias, Farpoint Group analyst and Computerworld columnist

Another reason why LTE is more sustainable that WiMax is that LTE operates on a lower frequency of 700 MHz, thus providing further signal range and building/obstacle penetration. To invest in LTE, Verizon is the best play as they have significantly more space (seven of ten total licenses) in the wireless spectrum where LTE will be rolled out. They also plan to roll it out in 2010, a year ahead of AT&T. Alcatel-Lucent (ALU) and Ericsson were selected by Verizon as its primary infrastructure vendors to build out its LTE network. To invest in 3G, try China Mobile or Qualcomm (QCOM) a smartphone semiconductor manufacturer.

Fiber Optics

Fiber Optics are replacing the traditional copper coaxials cabes in Telecom thus revolutionizing signal transmission communications with numerous advantages as the world pushes further into a digital world. First and foremost, optical fibers can be strung thinner, thus more fibers can be bundled together for greater bandwidth capacity. For the consumer, this means more phone lines strung over the same cable line as well as more channels, including more HD channels which require more information to be sent over the network. This new technology also allows for better transmission quality through clearer voice and television picture quality coupled with less dropped signals.

Furthermore, the high quality signals can now travel greater distances with more resistance to outside interference such as radios and other cables. Next up is faster speeds: Verizon’s fiber optic network called “FiOS” offers internet speeds of 50 Mbps to download and 20 Mbps to upload. Comparatively, Comcast’s (CMCSA) high-speed “Performance tier” package can only provide internet download speeds of 18 Mbps. However, Comcast has announced in late 2008 that it will invest in “Wideband,” their next-generation fiber-optic network which will have equivalent speeds to FiOS. Other advantages of fiber optics over copper cables are their significantly lower usage of power and maintenance costs, thus saving money for your service provider and ultimately more cash in your pocket.

Corning (GLW) is a great play on fiber optic growth; their Telecommunications segment represents 30% of its sales and a 5% y-o-y CAGR by offering fiber optic cables, hardware and network services. Multiple macro trends favor telecom infrastructure spending: increased bandwidth demand, public policy, regional diversity and technological advances. As more fiber optic networks are built out over the next few years, deployment and operating costs per home connection will drop substantially. When investing in Corning, be cautious because they produce glass for LCD TVs thus binding them close to discretionary spending. However, with the nationwide switch from analog to digital TV as well as an economic rebound, Corning could see a snapback in LCD volume levels (the company predicts a 50% sequential increase). As with many technologies, substantial growth lies in China as it builds out its networks to support its booming economy and high demand for bandwidth.

More can be read on Verizon’s LTE plans and fiber optic buildout as compared to AT&T’s.

Stay tuned for Part 2 (to be released June 3rd) in which I will describe two other trends in Telecommunications: Voice Over Internet Protocol (VoIP) and the Postpaid to Prepaid Shift in wireless subscriber contracts.

- Jake Kimble

Disclosure: The author’s family is long VZ. The Fund the author is associated with is long VZ, CSCO, GOOG, and has interests in QCOM, CHL and GLW.

Comments

[Wisdom vs. ...:]

thank you for the most concise wireless BB article yet. who is poised to take advantage of the software interconnections of LTE/4G?

Jun 01 11:56 AM

[calixtus:]

The fiber optic section borders on incomprehensible. The traditional telephone and cable TV networks have been merged into a strange amorphous blob, with phone lines "strung over" cable lines and circuits apparently able to use every strand in a cable simultaneously. Why a consumer would care how many phone lines are served by their cable is beyond me.

I see the point that the deployment of fiber in the last mile is a trend, but I don't quite get the strange assessment of the fiber optic cable itself as a "new technology". I'm pretty sure Corning has been in this game for 25 years. Betting on Corning is a bet on growth, not so much on innovation. If you are looking for the "new" part, look to the equipment being deployed to make the fiber run -- the gear going into the boxes installed on the sides of FIOS homes, the cabinets in U-Verse neighborhoods, and the telco central offices.

Jun 01 12:18 PM

[Jake Kimble:]

As author of this article, I would like to address both of your concerns. First off, sorry for the elaborate wireless articles, but this is actually part 1 of a 2 part series. VOIP and Prepaid Growth is to be released in the next few days. I like to fully analyze my articles, rather than skim many topics as authors frequently do.

Calixtus: I did refer to fiber optics as a 'new technology' and you are correct that Corning has been doing this for quite some time. But not until the last few years, has this technology been taking off and consumers at home can realize the gains. 'Betting on Corning is betting on growth;' I agree with this thesis. Bandwidth demand is ever increasing and eventually, homes will need the carrying capacity that fiber optic offers. Someday you will be having real-time video conferences on your couch in HD with relatives across the globe and fiber optics offers this type of high demanding bandwidth usage. I selected Corning as they are the dominant player in the fiber optics market; I could have selected companies from a last mile perspective, but Corning had the most attractive valuation from an investment standpoint.

Jun 01 08:51 PM

[PrepaidWire...:]

Great article and dialog. I look forward to part 2!

Jun 02 05:02 PM

[asher:]

I would like to know what your source is on Clearwire's lack of results from Portland, as everything I have heard has been positive. That whole section sounded very biased towards the incumbent players, who will be bogged down with legacy costs from 2G and 3G customers who refuse to upgrade to newer smartphones. It seems to me like you do not have an adequate understanding of the spectrum holdings of the incumbents as opposed to CLWR and associates, and the size of the pipe that is behind those spectrum rights. The CLWR 2.5 band can hold a lot more traffic than the 700 stuff that the Verizons and AT&Ts of the world have.
Will you address either of those issues in your part 2?

Jun 03 11:34 AM

[Geddy:]

I think folks forget about the existing spectrum held by the existing carriers as well. All we hear about is the difference between 700mhz and 2.5Ghz but forget that eventually the old 1.9Ghz and 800Mhz spectrum held by incumbents will eventually be used, negating the very small (if even what anyone would indeed consider) advantage of capacity.

Jun 03 03:50 PM

[jstratt:]

Outstanding article! Understanding telecom long term can be very valuable. Across the telcom landscape a variety of companies that have growth potential and reasonable valuations are out there.

Jun 03 08:21 PM

[PJ Louis:]

Interesting article. However, the jury is still out on what 4G is. Yes many of the major carriers are heading down the path of LTE but that does not mean WiMAX is dead and buried. In my opinion, 4G wireless will be both WiMAX and LTE. As for Clearwire's so-called dismal results, I had heard something completely different.

LTE does not exist yet except for what is on paper and in the labs. Yes, LTE is an evolutionary stage of UMTS but that does not mean it is ready for prime time.

Jun 08 10:27 AM

[Geddy:]

Not sure what results you're seeing from Sprextel/Clearwire but the rest of the world is seeing them as horrible. I do however agree with you that both technologies will co-exist, just as TDMA and CDMA have.

I disagree with you on LTE being only in a lab. It's been proven to work and you will indeed see it in action by end of 2009 in a few markets. I also disagree with you on LTE being an evolution of UMTS. LTE is a WCDMA technology with nothing to do with UMTS.


On Jun 08 10:27 AM PJ Louis wrote:

> Interesting article. However, the jury is still out on what 4G is.
> Yes many of the major carriers are heading down the path of LTE but
> that does not mean WiMAX is dead and buried. In my opinion, 4G wireless
> will be both WiMAX and LTE. As for Clearwire's so-called dismal results,
> I had heard something completely different.
>
> LTE does not exist yet except for what is on paper and in the labs.
> Yes, LTE is an evolutionary stage of UMTS but that does not mean
> it is ready for prime time.

Jun 11 05:17 PM