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:
- 3G to 4G/LTE
- Fiber Optics
- Voice Over Internet Protocol (VoIP)
- 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 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.