Shifting Balance Between Telecom Infrastructure Vs. Service Providers Now Favors Infrastructure

Includes: GOOG, S, VSAT
by: Armand Musey, CFA

In the wireless industry hardware providers seem to be gaining the upper hand over the wireless service providers. Examining the wireless value chain, its clear that hardware and spectrum are the only areas with increased demand. The wireless service infrastructure consists of 1) spectrum; 2) network hardware; 3) network integration and management; 4) marketing, billing and customer care; 5) distribution; and 6) handset manufacturing.

Wireless operators perform network integration and management (#3) and marketing, billing and customer care (#4) while they share distribution (#5) with consumer electronic outlets. Network integration and management has been commoditized for a long time. Customer growth has stagnated, putting marketing, billing, customer care (#4) and distribution (#5) in commodity positions as well. While the iPhone briefly pulled handset manufacturing out of a commodity position, declining demand and the rise of Android systems, suggest it is slipping back to a commodity position again.

The net result is that the benefits of increased wireless minutes are accruing to spectrum (#1) and network hardware (#2). The two are obviously complementary - as demand grows, wireless operators have a choice of spending more on increasing spectral efficiency by purchasing hardware to divide cell sites and/or invest in technologies such as Wi-Fi offloading, or buying additional spectrum.

Attempting to improve their negotiating position with network hardware manufacturers is one reason for the wireless consolidation - particularly cross-border consolidation that yields few other operating benefits besides increased purchasing power with network hardware manufacturers. For example, Sprint's (NYSE:S) potential acquisition of Clearwire (CLWR) is likely to be motivated, in part, by a desire to help its parent Softbank convince equipment manufacturers to support the TD-LTE standard Softbank uses.

The improving position of hardware manufacturers is not limited to the wireless industry. Its likely one reason Google (NASDAQ:GOOG) is investing in fiber networks, a reason behind the recent discussion of the European single telecom network. Even in the satellite industry, the most disruptive force is coming from the new Ka-band spot-beam satellite that are allowing new entrants such as O3B, NewSat, ViaSat (NASDAQ:VSAT) and others to enter and threaten existing operators with older legacy equipment. As spectrum demands continues to grow faster than supply, network equipment companies capable of offering the most efficient systems are likely to take an increasing portion of the value chain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.