Over the course of past few decades, we have witnessed a shift from the traditional industries to an economy based on information. We are still in the nascent stages of technological revolution much like the industrial revolution of the seventeenth century.
This knowledge-based economy has resulted in an explosive growth in data and it continues to grow with the addition of billions of users, devices, and applications each year. Dubbed Big Data, the data sets produced by each component requires massive resources to process and render it consumable. Throw into the mix the Internet of Things, where communication and collaboration between devices is key and the scale at which data grows becomes exponential.
While some may argue that the devices are becoming smarter (smartphones, smartwatches, smartglasses), one could argue that the devices are actually becoming more simpler. The devices are becoming mere commodities, akin to sensors in the field, as a data collection or generating interface - while all the data mining, intelligence of algorithms and data processing moves to server farms - something that is gaining an audience called The Cloud. A recent survey has revealed that majority of the data center professionals agree that at least 60% of the computing will be done on the cloud by the year 2025.
Why I think the devices are becoming simpler? Let's take an example. The early smartphones from ten years ago were considered intelligent devices. At a time when the flip phones were the craze, the consumers could not do much on the phone other than talk and text. The advent of smartphones enabled consumers to install apps, take pictures, access the internet. The possibilities seemed endless. But in a matter of a few years, the phone makers seem to have hit a wall. Every new physical feature that could be crammed into a phone was completed - with good success. More lately, software became the defining and differentiating feature and gained more focus. While the consumers remain insatiable, the tech companies have started looking at other avenues for growth - such as wearables, in-car entertainment, media production and distribution etc. The wide array of smart devices has resulted in a distributed system and the need to sync up between the various commodities.
The focus has shifted from the device to the consumer; what matters now is how well the consumer can be integrated into the ecosystem. The consumer needs all the data accessible from each of the access points - whether it's a phone, a car, a computer, a glass or whatever. This is exactly the reason for moving everything to the cloud. For e.g., consumers watching movies on Netflix (NASDAQ:NFLX) do not need to download it and store it locally. The data is stored on and streamed from the cloud to be accessible from any device anywhere.
Who the big winners from the Big Data movement will be is anybody's guess. There are some big name blue chip companies that can benefit from the infrastructure investment such as Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), IBM (NYSE:IBM), Cisco (NASDAQ:CSCO), and Microsoft (NASDAQ:MSFT), but the tech sector has always been able to incubate disruptive startups. A new startup can quickly develop an innovative method to trump the big players.
One thing for certain is that the common denominator that will benefit from the explosive growth in data are the data pipe operators. This includes the cable, internet and wireless service providers that already have and/or will have the infrastructure in place to provide the access to the cloud. These include players such as Comcast (NASDAQ:CMCSA), Time Warner Cable Inc (TWC), AT&T (NYSE:T), Verizon (NYSE:VZ) in the US and international players include BCE Inc (NYSE:BCE), Rogers Communications Inc (NYSE:RCI), Telus (NYSE:TU), Vodafone Group plc (NASDAQ:VOD), BT Group plc (NYSE:BT), China Mobile Ltd (NYSE:CHL). We can already see a shift in how the cable providers, realizing that they have the power to push their weight around, have started demanding a piece of the pie with the Comcast-Netflix (NFLX) agreement and the Verizon-Netflix agreement. This trend is expected to continue as we generate and consume more data.
Picking the Winners
Keeping an eye on deals such as the Comcast-Netflix and Verizon-Netflix deals might provide a clue for picking the right winners. For e.g., AT&T is at the frontrunner for in-car entertainment with deals struck with a majority of the car manufacturers, which is bound to increase the cash flow of the company. Also watching for capex trends could possibly clues on which provider is at the forefront.
Alternatively, one can invest in a basket of telecom stocks as the following to take advantage of the industry-wide trend.
- Vanguard Telecommunication Services ETF (NYSEARCA:VOX)
- iShares Dow Jones US Telecommunications Sector Index Fund (NYSEARCA:IYZ)
- iShares S&P Global Telecommunications Sector Index Fund (NYSEARCA:IXP)
- SPDR S&P International Telecommunications Sector ETF (NYSEARCA:IST)
- SPDR S&P Telecom ETF (NYSEARCA:XTL)
The rise of smart devices has led to a tremendous growth in data over the last decade, but is expected to rise exponentially going forward. The push for smart devices including phones, tablets, wearables, cars and Internet-of-things has resulted in data moving to the cloud for better synchronization, storage and analysis. The common denominators that stand to benefit from the need for infrastructure support for communication includes cable, internet and wireless service providers.
Full Disclosure: Long BCE, RCI. My full list of holdings can be found here.
Disclosure: I am long BCE, RCI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.