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Equity Perspectives

Amid ongoing consolidation of wireless, cable, Internet, and content providers, next-generation networking could transform the competitive landscape.   


In Brief:

  • Rapid growth in mobile data traffic has not only spurred a surge in capital investment but also a new competitive dynamic among the four national wireless networks.
  • The challenge is how do these companies differentiate their product from one another to stand out, retain customers, charge more, and get a higher share of wallet when pricing is being driven down and the product itself is becoming more commoditized.
  • With the coming fifth generation (5G) of wireless networking, some phone giants have made sizable acquisitions of small-, mid- and large-cap companies to enhance their value propositions and drive future growth.
  • Once it is rolled out, 5G technology has the potential to transform the digital divide between urban and underserved rural areas, and accelerate expansion of the Internet of Things by connecting billions of microchip-enabled products.


If you’ve ever wondered why phone giants have been on a buying spree in the last year, Lord Abbett research analyst Randy Reynolds has “the 411.”  Think of it as positioning themselves for the next Internet revolution, driven in large part by the coming fifth generation (5G) of wireless networking, powerful bandwidth, to meet the demand for connectivity and digital content any place, any time, and on any device.

After all, there are more mobile devices than people in the world, and 4G (fourth-generation) and LTE (“long-term evolution”) wireless networks already support everything from Google Maps, Facetime, and Uber to a plethora of streaming video on demand.  With 5G, the build-out of much faster wireless networking, along with cloud computing and Big Data, means a mind-boggling array of devices in vehicles, buildings, and everyday objects will eventually be connected wirelessly in the expanding universe commonly referred to as the Internet of Things.

“With the rapid growth of data [see Chart 1] spurring significant capital investment [see Chart 2], and the four national wireless networks now approaching parity, there is a new dynamic of competition,” said Reynolds. “The challenge is how do these companies differentiate their product from one another to stand out, retain customers, charge more, and get a higher share of wallet when pricing is being driven down and the product itself is becoming more commoditized.”

All of which helps to explain acquisitions like the No. 2 (by subscribers, according to Strategy Analytics) wireless carrier AT&T’s $63 billion acquisition of satellite TV operator DirecTV last year, and Verizon’s purchases of online media, advertising, and dial-up relic AOL, and struggling Internet portal giant Yahoo.  For all their strategic differences, both deals were moves toward leveraging existing strengths and integrating content with vast distribution networks.  

In AT&T’s case, the Direct TV purchase brought not only a substantial source of free cash flow that in turn could help support the parent’s dividend but also a new national satellite delivery system to augment its existing pay TV business. That, in turn, allows them to negotiate better pricing for content and monetize more video over wireless networks.

According to Reynolds, AT&T already reports getting more than $1.4 billion a year of advertising across all screens, and it can charge more for those targeted ads because so-called “supercookies” provide them with very granular detail about the subscribers to whom they’re serving ads.

“They know your web browsing history, they know your location, and they know a lot from having you as a subscriber on their wireless network,” said Reynolds. “So they can provide really targeted high-value advertising for advertisers, which content owners also benefit from.”


Chart 1. Mobile Data Traffic Grew at a Rapid Clip in 2015
Growth rates by region (%)

Source: Cisco VNI Mobile, 2016.
Note: North America grew at an estimated 55%, a rebound from an unusually low growth rate of 26% in 2014. At the country level, Indonesia, China, and India led global growth at 129%, 111%, and 89%, respectively.


Chart 2.  Cisco Forecasts an Eightfold Increase in Global Mobile Data Traffic
Global mobile data traffic, 2015–2020

Source: Cisco VNI Mobile, 2016.
Note: Overall mobile data traffic is expected to grow to 30.6 exabytes per month by 2020, an eightfold increase over 2015. That forecast implies mobile data traffic will grow at a compound annual growth rate (CAGR) of 53% from 2015 to 2020.
Exabyte is shorthand for 1,000,000,000,000,000,000 (1018) bytes.  One byte equals a single character.


Building a 5G Force
As tech terms go, 5G may not be a household word, but many people will want it in their home or office once they realize what it can deliver in terms of speed, responsiveness, and spectrum capacity.

While international standards for 5G are not expected to be set before 2020, the Federal Communications Commission (FCC), which regulates interstate and international communications by radio, television, wire, satellite, and cable, recently voted unanimously to open up a huge chunk of high-frequency spectrum for 5G.   

FCC chairman Tom Wheeler called that vote one of, if not the most important decision the agency will make this year. “By becoming the first nation to identify high band spectrum, the United States is ushering in the 5G era of high-capacity, high-speed, low latency [time delay] wireless networks. By not getting involved in the technologies that will use the spectrum, we're turning loose the incredible innovators of this country,” he said.2

Given this regulatory boost, a few phone companies plan to roll out some 5G technologies as early as next year. One company is planning to offer a pay TV broadband service that will be delivered over the air.  While the technology is still being developed, Reynolds said the system may consist of a series of small-cell antennas attached to street lights and telephone poles, which in turn would provide a very “fat” and fast wireless connection to a receiver the size of a deck of cards in your window.

“This has been tried before and it hasn’t worked in the past, but [one provider] says the antenna technology has advanced to the point where has become more practical,” said Reynolds. “But there may still be interference issues like snow, which would impede the signal. So while it’s too early to say whether this technology would be equivalent to faster fiber connections, it is a much cheaper alternative to trenching and running fiber to the home.”

That economic advantage has the potential to expand high-speed broadband service to rural areas.

“If something can be connected, it will be connected in a 5G world,” Wheeler added. “But with predictions of hundreds of billions of microchip-enabled products from pill bottles to plant waterers, you can be sure of only one thing: the biggest Internet of Things has yet to be imagined.”3

Analytical Synergy
When a company in one sector makes an acquisition in another, Lord Abbett research analysts are quick to confer with each other about the implications for the companies they cover. Enter So Young Lee, who covers cable, media, and Internet companies, and has deep insights into the values and vulnerabilities of the companies AT&T and Verizon acquired.

She welcomed recent consolidation and changing technology as these trends have worked in favor of the companies she covers. They also lay the groundwork for more revenue opportunities for some of the Internet companies in her universe.

“Anything that can expand the broadband pipeline should foster more innovative 'over the top'4 delivery of videowhether it’s from distributors, cable companies, or new services like Netflix, Hulu, or Amazon Prime,” Lee said. “And that doesn’t even include the way we share information with each other through Facebook, Snapchat, and Instagram, which is becoming more about video communication. Video is important as advertisers are willing to pay a higher cost per thousand viewers than for static ads.” 

Rumble in the Bundles
As faster and more robust broadband services become more available and viewers move toward “skinner” programming bundles, look for more consolidation among content providers and distributors.

“Recently, Comcast acquired Dreamworks Animation to add to its NBC Universal media assets. And I think Charter would also be interested in buying content players over time,” Lee said.

Of course, there is no reliable way to predict how far this consolidation trend will go. Past business cycles have proven that a substantial number of acquisitions don’t work out, as the record $350 billion AOL/Time Warner merger in 2000 would eventually prove. But considering the rapid pace of innovation, Reynolds suggested leading cable companies will probably want to have a plan for the growing threat of wireless communications. 

“So far regulators haven’t viewed wireless as a direct substitute for a wire connection into the home for consumer video and broadband, but given the way 5G technology is evolving, I believe it is going to be a direct competitive threat,” Reynolds added. “Smart players will start setting up deals before it arrives, because once it becomes obvious that this tech changes the playing field, acquisition prices may be higher and regulators will be less inclined to allow combinations.” 


1 Prepared remarks of FCC chairman Tom Wheeler, “The Future of Wireless: A Vision for U.S. Leadership in a 5G World,” National Press Club, Washington, D.C., June 20, 2016.
2 Diana Goovaerts, "FCC Unanimously Opens Nearly 11 GHz of Spectrum for 5G,", July 14, 2016.
3 Wheeler, Op.cit.
4 According to Techopedia, an over-the-top (OTT) application is any app or service that provides a product over the Internet and bypasses traditional distribution. Services that come over the top are most typically related to media and communication and are generally, if not always, lower in cost than the traditional method of delivery.
5 John Eggerton, “Sources: Indie Programming NPRM Based on Charter-TWC Conditions,”, August 4, 2016.

The information provided here is for general informational purposes only.  It does not constitute a recommendation nor investment advice, and should not be used as the basis for any investment decision.  This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable. This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Investing involves risk, including possible loss of principal.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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