Despite the sluggish economy and stiff competition, U.S. telecom service providers are delivering consistent growth. These companies are innovating products and services as well as enhancing the existing ones to grow market share.
Telecom operators provide Voice Telephony, Data, Internet, Cable and Satellite Television services through either wireless or wireline networks. Future growth of the telecom industry depends on the wireless segment as subscribers are discontinuing landlines and moving quickly to wireless connections. We expect wireless services to grow at a larger pace and account for 46% of the industry’s revenues in 2013, up from the current 42%.
The carriers are rapidly entering into the cloud computing business due to increased competition and changing consumer habits. Cloud computing is now a business prerequisite that is high in demand. The global cloud computing market is currently estimated at approximately $37 billion and is expected to hit $121 billion by 2015 at a growth rate of approximately 26%. Verizon Communications (VZ) was the first wireless provider to tap this growth opportunity through the acquisitions of Terremark Worldwide and CloudSwitch in 2011.
Like Verizon, AT&T Inc. (T) is currently investing in network-based cloud, mobility and network sourcing solutions. This is helping operators to differentiate their products and services and pave the way for strategic alliances between telecom and IT companies.
Further, the wireless operators are making significant developments to alleviate competition from cable operators. As the smartphone market is growing rapidly, companies are progressing fast to acquire more spectrum licenses in order to support their video content and other data services. In this regard, Verizon has emerged as a strong winner following its agreements with several cable operators like Leap Wireless (LEAP), Comcast (CMCSA), Time Warner Cable (TWC), Bright House Networks, and Cox Communications Inc. This improvement allows Verizon and cable operators to sell each other’s residential and commercial products and services, thereby solidifying their respective competitive positions in the telecom sector.
Again, AT&T is following the same trend in the industry by acquiring new spectrums from the U.S. chipmaker Qualcomm Inc. (QCOM). After AT&T lost its exclusive hold on Apple Inc.‘s (AAPL) iPhone earlier in the year, we believe the new spectrums would aid it in improving the quality of services for the iconic phone.
The company added another feather in its cap when it joined hands with a social gaming company in order to add more value to subscribers’ wireless experience. AT&T collaborated with Zynga, a popular Web-based social gaming company to offer mobile social gaming options on its Google Inc. (GOOG) Android-based smartphones and tablets. Notably, AT&T was the first wireless carrier to form an alliance with a social gaming company.
The third-largest U.S. wireless carrier Sprint Nextel Corp. (S) is increasing its presence in Managed Telepresence services, which are gaining popularity in corporate communication and is expected to reach market capitalization of approximately $1.5 billion by 2016, with an annual growth rate of approximately 25%. The company collaborated with Indian telecom giant Tata Communications Limited to offer Managed Telepresence services. We believe Managed Telepresence remains well positioned for accelerated growth, creating revenue opportunities for network service providers like Sprint.
We believe the product improvements and developments made by companies will boost wireless profitability going forward. We are maintaining our long-term Neutral rating on Verizon, AT&T and Sprint with a Zacks # 3 (Hold) Rank for the short term (1-3 months).
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