Telecommunications

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Michael Luddy

The telecommunications industry is responsible for radio, television, voice communications, and broadband services. The growth and innovation of the telecom industry has enabled people to communicate across the globe and access endless amounts of information over the internet. Broadband services are becoming faster and easier to access with fiber optic networks and wireless services like WiMax and CDMA. Many of the major telecom companies have merged over the last 10 years in order to offer massive product and service portfolios, as well as further capitalize on bundled media packages ('triple play"). These new technologies and growth through mergers are enabling these companies to find new revenue sources and growth opportunities in a mostly mature market.

Major Telecommunication Vendors

These are the companies that offer local and long distance telephone and internet access to homes across the world. These companies are increasingly trying to ramp up their network infrastructures to create capacity for the growing demand of "triple play" options.

• Verizon Communications (VZ)
• AT&T (T)
• Sprint Nextel (S)
• Alltel (AT)
• Time Warner Telecom (TWTC)
• Cablevision Systems (CVC)
• Comcast (CMCSA)
• China Mobile (Hong Kong) (CHL)
• Qwest Communications International (Q)
• Vodafone AirTouch Public Limited Company (VOD)
• United States Cellular (USM)
• Bharti Airtel (India)
• Shaw Communications (SJR) (Canada)

Bmobile

Major Telecommunication Equipment and Network Providers

These are the companies that build and maintain the telecommunications infrastructure. These companies offer the means and the equipment to build fiber optic to WiMax networks.

• Alcatel-Lucent (ALU)
• Tellabs (TLAB)
• BigBand Networks (BBND)
• Corning (GLW)
• Arris Group (ARRS)
• American Tower (AMT)
• ADC Telecommunications (ADCT)
• Cisco Systems (CSCO)
• Equinix (EQIX)
• QUALCOMM (QCOM)
• NETGEAR (NTGR)
• Orbital Sciences (ORB)

Communication Equipment

These companies provide the mobile phones and devices to use a telecommunications network.

• Motorola (MOT)
• Nokia (NOK)
• Research in Motion (RIMM)
• Samsung
• Vonage Holdings (VG)
• Sierra Wireless
• Palm (PALM)
• Sony-Ericsson
• LG Electronics
• Apple (AAPL)

Industry Sectors

The following is a breakdown of the different parts of the telecommunications industry with a particular focus on broadband technology. Telecommunication services cover radio, television, voice (i.e. cell phones and telephones), and internet access (broadband). Broadband service is the primary area of growth for the telecommunications industry going forward. There are a wide array of services and devices that are utilizing broadband and they are opening new markets and niches for the companies involved.

Fiber

^[1]

Optical fiber is quickly becoming the Internet backbone as large network operators like Level 3 Communications (LVLT), Verizon Communications (VZ), and AT&T either offer or are upgrading to all-fiber networks. Fiber is currently viewed as the optimal material available to deliver data at high speeds over long distances, but it is more expensive than other technologies. Although it is expensive, fiber-to-the-premises (FTTP), or last-mile ^[2] fiber connectivity is quickly gaining traction, and the largest deployment to-date in the U.S. is Verizon's FiOS network which offers super 50 Mbps data rates. According to Parks Associates, the number of US households subscribing to FTTx (fiber connections) will increase from 3 million in 2007 to 18 million by the end of 2011. ^[3] Fiber is also generally provided to enterprise customers that lease dedicated T1, T3, ((types of dedicated high-capacity lines) and SONET (a dedicated high-speed solution for multi-site businesses) services.

• Verizon Communications (VZ) is head and shoulders over the competition when it comes to Fiber-to-the-Home (FTTH). Verizon FiOS offers speeds up to 50 mbps (fast enough to download a 60 minute video in 8 seconds) and Verizon had 9.3 million FiOS customers at the end of 2007.
• AT&T (T) offers a competing technology called U-Verse. U-Verse is a cheaper option than FiOS but has a max speed of 18 mbps. AT&T had passed 1 million homes by the end of 2007.
• Alcatel (ALU) and Tellabs (TLAB) are likely to be the major telecom equipment providers used to build the infrastructure for the growth of fiber optic networks. However, smaller players like EMCORE (EMKR) could also get a piece of the action.
• Corning (GLW) specializes in glass and glass is the building block of fiber optic cables. Corning also made an important technological step by developing bendable fiber optic cable which is very important for companies like Verizon who want to lay their cable in the old and tight New York City infrastructure.

Cable

^[4]

Cable is primarily a consumer broadband solution that theoretically provides up to 30 Mbps, but fastest average speeds are around 6 Mbps in America. Cable is leading the subscriber race in America, but trailing in Europe, where cable infrastructure is more spotty. Cable could see a shot in the arm though with its new Docsis 3.0 technology which can enable speeds of 50 mbps, comparable to that of Verizon's FiOS.

• The major cable companies are Cablevision Systems (CVC), Comcast (CMCSA), and Time Warner Cable (TWC). However, Comcast is the only one that offers Docsis 3.0.

DSL

DSL is the main consumer broadband offering from carriers, because it can provide high data speeds over a dedicated telephone line. SDSL and ADSL, reaching speeds up to 6 Mbps, are the less expensive versions of the technology and by far the most common in the States. VDSL, slowly gaining steam in America and already predominant in Japan and South Korea, can reach speeds between 30 and 50 Mbps.

• The primary DSL incumbents are Verizon Communications (VZ) and AT&T (T), but Verizon has been losing sales on DSL with its push into fiber.

Mobile Service

There are a number of competing technologies within the mobile broadband space that all can provide throughput in the low single digit Mbps. 3G technologies EV-DO, Edge, and HSDPA are the current mobile broadband options for CDMA2000 and W-CDMA networks. China Telecom (CHA) has acquired a CDMA network from CHINA UNICOM (CHU) and plans to have it set up by the end of 2008.

• The advent of smartphones has increased demand for mobile broadband considerably. Companies like Research in Motion, Palm, Nokia, and Samsung all offer mobile smartphones that utilize mobile broadband technology.

• American Tower (AMT) is one of leading makers of cell phone towers in the country.

WiMax

WiMax, although only deployed heavily in Russia, is currently a fixed-wireless and mobile broadband technology that can theoretically deliver broadband speeds of up to 70 Mbps, but in reality delivers similar speeds (low single digit Mbps) as other mobile broadband technologies. WiMax is definitely a contender for "last mile" connectivity in rural and emerging markets where laying fiber, cable, or DSL is not cost effective. An up and coming rival to WiMax is something called Long Term Evolution (aka 3GPP LTE). Considering the list of major telecom companies that have more or less committed to LTE (Verizon, Alltel, AT&T, and Vodafone), WiMax could see intense competition down the road.

• Sprint Nextel (S), Cisco Systems (CSCO), and Time Warner (TWX) are three of the six companies to enter into a partnership with Clearwire (CLWR) to build a WiMax network that is planned to reach 140 million homes by 2010. In addition, Sprint, Cisco, Alcatel (ALU), and Samsung have all entered into a patent alliance to further drive the advancement of WiMax technology.
• Nokia (NOK) is another notable company when it comes to WiMax as it was one of the first to come out with WiMax.

Satellite

Satellite broadband and TV access is most useful in rural areas, where other technologies are cost prohibitive to offer. Broadband download speeds are offered for speeds of up to 2 Mbps, but uploading is much slower. Satellite broadband, because signals have to travel so far, have much longer latency rates than other broadband technologies. Reliability is also questionable in bad weather or during sunspot activity.

• The DirecTV Group (DTV) is the leading satellite TV provider.
• Sirius XM Radio (SIRI) is the only satellite radio company.

Trends and Forces

Digital Television Transition

On February 17, 2009, the Analog to Digital Television Transition will be complete. Due to a Congressional mandate, all full power television broadcasters must stop broadcasting in analog and will be allowed to only broadcast in digital.^[5]

The Growth of Broadband Technologies

There are many different technologies that enable broadband connection speeds. The most mainstream of these include fiber, cable, DSL, mobile broadband, WiMax, and satellite. The competition among these technologies exists primarily in providing "last mile" ^[6] service - the connection between your home and the network's backbone. Because the major long distance wires that make up the global Internet are primarily made out of optical fiber. Some "last mile" technologies are poised to grow in adoption - like Fiber-to-the-Home (FTTH) - while others won't be able to compete in the long run as they run at slower speeds.

Bundle Media Package

The growing trend in telecom is to offer voice, broadband, and television into one bundled package. This "triple play" option is the future of telcommunications offerings, and it allows telecom vendors to earn additional revenues from mature markets by cross-selling more services to their customers. By bundling these services together a vendor is making itself a one stop shop for consumers which in theory should yield a higher average revenue per user. At the same time, by bundling, the vendors are getting a lower margin than they would by offering the services individually, on the flip side there is no guarantee a user would buy all three services from that same vendor. While a bundled media package is a win for large telecom vendors, smaller competitors who don't have the resources to offer a similar deal could potentially suffer in the long run.

Telecom Consolidation

Over the last 10 years there have been a number of mergers in the telecommunications industry. The largest was the $86 billion acquisition of BellSouth by AT&T (T). Other notable mergers include: Sprint and Nextel, Alcatel and Lucent, Qwest and US West, Worldcom and MCI, SBC and AT&T, and in the works is a possible merger between Verizon and Alltel. These mergers create companies that have wider coverage networks and more products in their portfolios - but they are seldom seamless transitions due to their high costs and integration risks. For example, the merger between Alcatel and Lucent was born out of necessity, as both companies were losing business to larger rivals and together the new company would have one of the widest product portfolios in the industry. In 2007 ALU lost over $5 billion and continues to bleed money as it tries to assimilate the different parts of the company.^[7]

Moving from Copper to Fiber

Before the internet bubble the predominant material used in telecommunication networks and wiring was copper. However, during the internet bubble a lot of telecommunication companies started laying down fiber optic cables in place of the copper networks because fiber optics allow for greater internet speeds. Companies like Verizon and AT&T are now offering Fiber-to-the-Home (FTTH). This means that fiber optic cable is taking over the "last mile" connection that was once dominated by copper wiring. While copper is still widely prevalent in the telecom networks, the growth of fiber optics is beginning to replace those networks. By 2010, the combined amount of homes expected to be passed by FiOS and U-Verse (the two predominant FTTH services) by 2010 is almost 50 million homes and there are an estimated 112.8 million homes with TVs in the US, that's 44% of homes with a TV.^[8].

References

1. ↑ http://www.itfacts.biz/index.php?id=C10_15_1
2. ↑ http://en.wikipedia.org/wiki/Last_mile
3. ↑ www.itfacts.biz/index.php?id=P8436
4. ↑ http://compnetworking.about.com/od/dslvscablemodem/ss/broadbandtutor.htm
5. ↑ "DTV" is Coming (And Sooner Than You Think!)
6. ↑ http://en.wikipedia.org/wiki/Last_mile
7. ↑ ALU 10-K 2007 pg.54
8. ↑ ABC Snaps a Fox Winning Streak