Net Neutrality: What's Next For Telecom?
Zacks Investment Research | Nov 14, 2014 06:05AM ET
Last week, President Obama’s strong endorsement of net neutrality created considerable turmoil in the Internet Service Providers (ISP) industry. Major cable TV operators like Comcast Corporation (NASDAQ:CMCSA), Time Warner Cable Inc (NYSE:TWC), Charter Communications Inc (NASDAQ:CHTR) and Cablevision Systems Corporation (NYSE:CVC) lost substantial value in the stock market.
Moreover, telecom behemoths Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) have decided to challenge the new regulation in court if the Federal Communications Commission (FCC) ultimately considers the President’s proposition.
Meanwhile, non-U.S. telecom operators, including, BCE Inc. (NYSE:BCE)., TELUS Corporation (TO:T)., Vodafone Group PLC (NASDAQ:VOD) and Telefonica (MADRID:TEF) reported better-than-expected financial results for the third quarter of 2014, backed by strong wireless network growth and higher average revenue per user. Additionally, AT&T has decided to acquire Mexican wireless operator Iusacell to get a strong foothold in that country.
Recap of the Week’s Most Important Stories
1. President Obama called on the FCC to make a radical change in the way the government treats high-speed broadband service and ISPs. The proposed regulations can drastically alter the entire business model of the ISP industry. Obama has asked the FCC to reclassify high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act instead of treating Internet under section 706 of the 1996 Telecom Act. The reclassification will allow the government to strongly regulate ISPs.
All ISPs, along with several cable and telecommunications industry bodies have vehemently opposed net neutrality. Notably, Republican senators are also not in favor of this newly proposed directive. These groups believe that a slight law reformation under section 706 of the 1996 Telecom Act will be enough to enforce net neutrality. (Read More: Cable Stocks Plunge on Net Neutrality Talk .)
2. AT&T has decided to acquire Mexico’s third largest wireless service provider Iusacell, controlled by Grupo Salinas. The government of Mexico has decided to reform its telecommunications sector, which is highly monopolistic with one or two companies dominating the market. The Mexican government, however, intends to increase competition by encouraging the entry of other operators. As the new reforms open up considerable scope for investment in Mexico, AT&T is trying to capitalize on the opportunity. (Read More: AT&T to Acquire Iusacell, Explore Mexican Telecom Market .)
3. Telefonica SA recently sold another 2.5% stake in China Unicom for approximately $865 million. In Jun 2014, Telefonica sold a 4.56% stake in China Unicom for approximately $1.4 billion. Post this stake sell, the company is left with a 2.5% stake in China Unicom which however cannot be offloaded over the next three months. (Read More: Telefonica Vends Another 2.5% Stake in China Unicom .)
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4. AT&T has cancelled its plans to provide in-flight Wi-Fi service. The move hints at the carrier’s intention to instead emphasize on international expansion and enhance video offerings. In April this year, the company had announced its decision to provide in-flight Wi-Fi service by late 2015. AT&T’s withdrawal has, in turn, acted as a catalyst for Gogo Inc. – the leading Wi-Fi provider on flights in the U.S. (Read More: AT&T Drops In-Flight Wi-Fi Plans to Focus on Global Expansion .)
5. Cablevision Systems reported strong financial results for the third quarter of 2014 with both the top and the bottom line surpassing the respective Zacks Consensus Estimate. Adjusted earnings per share of 26 cents were well above the Zacks Consensus Estimate of 16 cents. Total revenue came in at $1,626.2 million, up 3.7% year over year and also outpaced the Zacks Consensus Estimate of $1,610 million. (Read More: Cablevision Beats Q3 Earnings, Revenues on Higher ARPU .)
Price Performance
The following table shows the price movement of major telecom players over the past week and the last six months.
Over the last five trading sessions, the price movement for most of the major telecom stocks was mixed. Vodafone was the top gainer, whereas America Movil lost the most during the same time period.
Over the last six months, the price performance of major telecom stocks was also mixed. China Mobile and America Movil witnessed considerable rally in stock prices of 30.51% and 14.42%, respectively, while Sprint collapsed a massive 44.26% and T-Mobile US lost 12.20% of value over the same time frame.
What’s Next in the Telecom Sector?
The FCC will start the auction of the Advanced Wireless Services-3 (AWS-3) spectrum from Nov 13. Altogether 1,614 AWS-3 licenses in the 1695-1710 MHz, 1755-1780 MHz and 2155-2180 MHz bands will be up for auction. These spectrum bands are highly useful in the deployment of 4G LTE services.
The AWS-3 Spectrum auction has registered massive applications from large telecom and cable TV operators. Verizon Communications, AT&T, T-Mobile US, America Movil, and DISH Network are some of the major bidders.
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