Can You Hear Me Now?

by Brad Houle, CFA, Executive Vice President

For the week, the equity markets were down by about .50 percent as investors absorbed positive results from the Federal Reserve stress tests on financial instructions and hawkish comments from global central banks. Interest rates were higher with the 10-year Treasury climbing in yield from 2.12 percent to 2.28 percent.

Wireless telephone growth has stalled in the United States as the number of active cellphones in this country approaches the level of the population and roughly 80 percent of people in the U.S. own a smart phone, according to The Wall Street Journal. The telecom sector as a whole has had a rough year, returning -13 percent through the end of June. Increased competition has led to pricing pressure and with fewer new customers to compete for, subscriber growth has slowed and has even started to decline in some instances. Customers moving between carriers are referred to as “churn,” which is a negative for the industry due to the high cost of new customer acquisition. Much of the pricing pressure has come from the unlimited data plans that have been reintroduced into the market recently. Sprint and T-Mobile have been luring customers from AT&T and Verizon by offering unlimited data. As a result, AT&T and Verizon were forced to offer unlimited data as well, which puts pressure on margins because the companies cannot earn incremental revenue from customer data overage. In addition, offering unlimited data exacerbates the trend in data usage that is growing at about 35 percent annually. Increased data usage then creates the need for wireless companies to invest in additional equipment as well as wireless spectrum to maintain the quality of their networks.

Wireless telecom service is part of the Consumer Price Index which measures inflation. On a year-over-year basis, wireless service pricing has declined 13 percent since May of last year, according to the Labor Department. New competitors have also joined the market, resulting in further splitting-of-the-pie of existing customers. Cable provider Comcast is now offering a wireless service to customers, adding to the complexity of this market.

In an attempt to grow revenue, AT&T and Verizon are working on 5G technology to deliver home and business internet service and meet demand for the "internet of things." Delivering internet service to homes and businesses using wireless spectrum will allow for lower costs of implementation than traditional wired internet service.

Our Takeaways for the Week

  • Wireless competition is heating up due to increased competition and slowing subscriber growth
  • This is both a serious headwind for the industry and in contrast, a boon for consumers