Tag Archives: Telecommunications

T-Mobile Provides a Compelling Investment Opportunity

I have written at length about my research regarding government regulation in the wireless telecommunications industry, which I had to conduct for Econ 432. As I studied the regulatory and antitrust issues facing this industry, I because interested in it from an investment stand point as well. Last month, I pitched an investment in T-Mobile (NYSE:TMUS) to an investment club that I am a member in called Michigan Interactive Investments and the club invested in the company following the pitch. Our thesis was that T-Mobile survived an attempted takeover by AT&T in 2011 thanks to an antitrust intervention and since then has come a long way in terms of boosting its network quality and brand reputation. As the primary disruptive force, in a relatively uncompetitive industry, I believe T-Mobile has the capability to disrupt the established business model and steal significant share from its competitors, which is why I recommend investing in it now.

From an industry perspective, wireless telecommunications seems to be a very attractive industry. According to IBIS World Reports, the industry is expected to grow at 6.6% percent over the next five years, outpacing GDP growth. The driver for this growth is not necessarily adding new subscribers, but rather selling existing subscribers more data. Individuals are purchasing more devices that need wireless connections, such as tablets so data needs will continue to rise for some time to come, which will benefit the entire industry.

The necessary requirement in order to sell more data to consumers, however, is a good network. A good network requires heavy investment in infrastructure and spectrum licenses. This mean that barriers to entry are very high, which should protect incumbents like T-Mobile. One question is, though, how does T-Mobile’s network stack up against competitors? According to CNET, T-Mobile CEO John Legere has claimed that the company now has the fastest 4G LTE speeds in some markets, as shown by average speeds on Speedtest.net, a long way from not having LTE at all three years ago. It is true that they are the smallest of the Big 4 wireless companies, but they have made great strides in improving their network. Now that they have a network that they are closer to their rivals in terms of quality, T-Mobile is free to compete on other points like price and contract flexibility in order to win customers.

I also believe now is a great time to invest in T-Mobile because there is a very low-key catalyst that could boost the stock significantly – the 2015 600 MHz spectrum auction. According to the Wall Street Journal, the FCC is planning to auction a significant chunk of spectrum in the 600 MHz range, which has some of the best properties of any spectrum ever auctioned, making it incredibly valuable. All spectrum below 1 GHz is considered low frequency and has excellent propagation and range properties, which make them very valuable to wireless broadband providers. T-Mobile is the only wireless company without significant low frequency holdings as shown below as the WSJ explains.

The key to the 2015 auction is that the FCC is considering imposing caps that limit how much the Big 2 – AT&T and Verizon – can acquire of the low frequency spectrum. This could be a big win for T-Mobile, which would have a clear path at acquiring the spectrum it needs to further improve its network and compete at a higher level with the Big 2.

Because the market may not be fully buying into T-Mobile’s turn around, or may not be fully pricing in the possibility of the company winning low frequency spectrum, I believe the stock may be underpriced at the current level and now is a great time to invest in a company that is one the rise.

 

Apple + Comcast

There has been recent talk of a deal forming between Apple and Comcast. Apple will benefit from the deal because they have been looking to jump into cable for a while now. Apple can also complement Comcast because it can benefit Comcast’s huge scale. Apple has a 22 million video subscriber base, a huge portfolio of content, and owns NBC, partial stake in Hulu, and just recently signed a big deal with Netflix. Comcast can benefit from the deal because they have been losing subscribers lately (see table below). With the help of Apple’s brand name and quality, a new streaming-video service from Apple will potentially allow both companies to refine the TV business.

Screen Shot 2014-03-24 at 11.00.42 PM

In terms of the actual streaming-video service, “Apple wants traffic to the boxes to be marked as distinct from public internet traffic and travel in a separate flow of bandwidth over Comcast’s cables to homes, ensuring better quality for Apple’s TV service than Web video.” The content from the service would stream from Apple set-top boxes. However, the companies are not close to closing a deal and there is no guarantee that there may even be a deal in the future. Also, a deal as big as this is bound to face regulatory scrutiny.

Moreover, Apple proposes that its video traffic be treated as a “managed service” traveling in internet protocol format- similar to cable video-on-demand services. In January, Federal “net neutrality” rules were passed which barred broadband providers from discriminating against any public internet traffic. However, the rule makes exceptions for managed services because they don’t interfere with other web traffic.

Opponents of the deal (in favor of treating all internet service traffic equally) argue that the deal would allow Comcast to pick winners and losers and ultimately make it harder for new innovative companies to join the internet service. As we have learned throughout our Econ courses, increased competition raises entry costs and barriers for new competition. In my opinion, I believe that the two companies have good intentions- but I actually feel that the deal could have a negative effect. If Apple and Comcast paired up, I can foresee extra fees added to cable bills that will become active as consumers are provided with new, higher-bandwidth services. I actually just recently cancelled my Comcast service because I was being billed for extra irrelevant costs that they had never specified up front. If the deal is passed, I can definitely foresee the FCC re-writing the “net neutrality” regulation in order to prohibit the TV business from becoming more highly monopolized than it currently is.

U.S. Appeal’s Court’s Controversial Strike on Net Neutrality: Is all lost?

In a Wall Street Journal report, net neutrality proponents were set back on Tuesday when a U.S. federal appeals court in Washington rejected federal rules that require broadband providers to provide equal service to all internet users. In presiding over Verizon’s lawsuit against the Federal Communications Commission (FCC), the court decided to repeal the 2010 FCC rules that require Internet service providers (ISPs), such as Verizon and Comcast, to treat similar content crossing their networks equally. The repeal would give ISPs greater freedom and discretion in how they allocate and charge for bandwidth.

It appears that the decision stems from legal confusion about how exactly to classify broadband carriers. In a Bloomberg news article, according to U.S. Circuit Judge David Tatel, “[…] the commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such.” A common carrier is an old, legal definition of a service that provides a method of transportation to the public. CNET provides a good example of a common carrier: a ferry company could provide a service by transporting people across a river, but since the river is a public waterway the company would be required to charge customers fair and reasonable prices, and could not “indiscriminately choose to service some customers and not others.” Due to a past FCC ruling that excluded broadband from being considered as a common carrier, it is now ruled that they cannot now regulate broadband as one.

The main problem that proponents of net neutrality see is that broadband network companies such as Comcast and Verizon could now charge Internet companies, including Google and Netflix, for broadband access. The main fear is that this will stifle innovation by increasing the costs and barriers to entry for Internet startups. Opponents stress that the previous net neutrality rules had been too harsh on network providers. Opponents also suggest that there could be potential benefits if the balance shifted more towards the network providers, mainly through the added safety of allowing for better policing of the internet if providers could shut down access to websites suspected of criminal activity. In addition, if the rewards to competition were increased in the broadband industry, ISPs may be better incentivized to provide faster and cheaper service to end-users in the long-run. Although I would consider myself a proponent of net neutrality, I agree that by providing the right incentives to encourage competition, broadband companies might seek to expand their service by laying more high speed network infrastructure that would ultimately benefit both Internet companies and end-users at home. To me, this situation is akin to the development of the highway infrastructure across the U.S.: Drivers benefit greatly from having greater access to transportation, and they definitely hate to pay at toll roads, but in the end someone has to pay for the concrete, asphalt, the highway construction crews, and maintenance workers that gave them the freedom of mobility. Just like in the development of highways, there is no free lunch in the construction of new broadband networks, so an uncompromising war on the ISPs likely won’t lead to the most efficient outcome.

In the end, this isn’t a question about whether we would prefer a Mad Max like anarchical broadband system to 1984-esque totalitarian style bandwidth providers. Internet startups need a cheap, effective way to reach users, consumers need an affordable way to find the content they want, and broadband providers need a way to be compensated for their enormous costs of creating the expensive infrastructure. This is a matter of how to best incentivize all players in the Internet to create the most efficient system of transferring information from one place to another. Without the ability to balance the interests of both bandwidth consumers and producers, achieving that goal will be hopelessly impossible. Lets hope further appeals could further refine the FCC regulations such that everyone benefits.