If we are correct, we believe that the leaders in the wireless industry can gro w revenues in the 6% area, EBITDA at 9% and FCF at 12% over the next five years. We examine three core areas for improved EBITDA growth throughout this report. These new revenue opportunities should help customer lock-in and churn, the major expense item for carriers. In addition, we evaluate the primary enablers of the wireless cloud computing strategy—cloud computing, LTE, and HTML5.
We believe that the communications industry will undergo major structural change over the next five years with traffic shifting to wireless networks and applications to remote data centers. This in turn should drive more centralized computing storage and processing, which should significantly increase the competitiveness of simple low-cost devices. When cloud computing matures, consumers will be able to access their content over any screen/device.
Cloud computing is still in its infancy, but it is evident that wireless access has become a core enabler in transforming computing into a utility sold over the Internet (Amazon is the current leader in this application); the ability to access content/computing power through dozens of new wireless and wireline devices has tremendous appeal to consumers as well as enterprises.
We believe that there is a natural marriage between mobile connectivity and cloud computing, and that the carriers can take advantage of this to reshape the industry for their benefit. The carriers are positively adjusting their underlying pricing model with a complete shift from voice and text usage to data. Some of the major implications of this will be a huge proliferation of new enduser devices ("thin" devices), greater data usage, and more network-based computer storage and processing. The primary leverage that the carriers have is control of the wireless (spectrum) pipes that connect what is relatively commoditized hardware (end-user devices and data center-based servers), and partially commoditized content/applications.
Eoin Treacy's view In order to explain the role of network providers let us compare the wireless networks sector with natural gas. In the case of natural gas, the proliferation of new supply has depressed pricing. As more manufacturers enter the mobile devices market, pricing will contract. As natural gas prices came down, demand increased not least because it became competitive with coal. As the cost of entry falls, demand for mobile devices will increase and there will be even fiercer competition for market share. The sector that has done best from the natural gas revolution have been pipeline companies since all that new supply has to be transported to market. As demand for wireless devices increases, consumers can have any device they want but the number of networks they can use is quite limited. (Also see Comment of the Day on October 25th).
Verizon (4.63%) found support in the region of the 200-day MA and the upper side of the underlying trading range in November and has since rebounded impressively. A sustained move below $40.50 would be required to question medium-term scope for additional upside.
AT&T is an S&P 500 dividend aristocrat and yields 5.25%. It pulled back sharply from the September highs but has found support mostly above $33 and a sustained move below that level would be required to question medium-term scope for additional upside.
Sprint has been ranging below $6 for the last few months but will need to sustain a move above that area to complete its three-year base.
Among service providers to the sector, AMDOCS (1.52%) completed a 30-month range in August and a sustained move below the 200-day MA would now be required to begin to question medium-term scope for additional upside.
Viacom (2%) found support at the lower side of its range earlier this month and a clear downward dynamic would be required to check potential for additional higher to lateral ranging.