TSTC nice IBD article on Telecom Infrastructure co.s BTW the #3 sector in IBD's 197 sectors ....
The Rising Tide Of The Smart-Phone Era
By REINHARDT KRAUSE, INVESTOR'S BUSINESS DAILY Posted 11/19/2010 04:54 PM ET
Featured Stocks
Investors learned a hard lesson when the technology bubble burst in 2000: Despite the blurred speed of Internet traffic growth, even an infrastructure-intensive sector like telecom could overspend.
Telecom infrastructure stocks were among the hardest-hit during the dot-com meltdown. But much has changed.
Many more people now access the Internet via smart phones and other mobile devices, rather than speedy, old fixed-line connections going into homes or offices. That ongoing shift to the wireless Web is reviving spending across the telecom infrastructure business.
A fisherman uses his cell phone near Chennai, India. Nearly every other Indian is expected to have a wireless phone by the end of this year. AP
A fisherman uses his cell phone near Chennai, India. Nearly every other Indian is expected to have a wireless phone by the end of this year. AP View Enlarged Image
This month, the telecom infrastructure group accelerated to a top-five ranking among industries tracked by IBD, up from 79th place three months ago.
While the wireless Web is a big growth engine, the fixed-line infrastructure business hasn't gone away.
Spending by phone and cable TV companies underwrites the industry. New fiber-optic and Internet-protocol (IP) technologies remain priorities. So does capital spending on mobile data networks, easily outpacing outlays on wireline infrastructure.
1. Business
Telecom companies whisk voice, data and video over fixed-line and wireless networks.
Infrastructure suppliers sell electronic chips, subsystems, switches, communications software and other stuff that sends traffic over networks.
Some infrastructure companies provide managed services or run clearinghouses that enable telecom companies to share customer or network data.
The Internet's arrival drove phone and cable TV companies to invest in speedier connections to homes and businesses. By 2000-01, too many companies had built fiber-optic networks to pipe Internet traffic over long distances. The capacity glut bankrupted dozens of telecom services providers. Contracts for infrastructure suppliers dried up as customers disappeared or cut back on capital spending for fixed-line networks.
Some analysts say such boom-and-bust cycles are intrinsic to the telecom business, although a downturn as sharp as in 2000-01 is unusual.
Major network upgrades, which create demand for new advanced technologies, are a key time to capitalize for infrastructure equipment and services suppliers. Network upgrades also give innovative startups a chance to win contracts and grab market share.
In much of the world, phone companies have been ramping up pay-TV services by replacing copper wiring with newer fiber-optic lines. The upside for infrastructure suppliers from telcos entering the video business is winding down, though.
The new buzz is all about the wireless data "tsunami" — the explosion in data traffic created by smart- phone usage.
In IBD's infrastructure group, most of the best-performing companies focus on wireless. Capital spending trends tell why.
In 2000, phone companies worldwide spent $87 billion on wireless networks and $180 billion on fixed-line networks, says UBS analyst Nikos Theodosopoulos. They'll spend $125.4 billion on wireless networks in 2010 vs. $83.7 billion on fixed-line networks, he estimates.
Wireless phone companies are upgrading their networks to expand data products and services.
In emerging markets, many wireless firms are still upgrading from voice-centric 2G networks to data-ready 3G networks. In the U.S., Japan, and parts of Europe, wireless firms are upgrading to a 4G technology called LTE.
Motricity (MOTR) in October signed a deal to provide Reliance Communications, India's second-biggest wireless firm, with mobile data services. With more than 100 million customers, Reliance is in the early stages of building out a 3G network.
Agricultural weather stations, like this one in Michigan, transmit over wireless networks and contribute to the surge in network data traffic. AP
• Name of the game: Identify telecom firms upgrading networks and capture their business.
Motricity Chief Executive Ryan Wuerch says his firm focuses on getting deals from wireless firms "committed to being an absolute leader in mobile data, that see mobile data services as transformational and being a core area of growth in their strategy."
2. Market
Smart phones are forcing wireless networks to become more complex, to handle an increasing array of mobile data services. In North America, smart-phone users generate about 86% of mobile data traffic, says Informa Telecoms & Media.
Text messaging is already old-school. Newer products for smart phones — downloaded software programs called "apps:" games, music, video and other content — are now the main drivers of data traffic.
In the U.S., 46% of mobile phones sold in the quarter ending Sept. 30 were smart phones, up from 22% two years earlier, says consumer market research firm NPD.
In emerging markets, wireless firms are selling lower-priced smart phones to drive data usage. In 2014, 26% of mobile phones worldwide will be smart phones, up from 12% in 2010, says Analysys Mason.
Early indications, meanwhile, are that subscribers to the faster, LTE-based services consume much more data than subscribers using 3G mobile phones.
"If you give consumers bandwidth, they will use it," said Deutsche Bank analyst Brian Modoff.
With data traffic exploding, wireless phone companies are buying up network gear to speed data delivery or add network capacity. They're also investing in software and services that manage data traffic, deliver apps to subscribers, and track customer data-consumption habits.
Wireless firms still handle most network operations in-house. But they're increasingly relying on third-party platforms to save time and lower costs.
They need to take advantage of outsourcing services to keep costs low," said John Bright, an analyst at Avondale Partners.
Infrastructure vendors such as NeuStar (NSR) and Neutral Tandem (TNDM) have stepped in with managed services that help telecom firms exchange network or customer data, he says.
3. Climate
The wireless data tsunami is in its early stages, say analysts. Mobile data traffic is growing globally at a pace 10 times faster than voice, says a study by Swedish gear maker Ericsson (ERIC).
Unlike the telecom meltdown in 2000-01, overcapacity is not an issue. In the U.S. and many other countries, there's a shortage of radio spectrum needed for broadband wireless services.
Wireless phone companies are rushing to add network capacity as data traffic surges. They're buying more radio antennas, network subsystems, and long-haul equipment from the likes of Powerwave Technologies (PWAV) and Ceragon Networks (CRNT).
Wireless phone companies are under pressure because data traffic volumes are growing faster than data revenue. Wireless firms want to avoid being just pipes that carry bits of data while Apple (AAPL) and Google (GOOG) rake in revenue.
Wireless firms aim to sell more apps and value-added services of their own, especially to corporations. If they're able to do that, analysts say infrastructure vendors that specialize in software and managed services could benefit.
Infrastructure vendors say they'll keep up with a fast-evolving market. "We (plan) to take our core service platform wherever mobile data services are going," said Motricity's Wuerch.
4. Technology
Wireless phone companies are targeting new areas, such as the machine-to-machine (M2M) market, to grow revenue.
Wireless firms aim to sell services that connect electrical meters in homes, medical devices, autos and industrial machines to mobile data networks.
Wireless firms also are targeting e-commerce and GPS location-based services. AT&T (T), Verizon Wireless (VZ) and T-Mobile U.S.A. are teaming to launch a mobile e-commerce network that lets consumers make retail purchases using smart phones with built-in payment tools instead of credit cards.
Infrastructure vendors, meanwhile, are making acquisitions to add product expertise in line with the strategic plans of their customers.
Sierra Wireless (SWIR) in March acquired France-based Wavecom, a maker of M2M modems. Novatel Wireless (NVTL) bought Enfora, an M2M gear maker, in early November.
M2M module revenue will hit $6.5 billion in 2014, up from $813 million in 2009, says research firm iSuppli.
5. Outlook
Takeover activity has been rife among fixed-line infrastructure firms, and analysts expect it to continue.
Fixed-line gear supplier Calix (CALX) in September acquired Occam Networks (OCNW), and Neutral Tandem has agreed to acquire Italy's Tinet.
Interactive Intelligence (ININ), which sells Internet calling systems to large companies, snapped up Global Software Services.
Private equity firms have also been on the prowl. Carlyle in October acquired CommScope (CTV), an infrastructure services provider, as well as mobile roaming services firm Syniverse (SVR).
While major network upgrade cycles are good news for infrastructure suppliers, the wireless industry's move to next-generation LTE technology may drag on for several years, analysts say.
Much of Europe may not upgrade to LTE until 2014 because wireless firms there are increasing the speeds of existing 3G networks.
• Upside: The arrival of 4G networks will enable wireless firms to offer new data products and services that boost demand for high-profit margin software or managed services from infrastructure suppliers.
