NEW YORK-After a two-year bear market, wireless stocks began a rebound in April that is ongoing, and companies involved in all aspects of the industry are well worth a look, securities analysts told institutional investors at last week’s Wall Street Forum.
Financial and technical disappointments and strategic and valuation uncertainties caused the slump, Michael Elling, senior telecommunications analyst for Prudential Securities Inc., New York, said. But now, wireless sector stocks generally are outperforming broader markets.
“The current domestic telemedia market pie is $200 billion, with a unit growth of 15 (percent) to 20 percent annually, price declines of 5 (percent) to 10 percent annually and real growth of 10 percent annually,” he said. “In year 10, the telemedia pie will equal $500 billion. How do you justify a shift from 4 percent to 7 percent of (Gross Domestic Product)? A shift from a real to a virtual movement of people?”
Relative to the rest of the world, the United States wireless telecommunications market will account for less than 20 percent of subscriber growth in the next five years, compared with its 40 percent share during the past five years, said Jeffrey A. Schlesinger, senior wireless analyst for UBS Securities L.L.C., New York.
In other ways as well, the wireless equipment and services environment is a lot different today than it had been for many years and from how it will look in years to come. “Investors need to realize that now and factor it in,” he said.
Today, the industry has moved out of a period lasting 10 to 15 years of monopolistic conditions and high prices and into a “marginal pricing phase that can be downward in some cases and severely downward in other cases,” he said.
The third phase will be one of consolidation and market segmentation, at which point growth will resume, Schlesinger said. Elling said he sees, “the 20 or so big players [become] five or six big players with hundreds of value-added resellers.”
Irrational price cutting early on in the second phase hurt the wireless sector. However, strategically planned low-cost service can actually boost real revenues, Elling said. “There is tremendous price elasticity. Lowering prices stimulates demand, as shown by Microcell, Nextel, PageNet and Sprint.”
Worldwide, Schlesinger said he sees prices dropping naturally as a result of converging movements in wireless communications: from high mobility to low mobility applications; from narrowband to broadband; from vertical to mass markets; from being spectrally inefficient to spectrally efficient; from a stand-alone service to one integrated with cable and wireline; from analog to digital; from narrowband to broadband; from circuit switched to packet-based data.
“There are three unique wireless businesses. Narrowband for data and one-way voice. Broadband for data and voice. Wideband for data, voice and video,” Elling said. “If we can tie processors to the Internet, we will have a messaging revolution like we’ve never seen.”
Schlesinger is similarly enthused about the potential the Internet has for the wireless industry. “The Internet is the killer architecture, not the killer application, that will make wireless data applications possible. It will put processing back into the network instead of in the handset,” he said. “It will be a differentiator for carriers, and voice will become a commodity.”
Fixed wireless and broadband satellite communications will solve the “bandwidth bottleneck for data in the local loop,” Schlesinger added.
