Some North American Service Providers are Under Stress, Says Zacks

The U.S. telecommunications industry now faces intense pricing competition and spectrum crunch, according to analysts at Zacks. Mobile operators no longer can expect to grow by adding lots of new smartphone accounts, for example.

Regulatory barriers also are an issue. Zacks cites Federal Communications Commission net neutrality rules as one additional source of industry headwinds.

But it might be pricing pressures that are most troublesome. “The U.S. telecom market continues to witness intense pricing competition,” Zacks notes, driven principally by T-Mobile US and Sprint, the two weaker carriers among the top-four U.S. suppliers.

On the video services front, the subscription TV industry faces “severe competitive threats from low-cost online video streaming service providers,” Zacks says.

The net neutrality law  announced on Feb 26, 2015 classified high-speed broadband (Internet) as a public utility under Title II of the 1934 Communications Act, instead of the less-regulated approach taken under section 706 of the 1996 Telecom Act.

“Importantly, the latest regulations will be applicable to both mobile and fixed broadband networks,” Zacks analysts said.

The reclassification means the “FCC can now strongly regulate the ISPs,” said Zacks.  

Some comanies might be under more pressure than others. Rogers Communications, Telus, Telefonica, Time Warner Cable and BCE are examples. Time Warner Cable and BCE carry a Zacks “strong sell” rating while the others are rated “sell.”

High debt levels and large financial leverage ratios are the concerns. For that reason, many service providers will be focused on improving their balance sheets, financial discipline and free cash-flow generation.