Mobile Now Drives 80% of U.S. Telecom Industry Revenue

U.S. mobile segment revenue--which now represents 80 percent of U.S. telecom industry revenue--will grow about four percent in 2016, after rising three percent in 2015, according to Moodys Investors Service.

Organic operating income for the U.S. telecom sector overall will grow around two percent annually through 2016.

That is most of the good news.

Fixed network revenue will be flat to negative in 2016, while competitive pressures--called “fierce”--in the mobile segment will limit profit margins, says Moodys Investors Service.

Results will be significantly affected by AT&T’s DirecTV acquisition, however. Operating profits industry wide might increase by about 10 percent this year, as a result of that acquisition.

Some might say that profit boost shows why AT&T did the deal. Others might note the importance of acquisitions as a growth contributor, giving slowing mobile revenue growth that essentially represents all of industry net growth.

Ongoing margin erosion in the fixed network segment also is expected, “as lower-margin modern services continue to replace higher-margin legacy services and somewhat offset wireless growth."

Fixed network operators will “mostly focus on cutting costs in response to shrinking margins,” Moodys predicts.

Moodys maintained its stable outlook on the telecom sector and believes that continued subscriber growth in smartphones and tablets will offset flat-to-negative wireline revenue growth.

"Growth in mobile video, higher network speeds, the availability of equipment installment plans and the expansion of machine-to-machine connections will continue to fuel wireless growth, which is the backbone of the telecom industry," said Dennis Saputo, a Moody's Senior Vice President.

And while merger and acquisition activity has been high in 2015, Moody's believes that the 600-MHz incentive spectrum auction in March 2016 will dominate sector capital investment activity in 2016.

That auction also could mark a turning point for the mobile market, marking the first new entry of new players from “outside” the telecom industry in decades.

The last big move into the industry was that of Craig McCaw, a cable TV industry magnate, with McCaw Cellular. Those assets eventually were purchased by AT&T.

"Bids could surge to $60 billion if non-traditional bidders such as cable multiple system operators and technology companies participate," said Saputo. Bids by one or more cable operators would not be unexpected.

Many consider it is only a matter of time before one or more cable operators makes a major move into the mobility segment of the business.

Bids by app providers might be more significant, though, and could mark entry into the market of firms that have other business models in mind. It always is difficult to compete with new providers that essentially “give away what you sell.”

But that has proven to be a salient feature of market dynamics and strategy in the Internet era. Google Fiber, even if using a traditional subscription model, arguably has disrupted industry pricing and feature norms.

And then there is Android, Nexus, Hangouts, municipal Wi-Fi, as well as Internet access by balloon or unmanned aerial vehicles.

Many have speculated about the value to Apple of owning yet one more piece of the value chain and ecosystem, even if a traditional mobile virtual network operator approach might be questionable.

As Apple integrates hardware and software, so additional value could be obtained if access were integrated as well. The degree of value has been the question, in relation to investment.
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