The U.S. telecommunications industry is going through a huge transformation, which was triggered by the overcrowded, near-saturation stage of the market place. AT&T (T, Financial) and Verizon (VZ, Financial) are the leading players with over half of the country's subscribers, followed distantly by T-Mobile (TMUS, Financial) and Sprint (S, Financial).
For a long time, subscriber additions have been the bread and butter for bringing in the extra revenue each year. At the end of the second quarter of 2016, Verizon had 142 million subscribers, followed by AT&T with 131 million. T-Mobile and Sprint reported 67 million and 58 million subscribers. As you may have noticed, the total subscriber base of the top four companies adds up to nearly 400 million, way more than the total population of the U.S., which stands around 320 to 330 million.
Even if you factor out the children and senior citizens who are not in a position to take a subscription, it is clear that the penetration level has shot up over 100%. The reason why the penetration level has surpassed 100% and these companies were able to add more subscribers is because of users taking multiple connections.
As homes get used to multiple devices, there is still room for the subscription base to grow, but that growth definitely has an end number to it. According to Strategy Analytics, a research and consulting firm, U.S. wireless subscriptions will increase by 15 to 16 million each year through 2022.
“While growth has slowed in the maturing US wireless market, Strategy Analytics forecasts show the outlook is not bleak: US wireless subscriptions will add 15 to 16 million net adds per year through 2022, while gross adds will grow each year, from 113 million in 2016 to 139 million in 2022—providing plenty of room for competition.” - Strategy Analytics
Though that forecast looks like it provides a bit of a breathing room for wireless carriers, the companies know that their days of solid stable growth are over. While the subscriber base can be grown in the short term, it definitely cannot be grown in the long term. As the largest players in the industry, Verizon and AT&T will find it extremely hard to improve their top line numbers. If the past few quarters are anything to go by, both companies are already facing a slowdown at the top.
Verizon and AT&T have taken divergent paths to address the issue, with the former choosing to create a content empire by buying media properties such as AOL and Yahoo in an effort to build a stream of advertising revenues, while AT&T chose to go the entertainment and telecast route by buying Time Warner and DirecTV.
Both companies have decided to stay put in their home market and vertically integrate segments related to their core business as they continue to search for future revenue drivers. Things will be a bit more difficult for smaller companies, especially Sprint and T-Mobile, as they will have to depend on stealing customers away from the top two players. Margins will be tight and growth will be erratic at best. If they do not have diversified revenue streams, it will only make the fight for survival even harder.
As such, the time has come for industry-wide consolidation. But at the higher levels, the Department of Justice and the Federal Communications Commission will not allow it. They already blocked AT&T's offer to buy T-Mobile for $39 billion a few years ago, and prevalent antitrust laws just will not allow for any major mergers at the top of the pile.
That is possibly what prompted these companies to look at various other options - in Verizon’s case, content and in AT&T’s case, television broadcasting. But this is not the end of the trail for these companies. As they explore new revenue streams ahead of super market penetration in the U.S., they will be looking at even more opportunities to diversify into related areas. It is inevitable.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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