Telecom Stock Roundup: Second Part Of Incentive Auction Begins, Verizon To Roll Out Dark Fiber

The U.S. telecom industry has remained quite downcast over the past week. Nevertheless, a few developments were worth noting.

On Aug 16, the U.S. telecom regulator Federal Communications Commission (FCC) will open the second part of the 600 MHz low-band wireless spectrum auction, popularly known as Incentive Auction.

The FCC has received as many as 62 applications for the second part of the Incentive Auction. All 62 bidders have made upfront payments. Important bidders include national telecom giants Verizon Communications Inc. (NYSE:VZ) , AT&T Inc. (NYSE:T) , and T-Mobile US Inc. (NYSE:T) , satellite TV operator DISH Network Corp. (NYSE:S) and cable MSOs (multi service operators) Comcast Corp. (NYSE:S) and Liberty Global (NASDAQ:LBTYA) Inc.

According to a recent research report by Leichtman Research, the top 14 pay-TV operators were able to add only 190,000 high speed internet customers in the second quarter of 2016. This data, per the research, marks the slowest pace of broadband subscriber addition in the last 15 years.

Moreover, as per a report by Informitv, 10 major U.S. pay-TV operators lost a total of about 663,000 television subscribers in the second quarter of 2016. Notably, the U.S. pay-TV market comprises three kinds of service providers, namely, cable MSOs, satellite TV operators and fiber-based telecom operators. Significantly, cable TV operators are most susceptible to challenges arising from online video streaming services.

Meanwhile, by focusing on customer retention rather than pushing customer addition through promotional campaigns, the wireless industry has seen its lowest level of customer churn rate in the second quarter of 2016. The industry churn rate at the end of this reporting quarter was 1.22%. Customer churn rate displays the percentage of subscribers who cancel their services during a specified time period.

U.S. telecom behemoth Verizon has decided to acquire and install dark fiber based network throughout the areas of its presence in order to support the existing 4G LTE network and more importantly to transition into the upcoming 5G wireless network. Dark fiber provides abundant bandwidth which is of utmost necessity for the smooth functioning of super-fast wireless networks such as 4G and 5G.

In a separate development,leading U.S. fiber optic network service provider, Level 3 Communications Inc. (NYSE:T) has launched its automated on-demand Network-as-a-Service (NaaS) with Adaptive Network Control Solutions, which is powered by Cisco System Inc.’s (NASDAQ:CSCO) Network Service Orchestrator. The latest offering will allow customers to control their Ethernet service bandwidth for cloud connections among other things.

Outside the U.S., Finland-based Nokia (HE:NOKIA) Corp. (NYSE:NOK) and China Telecom Corp. Ltd. (NYSE:CHA) are expanding 4G network coverage in Chinese markets. The companies recently signed an agreement to go ahead with their 4G rollout in 19 provinces of China, enabling China Telecom to expand coverage and capacity as well as the quality of service for subscribers. The agreement with Nokia paves the way towards the introduction of 5G technology and lays the foundation for China Telecom's launch of Voice over LTE (VoLTE) services in 2017.

Read the last Telecom Stock Roundup for Aug 11, 2016.

Recap of the Week’s Most Important Stories

1. The Incentive Auction, which was initiated by the FCC on Mar 29, 2016, completed its first part in early last month. In the first part, which was essentially a reverse auction, the airwaves were freed by TV broadcasters who no longer had any productive use of the same. The TV broadcasters had agreed to free a substantial amount of 126 MHz of spectrums for a massive $86.4 billion. (Read more: FCC to Open the Second Part of Incentive Auction Today.)

2. Verizon acquired dark fiber through its acquisition of MCI in 2006. In Feb 2016, the company entered into a definitive agreement to acquire XO Communications Inc.’s dark-fiber optic network. The deal, valued at $1.8 billion, is expected to be closed by the first half of 2017, subject to customary regulatory approval. Verizon will also lease XO’s LMDS wireless spectrum with an option to buy them by the end of 2018. (Read more: Verizon to Aggressively Deploy Dark Fiber for 5G Backhaul.)

3. In the second quarter of 2016, AT&T and T-Mobile US, two of the top four wireless players, have improved their churn rate with rates of 0.75% and 1.27%, respectively, compared to 1.01 and 1.32% a year ago. Meanwhile, Sprint Corp. (NYSE:S) and Verizon have had a relatively flat churn rate this quarter, with 1.56% and 1.19% respectively. However, Sprint’s churn rate would have be around 1.39% after adjusting for effects of promotional period. (Read more: Wireless Churn Rate Hits Record Low: Is It Sustainable?)

4. Level 3 Communications’ collaboration with Cisco Systems will enable the former to offer hybrid cloud connectivity, dynamic capacity with bandwidth of up to 300%, optimized data backup and real-time information on network performance and utilization. The new offering will leverage the advantages of network automation and SDN to offer technology systems quicker and more efficiently, thereby allowing rapid integration of new third-party cloud services and applications from test environments to full-scale production. (Read more: Level 3 Communications to Introduce NaaS Solution.)

5. As per the deal with China Telecom Nokia will deploy its 4G technology in 19 provinces of China. The deal also includes Nokia’s Flexi MultiRadio 10 base stations and services followed by project management, network design and installation. Hardware and software maintenance services will also be provided. Further, Nokia optimization experts will use the Nokia NetAct to improve the performance of the network for subscribers. (Read more: Nokia-China Telecom Forge Ahead with 4G Rollout in China.)

Price Performance

The following table shows the price movement of the major telecom players over the past week and the last six months.

Over the last five trading sessions, share price movement of the major telecom stocks witnessed a mixed trend. All major telecom stocks observed minor gains or losses in the same time period. Over the last six months, the price performance of most of the telecom stocks was positive. America Movil was the sole exception. Among the stocks that gained considerably were Sprint (101.00%), T-Mobile US (25.86%), Comcast (17.26%), China Mobile (15.30%), AT&T (14.25%) and DISH Network (11.09%).

What’s Next in the Telecom Sector?

We do not foresee any significant changes in the telecom industry or overall global economic factors that can affect the industry in the coming week. Consequently, we expect stocks to trade in line with the broader market movement.