Communications Services Spotlight – Growth Opportunities in a Maturing Sector (Sector Report)

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The communications-services sector is experiencing the convergence of wireless, wireline, high-speed data and video services. While growth drivers still exist, we feel that wireless services will continue to be a key leader of industry revenue growth as subscribers adopt smartphones and increase usage of wireless data. We expect wireline data services to grow also as consumers activate high-speed internet connections and increase speeds to accommodate using internet-based video and as businesses transition to new technologies. These growth drivers are partially offset by declining wireline voice and other legacy services.

The internet continues to be a game-changer

Many traditional services are being upended by new internet-enabled solutions. Voice calls can be completed over the internet using Skype or Vonage. Video is increasingly accessed from sites such as Netflix, Hulu and Amazon Prime. Even pay-TV services are available via the internet on multiple devices such as smartphones, tablets and PCs.

Industry is maturing, but growth opportunities still exist

The communications services sector has transitioned from a high-growth trajectory in the late 1990s to a much more mature phase. Most consumers and businesses have a choice of purchasing a landline, high-speed internet and pay-TV services from at least two providers. Consumers also can opt for pay-TV service from two satellite TV operators and can purchase wireless services from multiple providers.

The way in which users access content and communicate with each other is evolving. Years ago, most households had a landline telephone, while now an increasing number of people exclusively use a cell phone. A study by the Centers for Disease Control and Prevention estimates 51% of households in the U.S. do not have a landline. The nature of traffic on wireless networks has also shifted as subscribers increasingly use cellphones for texting and accessing internet content rather than for voice calls.

Video viewing habits are also changing as content is increasingly accessed via the internet rather than from an over-the-air or pay-TV broadcast. Services such as Netflix, Amazon Prime and Hulu are continuing to grow the movie and TV content they offer "over the top" (via their websites on the internet). These companies are also continuing to invest in their own original programming. To combat these trends, pay-TV operators allow subscribers to access the same content they enjoy at home on other devices (PCs, smartphones or tablets).

Competition is fierce in the telecom world

To be able to grow, all communications-services players need to invest in emerging technology to offer next-generation services and aggressively attack new markets. Cable-TV companies are increasing their market shares in consumer high-speed internet and services for business customers. Phone companies are taking on market share in the pay-TV business, and most have exposure to wireless services that cable-TV companies don't have. Due to fierce competition, industry players must be exposed to higher-growth areas to deliver increasing revenue and earnings.

What this means to investors

Investors with diversified equity portfolios may want to consider allocating a portion of their portfolios to the communications-services sector. Consider looking at dividend yields, interest rate sensitivity and individual performance compared to the overall equity market. Talking with a financial advisor can help you determine what choices in the communications services sector may be the right fit for your investment portfolio.

Important information:

Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal.

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