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Telecom Stock Roundup: FCC Alters ''Unlock the Box'' Plan, Starts Incentive Auction Stage 2

Zacks Equity Research

Last week has been quite dampening for the telecom sector. All major telecom stocks lost value, mirroring the slump in the broader market (the S&P 500) owing to the precipitous free fall of crude oil prices. Nevertheless, this did not keep the telecom sector from witnessing a slew of activities.

U.S. telecom regulatory body Federal Communications Commission (FCC) Chairman, Tom Wheeler, recently proposed revised rules for his “Unlock the Box” NPRM (Notice of Proposed Rulemaking). The new proposal is likely to go for final voting on Sep. 29, 2016. In the new proposal, pay-TV operators will have to offer subscribers a free app that allows them to access the same program that they have paid for on several devices, including tablets, mobile phones, gaming consoles, streaming devices, and smart TVs. Subscribers will no longer have to pay the monthly rental fee for set-top receivers since the app will be both mandatory and free.

In addition, the FCC initiated stage 2 of the second part of the ongoing 600 MHz low-band wireless spectrum auction, popularly known as -- Incentive Auction. Stage 1 of the Incentive Auction witnessed bids worth $23 billion after the twenty-seventh round of bidding. The FCC has received as many as 62 applications for the second part of the Incentive Auction. Important bidders include Verizon Communications Inc. VZ, AT&T Inc. T, T-Mobile US Inc. TMUS, DISH Network Corp. DISH and Comcast Corp. CMCSA. Each of these stocks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In recent times, major U.S. carriers have been gradually shifting from the annual contract model in an attempt to simplify things for customers. However, with the launch of Apple Inc.’s AAPL iPhone 7 and iPhone 7 Plus, it seems that wireless carriers are striving to bring back some of the features of the subsidy that used to be the standard norm a few years ago.

U.S. telecom behemoth, Verizon seems to be extremely focused on strengthening its footprint in the Internet of Things (IoT) space. Recently, the company inked a deal to acquire Sensity Systems Inc., a small IoT start-up providing smart city solutions, enabling customers to switch to connected LED lights from older lighting systems. Moreover, Verizon recently entered into a partnership with Qualcomm Inc. QCOM, the largest manufacturer of wireless chipsets. This partnership will see Verizon's IoT platform, ThingSpace, being integrated into Qualcomm Technologies' MDM9206 Category M LTE modem.

Meanwhile, U.S. telecom giant AT&T has signed a carriage deal with Discovery Communications Inc. DISCA. The deal will provide AT&T’s customers access to Discovery Communications’ linear channels, including on-demand and TV Everywhere rights on AT&T U-verse and the DirecTV satellite TV platform. In a separate development, AT&T recently stated that the companyis gradually expanding its 4G LTE wireless networks in Mexico. Currently, the service spans across 111 Mexican cities. The company is likely to cover 75 million subscribers by the end of 2016.

Outside the U.S., according to a recent Telegraph report, integrated telecom service provider Vodafone Group Plc.  VOD is forging ahead with its plans to launch pay-TV services in the U.K. this October. Headquartered in the U.K., the company had initially scheduled the launch for Nov 2015 which got delayed several times due to technical reasons.

Read the last Telecom Stock Roundup for Sep 08, 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 Jul 2016. In this 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 126 MHz of spectrums for a massive $86.4 billion. (read more: U.S. FCC Initiates Stage 2 of the 600 MHz Spectrum Auction.)

2.    According to the FCC, the set-top box market, dominated by pay-TV operators, is currently valued at about $20 billion annually. Meanwhile, lack of competition has resulted in higher rental fees for consumers. At present, an average consumer spends around $231 per annum to lease set-top boxes. According to a recent study by the FCC, the cost of cable set-top boxes has risen 185% while the price of computers, televisions and mobile phones has dropped 90% since 1994. (read more: FCC Proposes Revised Set Top Box Rules for Pay-TV Industry.)

3.    In order to promote iPhone 7, smaller wireless players like T-Mobile US and Sprint unveiled attractive device leasing plans with monthly payments that allow the user to own the device as well as trade in the device to upgrade to a newer version. Other large wireless players such as Verizon and AT&T have also launched their device leasing plans as a response to increasing competitive threat. (read more: Wireless Carriers Bring Back Subsidies for iPhone 7.)

4.    The deal with Sensity Systems is expected to boost Verizon’s IoT business wherein the company plans to add the leading provider of IoT solutions for smart cities to its ThingSpace IoT platform. Thus, Sensity Systems will become part of Verizon's IoT business. SensitySystems’ specialization on conversions to LED lighting should improve the digital transformation of cities, universities and venues and provide smart LED lights for streets, airports, malls, and more. Sensity Systems has managed to reach upto 42 smart city installations worldwide. (read more: Verizon to Buy Sensity Systems, Add LED to IoT Platform.)

5.    Last year, AT&T forayed into the Mexican telecom industry with the acquisition of Grupo Iusacell and Nextel de Mexico. These two acquisitions have added around 12.2 million subscribers to AT&T’s kitty. AT&T had approximately 9.96 million LTE subscribers in Mexico at the end of the second quarter of 2016. Management has decided to invest $3 billion toward the expansion of high-speed mobile Internet network in the country. (read more: AT&T's 4G LTE Network Expansion Plans on Track in Mexico.)

Price Performance

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

Company

Last Week

Last 6 Months

VZ

-4.15%

-2.24%

T

-3.48%

3.56%

S

-2.56%

83.38%

TMUS

-2.38%

24.75%

VOD

-2.68%

-5.85%

CHL

-0.40%

10.97%

AMX

-2.69%

-19.69%

CMCSA

-1.78%

9.71%

DISH

-1.10%

3.52%

Over the last five trading sessions, share price movement of all major telecom stocks was negative. This was in line with the broader market movement as the benchmark S&P 500 index also declined 2.56% in the same time frame. Verizon (4.15%) and AT&T (3.38%) lost significantly in the last five trading sessions.

On the contrary, over the last six months, the price performance of most telecom stocks was predominantly positive. Among the stocks that gained considerably were Sprint (83.38%), T-Mobile US (24.75%), and China Mobile (10.97%). In contrast, America Movil lost 19.69% in the same time frame.

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. Therefore, we expect stocks to trade in line with the broader market movement.

Interested in IPOs? Check out the special edition of Zacks Friday Finish Line below, where Editor Maddy Johnson and Content Writer Ryan McQueeney interview Kathleen Smith of Renaissance Capital about the IPO market in 2016 (see part two here).

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QUALCOMM INC (QCOM): Free Stock Analysis Report
 
AT&T INC (T): Free Stock Analysis Report
 
VERIZON COMM (VZ): Free Stock Analysis Report
 
DISH NETWORK CP (DISH): Free Stock Analysis Report
 
COMCAST CORP A (CMCSA): Free Stock Analysis Report
 
APPLE INC (AAPL): Free Stock Analysis Report
 
DISCOVERY COM-A (DISCA): Free Stock Analysis Report
 
VODAFONE GP PLC (VOD): Free Stock Analysis Report
 
T-MOBILE US INC (TMUS): Free Stock Analysis Report
 
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