Last week, T-Mobile USA (TMUS) fired the starter pistol on what is poised to be the race in 5G deployment in the U.S. More specifically, T-Mobile Chief Technology Officer Neville Ray said at the Morgan Stanley European Technology, Media and Telecoms Conference in Barcelona that T-Mobile would roll out its 5G network in the U.S. by 2020. Moreover, this builds on the recent news that AT&T (T) would bring its 5G Evolution service to Minneapolis by the end of 2017 as part of its plan to have the service running in 20 markets before 2018.
Typically, when we see announcements like T-Mobile's, it tends to erupt in a flurry of similar announcements from competitors as they need to get on board lest they be perceived by their customers as not being competitive or offering the latest, and speediest, network. With 5G networks offering data speeds that are expected to power mobile applications ranging from the Internet of Things to autonomous cars as well as the ability to stream high-definition movies in seconds, not minutes, the perception that a mobile carrier is behind the curve could lead to subscriber defections. Case in point, in the September quarter AT&T reported "Consumer Mobility added 14,000 total subscribers with 324,000 prepaid and 102,000 postpaid net adds, offsetting a loss of 394,000 reseller and 18,000 connected device subscribers."
This technology deployment race should benefit mobile infrastructure providers ranging from Ericsson (ERIC) to Alcatel-Lucent (ALU) to Nokia (NOK) as well as specialty contractors that build the actual networks, such as Trifecta bullpen company Dycom Industries (DY) . Meanwhile, there are some happenings in Washington that could alter the mobile playing field when it comes to 5G.
The FCC is rewriting some rules that would change rural access to broadband services. As background, roughly 30% of U.S. households in remote and rural communities still lack access to high-speed broadband, and the availability of broadband services in rural America continues to lag behind urban and suburban areas at all speeds. Recent estimates put the number of rural Americans who lack basic fixed broadband service in their homes at around 23 million. For context, exiting 2016, the Census Bureau reported there were 125.8 million homes in the U.S., which means 18% of all homes in the U.S. lack basic fixed broadband service.
Back in 2015, as part of its view that high-speed broadband service is a necessity in today's technology environment, the FCC adopted a rule that allowed something called priority access licenses (PALs) to be auctioned in 10-megahertz pieces. Sounds complicated, but the rule set up areas called "census tract auctions," smaller areas that helped protect underserved rural areas. The FCC also put out three-year licensing terms that were reasonable to stakeholders and did not lead to de-facto permanent licensing. All of these ideas were considered reasonable for both the large corporate mobile carriers and the smaller rural internet service providers (ISPs).
Today, following regime change at the FCC, those prior policies that aimed to stimulate rural broadband development are being reconsidered. Proposed changes include expanding the geographic size of licenses from census tracts to much larger areas; extending license terms from three years to 10; and adding an undefined "renewal expectancy." From the perspective of the larger, better-funded mobile companies, these changes would reduce the amount of competition in the marketplace, but it also raises the risk of those 18% of homes being left behind. I suspect that is something the new FCC commissioner, Ajit Pai, is going to weigh in reviewing these potential policy changes.
If the policies were to change, it would likely concentrate purchasing power among a handful of better-funded companies, and that could crimp profits at the margin for mobile infrastructure companies and specialty contractors. Case in point is Dycom Industries, which derives 70% of its revenue from four customers -- Comcast (CMCSA) , AT&T, CenturyLink (CTL) and Verizon (VZ) .
With the policies out for comment, odds are the FCC decision will land in early 2018, which isn't all that far off given the expected holiday lull. As an investor, this means its decision and implications could weigh on 2018 expectations to the downside for equipment suppliers and contractors if the current policies are changed. Once again, investors should be watching Washington to see if it alters the playing field, and if so what it means for companies you own in your portfolio as well as ones you are considering. That's how we'll be playing it.
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