Weekly Telecom Notes: Wireless Consolidation, Shared Data Plans And Cisco’s Value

The past week saw quite a few developments in the U.S. wireless industry. More rumors surrounding possible mergers and acquisitions made the rounds, with T-Mobile being linked with MetroPCS and AT&T (NYSE:T) with Leap Wireless. Sprint (NYSE:S) added to the speculation by saying that the FCC would be kinder to any small-scale consolidation than it was to the AT&T/T-Mobile merger last year since it increases competition in the industry. Verizon (NYSE:VZ) announced that it will be doing away with the grandfathered unlimited plans soon and instead pushing shared data plans for LTE upgrades. Cisco (NASDAQ:CSCO), meanwhile, continued to slide further, falling another 5% this week, as concerns about the European debt crisis continued to weigh on the stock.

Wireless consolidation

With growth slowing in a saturated wireless market, the incumbents are looking for ways to consolidate and grow through acquisitions. While none of the carriers has so far gone public with any such plan, the rumor mill has been at work ever since AT&T called off its T-Mobile acquisition. In the latest speculation, we had a Reuters report claiming that AT&T and Leap Wireless have held merger talks in the past few months. ^[1] This comes on the back of an earlier Bloomberg article that linked T-Mobile and MetroPCS in another acquisition rumor earlier last week. While the spectrum crunch situation and the increasing demand for data services does call for consolidation in the industry, the deals being proposed by the media make little sense.

AT&T and T-Mobile are both GSM players, unlike the smaller CDMA players MetroPCS and Leap. Merging two incompatible networks would become a nightmare for the carriers, as Sprint discovered after acquiring Nextel’s iDen network in 2005. Neither would the acquisition help create synergies of any sort nor will the carriers benefit from economies of scale since the networks will be different and they will have to maintain two different handset portfolios. Then, there is also the question of getting regulatory approval, which may not easy in AT&T’s case.

See our complete analysis for AT&T here

Sprint later joined the fray commenting that consolidation among the smaller wireless carriers may not be a big regulatory issue since that would foster greater competition in the industry. This fueled speculation that earlier reports that Sprint may have considered merging with MetroPCS seriously in February. However, Sprint will want to hold off on any M&A deal until it completes its expensive network upgrades and sees some returns for the iPhone come in.

The wireless industry is at an interesting transitional stage with growth slowing in an increasingly saturated market (there are more number of wireless connections than subscribers currently) and insufficient spectrum to meet the high data demands of smartphone users. Consolidation in the form of mergers or spectrum swap seem to be the way forward but first the FCC needs to bring back spectrum from the cable company hoarders to the wireless industry through the Verizon deal. (see The Verizon-Cable Deal Will Go Through Despite FCC Delays)

Shared data plans in; Unlimited plans out

Verizon is planning to eliminate unlimited plans altogether as ‘grandfathered’ customers on unlimited 3G plans upgrade to its new 4G LTE network. Speaking at an industry conference held March 16th, Verizon CFO Fran Shammo said that subscribers on the $30 per month unlimited 3G data plan will have to ditch their plans if they want to migrate to 4G LTE and take up a tiered shared data plan instead. ^[2] Unlimited plans have become highly unprofitable for Verizon and AT&T, both of which stopped offering the plans last year as their networks crumbled under the huge data load of smartphone users. As 4G LTE becomes the new standard and spectrum gets scarcer, Verizon will be looking to kill these plans completely and monetize every last byte of data that is transferred on its network.

See our complete analysis for Verizon here

Offering shared data plans will give the carrier more control over how much data it can afford to offer for a particular price without straining its network. The shared data bucket will also be beneficial for most users as they will be able to use multiple devices in the same data bucket, potentially decreasing the per device cost for the user. It will also allow a more efficient allocation of resources as against earlier when a few high data users used to clog the network to the detriment of the rest. We expect AT&T to follow suit as it has voiced its reservations against unlimited plans pretty strongly in the past while hinting that shared data plans will be the way to go ahead for the industry.

Cisco looking highly undervalued

Cisco’s shares have tumbled since it announced its Q3 FY 2012 results last week. While the networking giant saw solid growth in revenues and an even stronger growth in profits for the quarter ended April, the markets were unforgiving toward the company’s mellowed guidance for the next quarter. Cisco’s shares dropped almost 9% following the earnings on Wednesday and have been depressed since. However, we believe the markets are behaving irrationally here, thereby offering exciting valuations for a large-cap company that is executing pretty well on its turnaround plans so far. (see Cisco’s Post-Earnings Crash Makes The Stock Look Incredibly Cheap)

We have a price estimate of $23.40 for Cisco, which is more than 40% ahead of the current market price.

See our full analysis on Cisco

Understand How a Company’s Products Impact its Stock Price at Trefis

1. AT&T, Leap talked merger in recent months -sources, Reuters, May 10th, 2012 [↩]
2. Verizon will kill ‘grandfathered’ unlimited data plans, push users to data share, FierceWireless, May 16th, 2012 [↩]