SYNC. Global Telecom Themes TMT Sector Outlook (Volume IV): Telecom services Issue September 2012

Transcription

1 SYNC TMT Sector Outlook (Volume IV): Telecom services Issue 50 Global Telecom Themes 19 September 2012 Cyrus Mewawalla +44 (0) Authorised and regulated by the Financial Services Authority CM Research 22 Upper Grosvenor Street London W1K 7PE

2 Contents 2012 GLOBAL TMT SECTOR OUTLOOK: HOW TO USE THIS 4 PART SERIES... 3 VOLUME IV: CONCLUSIONS FOR TELECOM SERVICES DATA CENTRES TELECOM OPERATORS CABLE & SATELLITE OPERATORS GLOBAL TECHNOLOGY TRENDS... SUMMING IT ALL UP A REMINDER OF OUR RESEARCH APPROACH

3 2012 Global TMT Sector Outlook: How to use this 4-part series This is the final report in our four-part series on emerging investment themes in the global technology, media and telecom sectors. In Volume I, we focused on themes affecting technology hardware companies. We continued with the software sector in Volume II. Our third report focused on the internet and media sectors, whilst this final report covers the telecom services sector. The objective of this series of reports is to offer investors a comprehensive, global view of the TMT sector over the next 12 months. During the course of these four volumes, Sync will map out how a range of investment themes will affect the sectors identified in the chart below. The aim is to answer three questions: What will be the big technology themes over the next 12 months? How will they affect each of the TMT sectors in the chart below? Which trends are likely to influence investor perceptions going forward? To set the scene, the chart below shows the relative performance of the software sector in each of the calendar years from 2008 to Over the last five years, on a cumulative basis, telecom services has been the worst performing sector in global TMT Global TMT sector: Cumulative 5-year share price performance 140% 120% 100% 80% 60% 40% 20% 0% 20% 40% 60% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in each of the sectors listed above from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 17 September

4 Volume IV: Conclusions for Telecom Services Here is a summary of our dominant themes for the Telecom Services sector over the next 12 months: Data centres Competition is heating up in the data centre market, with a host of industry outsiders making waves in the sector. Some, like Amazon, are nakedly building market share with scant regard to profitability. Others, like Google see it as a way to monetise a core in-house skill set. Others still like EMC or NetApp from the storage sector are redefining data management solutions. Hardware makers like HP and Dell are trying to move to the higher margin services sector. And telecom operators are launching their own data centres as a means to escape regulated activity. After a four-year boom for traditional data centre players like Equinix, Rackspace and Telecity, the sector is beginning to look quite crowded. Margins may start to fall. Telecom operators The core telecom services revenue base of voice and messaging are declining and being replaced by wireless internet access revenues. But margins in the wireless access sector are declining even as subscriber numbers are growing because end users still expect all-youcan-eat data packages despite the fact that average data traffic per user is doubling every year. So telecom operators are looking for new charging mechanisms and are lobbying regulators to relax net neutrality rules, which have allowed internet companies to profit from highspeed broadband infrastructure without having to pay for it. Sync believes that regulators may soon start turn a blind eye to a two-tier internet, as Apple, Google and others show willingness to pay for preferential treatment for their customers. If this occurs, industry margins will rise. If not, operators will see margins squeezed from 30-40% today to utility-like levels of 10% in the near future, further stunting investment in high-speed networks. The most innovative operators are already moving beyond wireless internet access to focus on nextgeneration services such as their own software platforms (e.g. SK Telecom), data centres (e.g. China Telecom), social networks (e.g. Telefonica), cloud services (e.g. Verizon), app stores (e.g. China Mobile) and mobile payments (virtually everyone). Cable and satellite operators Many cable and satellite operators realised several years ago that they would become dumb pipes unless they built integrated ecosystems that packaged in-house content with their distribution platform. But the missing element from most cable ecosystems is software. Industry outsiders are looking to exploit this weakness and invade the pay-tv market by developing internet TV software that is as user friendly as current electronic programming guides (EPGs). So far the main candidates Apple, Google, Microsoft and Sony have failed to impress customers with their set-top boxes, but one day soon one of them will crack this last bastion of traditional media. 4

5 1. Data Centres Dominant theme: Competition is heating up in the data centre market, with a host of industry outsiders poised to enter, many with new, disruptive business models. Some, like Amazon, are nakedly building market share with scant regard to profitability. Outlook: After a four-year boom for leading data centre players like Equinix and Rackspace margins may start to fall. Theme What s happening? Our conclusions for the sector Leaders Laggards Emerging business models Traditionally data centres hosted websites and provided data recovery solutions. Tomorrow s data centre will be a one-stopshop for outsourcing IT infrastructure, operating platforms, software, storage, software and analytics. New entrants are flooding the market with their version of the data management business model. Amazon and Google are entering from the internet sector; Dell and HP from servers; Salesforce from the applications sector; EMC from storage; and telecom operators too. Amazon, Baidu, China Telecom, Dell, EMC, Facebook, Google, HP, NetApp, Salesforce, Teradata Equinix, Rackspace, Telecity Virtualisation The surge in big data (i.e. unstructured data than cannot be easily analysed) is creating the need for expensive databases and operating platforms accessed remotely. Data centres are investing in the latest hardware and software, and then selling virtualised services. As more corporate and personal databases move to the cloud, virtualisation companies will benefit Citrix, Microsoft, Oracle, Red Hat, VMware WAN optimisation Data centres are becoming increasingly fragmented, but they have to handle queries in real time. That makes response speeds a differentiating factor. During this growth phase, a handful of companies specialising in technologies that optimise wide area networks making data flow faster should benefit Brocade, Fusion-IO, SGI, Riverbed Technology Cyber security Smartphones and tablets are leading the shift from the PC generation to the cloud generation. These devices change the way data is stored and accessed. Physical security is replaced by cyber security. Most smartphones have no form of third-party internet protection. Several catalysts could re-rate the cyber security sector: the SEC may force companies to disclose the cost of cyber-attacks; the BYOD trend is exposing corporate networks to higher threat levels; mobile operating systems like Android are largely open source; and Google s vetting of apps remains minimal. Check Point Software, Fortinet, Sourcefire, Palo Alto Networks, Qihoo 360, 5

6 Outlook Data centres have been amongst the best performers in the global TMT sector over the last five years, with Rackspace Hosting up 400% since its IPO in August 2008 and Teradata, Telecity and Equinix all up around 100% since the start of Stored data is growing at 57% per annum, according to IDC. In the short term, this means that the leading data centre operators such as Equinix, Rackspace and Telecity may have another couple of quarters of consensus-busting earnings. But much of the data is unstructured video, s and documents making real time analysis difficult. So new entrants like Amazon and Google are trying to exploit this market opportunity the need for speed by using their core skill sets to develop big data appliances. In the longer term, data centre margins are likely to fall as new entrants with new technology move in. Facebook and Google already run some of the world s largest data centres for their internal use and may start selling these big data services within separate business units. Data centres: Cumulative 5-year share price performance 500% % 300% 200% 100% 0% 100% Amazon EMC Equinix Google NetApp Rackspace hosting Telecity Teradata Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 17 September The Rackspace Hosting chart shows cumulative share price performance since its IPO date, 8 August

7 2. Telecom Operators Dominant theme: Telecom operators are lobbying regulators to give them a bigger share of the profits of the mobile internet. Outlook: Voice and messaging revenues are falling. Broadband access revenue streams could see margins squeezed to utility-like levels of 10%, further stunting investment. But regulators may soon start to turn a blind eye to a two-tier internet, as internet companies show greater willingness to pay for preferential treatment for their customers, raising operator margins. Theme What s happening? Our conclusions for the sector Leaders Laggards Net neutrality Telecom operators are lobbying regulators to relax net neutrality rules, which have allowed internet companies to profit from high-speed broadband infrastructure without having to pay for it. Sync believes that regulators will have no choice but to allow operators and internet companies to come to commercial charging arrangements (currently illegal in the USA) in order to encourage broadband investment. Likely to happen in Europe and the US first, where mobile bandwidth shortages are acute May follow in Asian countries as a means to tax profits expatriated by US internet companies Shift to utility status Core services of voice and messaging are declining and being replaced by wireless access. But investment in LTE networks is slow because of poor expected returns. App stores, M2M revenues and data services can only go so far. Without a new killer app, the industry s margins may fall from current levels of 30-40% to utility-like levels of 10-12%. China Mobile, SK Telecom, Verizon, Vodafone Cloud In pursuit of growth, many operators are acquiring cloud services companies to cash in on the big data / cloud wave. Telecom operators tried going down the IT services route a decade ago and failed because they did not have the required skill sets. China Telecom, KPN, SK Telecom, Verizon Mobile payments Operators failed to profit from the mobile internet. Many see mobile payments as their second chance to ride the wave and are investing in mobile payment platforms. Leading operators in the UK, USA, Scandinavia and other regions are building mobile wallet platforms. But they are competing with more nimble technology companies. Apple, Alibaba, ebay, Google, Square, Tencent Most operators Big data 90% of stored data in the world has been created in the last two years. Much of it is unstructured and generated automatically from machine-to-machine (M2M). There is a market for real-time analysis of big data. Operators are trying to transfer the intelligence that is built into their networks via APIs to the developer community. Some, like SK Telecom, are focusing on in-house software; others, like China Mobile, are growing their app stores. China Mobile, SK Telecom, Vodafone 7

8 Outlook The changing face of the telecom sector is best summed up by a recently published research paper by Mobile Future Forward in which the author, Chetan Sharma, describes four waves of development. The first wave was voice, which dominated operator revenue streams between 1980 and The second wave was messaging, which became the growth driver in operator revenues between 1991 and The third and current phase is internet access, which took off with the iphone launch in The fourth wave represents new applications such as cloud services, internet TV, mobile payments, enterprise software and big data analytics. In most developed markets, the first and second wave revenue streams are in decline whilst the third broadband access revenues is flattening out. The fourth is still some way off. In the medium term, the driver for share prices for telecom operators will be regulation and, in particular, net neutrality. Sync believes regulators in Europe and the US are under pressure to increase broadband infrastructure investment and may soon turn a blind eye to the development of a two-tier internet in which Apple, Google and others start paying willingly for preferential treatment for their customers on operator pipes. If we are right, analysts earnings expectations for operators will be lifted. North American telecom operators: Cumulative 5-year share price performance 40% % 0% 20% 40% 60% 80% 100% AT&T CenturyLink Clearwire Frontier Comms Level 3 Rogers Comms Sprint Nextel Telus US Cellular Verizon Windstream Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 17 September

9 European telecom operators: Cumulative 5-year share price performance 80% 60% 40% 20% 0% 20% 40% 60% 80% Asian telecom operators: Cumulative 5-year share price performance 150% 100% 50% 0% 50% 100% 150% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 17 September

10 3. Cable & Satellite Operators Dominant theme: The optimum business model is one that combines in-house content with in-house distribution. But the weakness in these cable and satellite ecosystems is the lack of a common software platform. Outlook: Apple, Google and others are using software to enter these tightly guarded ecosystems. One day they will succeed. Theme What s happening? Our conclusions for the sector Leaders Laggards Content-filled walled gardens Many cable and satellite operators realised they would become dumb pipes unless they built integrated ecosystems which packaged in-house content with their distribution platform. Cable operators will continue to acquire content assets to strengthen their walled gardens. Simultaneously, internet companies like Google are commissioning their own original content. Film and TV companies will benefit. BSkyB, Comcast Software The missing bit of most cable ecosystems is software. If sufficiently user-friendly, internet TV software developed by industry outsiders may cause cracks in Cable-TV business models. As user preferences shift from broadcasting to narrowcasting, cable operators are adapting their set-top boxes accordingly. Whilst Apple and Google have thus far failed to conquer TV, it is only a matter of time before someone does. Apple, Google, Microsoft, Sony, Samsung Most cable operators Dual screening TV viewers are increasingly dualscreening: interacting with their TV via their PC or mobile device, talking about live TV content on social media, or using their mobile device as a remote control. Cable and satellite operators are trying to control the second screen by providing subscribers free mobile TV or interactive apps that communicate with their TV. But loss of control of this second screen is a real threat. Amazon, Apple, Facebook, Google, Netflix Most cable operators IPTV Telecom operators have tried to replace cable-tv with IPTV for a decade, but progress has been slow. Korea Telecom and Chunghwa Telecom were one of the early starters back in 2003, but have only managed to acquire 3.5m and 1.2m IPTV subscribers respectively since then. Leading IPTV players in mature Asian broadband markets like Hong Kong, Korea, Singapore and Taiwan have learned that it is difficult to displace incumbent pay-tv operators without offering a larger content library. Until operators acquire content on a large scale, they are unlikely to pose a significant threat. Google, PCCW, SingTel 10

11 Outlook As the chart on page 3 illustrates, cable and satellite operators have outperformed the telecom services sector by 40% over the last five years. Like the internet sector, successful companies in this industry will be those that build an ecosystem around content. Telecom operators trying to push incumbent pay-tv operators out of subscriber homes are unlikely to succeed unless they can provide superior content catalogues. The risk to cable and satellite operators comes from the trend towards dual screening and internet TV software. Smartphones and tablets provide this second screen and could replace the electronic programming guide (EPG) that sits at the heart of the cable TV proposition. In terms of internet TV software, Apple, Google, Microsoft and others have had several attempts but failed so far to impress. Investors, however, should not write them off, for one day soon an industry outsider will disrupt the cosy walled garden of cable operators. Cable & satellite operators: Cumulative 5-year share price performance 150% 100% 50% 0% 50% 100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 17 September

12 Global Technology Trends... summing it all up Volume I in our Global Technology Trends series was published on 29 July 2012 and looked at the big investment themes affecting technology hardware stocks, including: Smartphones Consumer electronics Component makers PCs, servers, storage and networking Telecom equipment Semiconductors Volume II was published on 14 August 2012 and covered themes affecting software and IT services: Applications software Infrastructure software Security software Video games software IT services Volume III was published on 29 August 2012 and covered themes affecting the internet and media sectors: Internet content Social networks Advertising Film & TV Publishing This fourth report on the telecommunications sector concludes the series and covers: Data centres Telecom operators Cable & satellite operators 12

13 A reminder of our research approach We study what s new and what s changing the rest we leave to mainstream research Global Investment themes Technology, Media & Telecoms Our research approach: Search for emerging technology trends Spot global investment themes Screen for local stocks impacted Sector Investment Strategy Thematic Research Our recent themes: Our research product: App revolution, Chinese Internet, Big Data, Cloud Computing, Cyber Security, Digital Media, HTML5, LTE, Mobile Internet, Mobile Payments, Net Neutrality, Regulation, Smartphones, Social networks, Video Games TMT sector outlook (bi-annual) In-depth thematic research (fortnightly) Technology briefings Analyst access Bespoke research 13

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