US Has Only 25% Smartphone Penetration at Present But Will Grow To 75% In the Next Five Years, Says Senior Analyst At Oppenheimer And Co.
May 25, 2011 - The Wall Street Transcript has just published Wireless Communications & Telecom Report offering a timely review of the Wireless sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Tim Horan is a Managing Director and Senior Analyst heading the communication and cable services equity research team at Oppenheimer & Co. Inc. Mr. Horan has been with the firm since 1998, and he has been a communications services Analyst for more than 13 years. Mr. Horan researches a broad range of communications companies, with a focus on data communications and the migration of the industry toward horizontal segmentation. He was chosen as The Wall Street Journal's "All Star Analyst" in 2000, 2001 and 2002. He earned a B.S. in civil engineering from Rutgers, The State University of New Jersey, and an MBA in finance, with Beta Gamma Sigma honors, from the Columbia Business School.
TWST: What does it mean for the sector to become segmented horizontally?
Mr. Horan: What it means simply is that you focus on a specific customer segment. You don't try to be all things to all people. You don't try to control every facet of the service that you sell or manufacture. Virtually every competitive industry is more horizontally or customer focused. Communications and computing have been realigning along customers lines for 30 years driven by technology. But by way of explanation, historically AT&T was completely vertically integrated. They made their own switches, own phones, built and ran the networks. They did everything from A to Z and sold services to consumers, enterprises and to other carriers. When IBM (IBM) controlled computing in the mainframe days, they controlled every aspect of the business. IBM manufactured their own hardware, semiconductors, they pieced these components together into mainframes. They were the operating systems of software, and they built all applications. Those are examples of being extremely vertically integrated.When we went to the PC world, you had a much more horizontally segmented world, where you had five or six different suppliers that made up the entire food chain, and they'd specialize in one area or the other. So you had Intel (INTC) making the semiconductors, Dell (DELL) putting together computers, Microsoft (MSFT) handled the operating system, and then you had a whole number of players that had different applications until Microsoft usurped that.
TWST: What major investment themes or trends do you look at in your area?
Mr. Horan: By far it is wireless data. Now the wireless networks can handle broadband speeds that are on par with wireline networks in the one- to 10-megabit range. This shift has been occurring for the last three years but has accelerated this year. So now when you have these kind of data speeds on wireless, you can get new applications, and you can use them for new things, new features and functionality that are mobile. And consumers prefer mobile communications to fixed. That combined with Apple (AAPL) creating handsets to use the wireless data much more efficiently, and now we have a lot of other people jumping on board looking at iPhone-type devices, obviously.Back to horizontal segmentation, Apple has in many ways driven a more horizontally segmented wireless industry. There are three components. You have the wholesale infrastructure, you have consumer-facing companies and then you have enterprise-facing companies. Usually the customer-facing companies are into outsourcing a lot of what they do. Apple has become a very dominant consumer-facing company, and it outsources a lot of its pieces. It outsources the entire manufacturing of the device. It has opened up applications development to the masses organized through its operating system, and in many ways it outsources the networks to carriers around the world. So their device works on the networks of hundreds of carriers around the world, and I am sure it is going to keep growing. All of this has enabled the company to do innovation a lot better than what a vertically integrated company, regional wireless carrier, can ever hope to do.
TWST: Who do you like in the wireless space right now and why?
Mr. Horan: MetroPCS is our top pick in the wireless carrier sector, and Crown Castle on the tower side. We think the fundamentals are very strong in the industry but that these two carriers represent excellent risk versus reward from a valuation perspective. Consumers are really becoming quite addicted to wireless data, and there is currently only about 25% penetration of smartphones in the U.S. We expect that in the next five years that's going to grow to 75%. What you're seeing, is the average ARPU generally 20 or 30 higher than voice-only device, and that really is the opportunity for the industry to see that 5% revenue growth over the next four or five, at least. What's happening with the service providers is, with the very strong demand out there for wireless data, they have limited supply. And with strong demand, they have pricing power. Prices are moving to usage of data as opposed to all-you-can-eat data plans. We think that with that change, carriers are going to be able to grow revenues a little faster than most had predicted and earn higher returns on invested capital, because that drops really right down to the bottom line. As mentioned, our top picks for the year were MetroPCS and Crown Castle. PCS has been a very strong stock year to date; however, the stock is usually a bit more volatile in the summertime, and this might be an excellent time to take a position.
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