20 Jul

Rise in Spectrum Sales Has Positive Effect on Telecom Stocks

WRITTEN BY Aditya Raghunath

Strong spectrum demand

Wireless networks are essential for the future growth of telecom stocks. Wireless networks are one of the most sought after commodities in the market, since they run on radio frequency as well as spectrums.

The FCC (Federal Communications Commission) recently conducted a spectrum auction of Advanced Wireless Services that raised $44.9 billion for the FCC. The auction value for the same spectrum was $19.6 billion in 2008.

Rise in Spectrum Sales Has Positive Effect on Telecom Stocks

In 2016, the FCC is planning to conduct a broadcast incentive auction in order to ease pressures faced by wireless operators. This will ensure uninterrupted transmission of data as well as voice packets. The high auction amount of $44.9 billion indicates that companies in the telecom sector believe that future demand for mobile data and video services will see an upward trend.

To gain a competitive edge as well as increase market share and offer better speed, spectrum license holders globally are expected to upgrade their networks. This will directly increase their capex (capital expenditure) and demand for telecom infrastructure gears.

Telecom companies focus on inorganic growth

The US telecom industry has developed into a sector in which competition is intense and technically superior companies are dominating market share. Existing players thus need to continuously introduce innovative products that cater to overall market demands.

The US telecom industry has seen a surge in mergers and acquisitions in spite of strict regulations imposed by the FCC to check monopolistic practices.

In 2014, Verizon Communications (VZ) acquired a 45% stake in Verizon Wireless from Vodafone (VOD). It was a deal worth $130 billion, making it the largest acquisition in this industry. On June 23, 2015, Verizon completed the acquisition of AOL (AOL) in a $4.4 billion deal to diversify business into mobile content creation as well as the online advertising segment.

Earlier this year, Comcast (CMCSA) withdrew its $45.2 billion merger deal with Time Warner Cable (TWC) due to strong reservations by the FCC and the U.S. Department of Justice.

Verizon constitutes 4.81% of the Technology Select Sector SPDR ETF (XLK).

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