“If you build it, they will come,” was a line
immortalized in the movie “Field of Dreams.” It is also a fitting mantra for
telecommunications companies in 2020, as they launch new initiatives that they
hope will turn into leading businesses in the future. Their efforts are of interest
to the Invesco High Yield team, as the communications sector represents just
over 20% of the Bloomberg Barclays US Corporate High Yield Bond Index.1
Our team is watching five key areas of opportunity in the sector in the coming
1. Viewer demand creates a rising tide of streaming services
Global streaming subscriptions, which allow consumers to
watch videos via the internet, eclipsed cable TV subscriptions for the
first-time in 2018.2 Today, 70% of households in the US subscribe to
at least one streaming service, with the average subscriber using 3.4 services.3
This creates strong demand for content. Almost 500 scripted original shows are
being produced today, 50% more than five years ago.4 Growing
connectivity options, mobile access, and launch of additional streaming
services will likely remain a tailwind for internet video adoption over the
next few years.
point: Competition among content providers, the so-called
“streaming wars,” will likely pressure profits in the short term. Even as
spending on content increases, there is limited room to increase subscription
fees as companies seek to attract and retain a critical subscriber base.
view: We think independent content owners can benefit from
streaming demand by partnering or selling themselves outright to technology or
media companies seeking to scale up their content libraries. New systems that
“bundle” streaming services may be an opportunity for cable or technology
platforms to simplify customer access, content search, and billing.
2. Cable companies combat ‘cord cutting’ through faster broadband
A growing number of consumers “cut the cord” on their
cable TV services in 2019, leading to a 6% decline in cable subscribers (versus
about a 3% decline in recent years.5 The primary driver has been the
rise in streaming services discussed above. The knee-jerk reaction would be to
stamp cable as the obvious loser. On the contrary, we believe that growth in broadband
use by cable customers more than makes up for this loss.
Key point:Cable companies offer broadband speeds
that are a huge advantage over their competitors. We believe this should allow
cable companies to continue expanding their current market share. In fact, given
that a majority of cable profit is generated via the high-speed connectivity business,
the growth in streaming services is great news for cable, in our view.
Cable remains at the core of household connectivity and is often the most
economical option for broadband services, as data demand grows both from a
volume and speed standpoint. While 5G poses a threat in the long run as an
alternative connectivity solution, we think cable remains well insulated over
the next few years due to the complexity and cost of a complete 5G rollout,
which may take several years to achieve national coverage.
3. The US continues to push for a quick 5G rollout
The US government believes that leading other nations in
5G network deployment is critical due to intellectual property concerns, which
is why 5G was declared a national security agenda in 2017. We believe the key
differentiator for wireless companies going forward will be their access to the
lifeblood of the network – spectrum. Spectrum refers to the airwaves necessary
to carry wireless signals across the landscape.
Not all spectrum is created equal. Spectrum comes in three primary types: high,
mid, and low band. High band is like a home wi-fi connection – it’s strong
enough to stream a high definition movie but ineffective as soon as you walk
out the front door of your home. Low band is like a car radio signal — it has
low data transmission demands, but a station can be heard over long
distances. Mid band sits in the middle
and is probably the most critical of all three bands due to its balanced blend
of signal transmission strength and distance.
view: Government actions and incentives are difficult to predict,
but if the US wishes to maintain its lead in 5G deployment, we believe it will
need to make enough spectrum available to carriers in a reasonable amount of
time. This should continue to push up spectrum values and benefit companies with
an advantage in their spectrum position versus peers.
4. An audio renaissance may be underway
With so much focus on internet streaming (both audio and
video), many market participants have forgotten about radio. The recent
problems facing radio companies have centered on their debt loads, not
necessarily the sustainability of their business models. With broadcast companies
having emerged from bankruptcies in the last two years, radio presents an atypical
opportunity, in our view. We believe new growth areas such as podcasting, layered
with the traditional political advertising boost in an election year, bode well
for their earnings profile in 2020.
Key point:Over the last three years, radio
listening has remained steady in terms of the overall media share and the percentage
of consumed audio.6 A key growth area has been digital, which is
mainly driven by podcasting.
view: Satiated by video options, consumers may begin to look
deeper into audio, especially podcasting. Radio has a natural attraction to
niche audiences due to its focus on local markets for talk, news, and sports.
At the end of the day, there are only so many hours one can dedicate to watching
a screen, so audio has an opportunity to fill the hours during commutes, daily
runs, and routine tasks.
5. Mergers and acquisitions fever looks poised to heat up
Every year we expect a healthy amount of M&A activity
in the telecom sector, and this coming year should not be any different. Scale
matters, and companies today have an opportunity to undertake transformational
Key point:Management teams are paying attention
to a major pending wireless merger. If approved, it would set the tone for a
horizontal merger, which supports consolidation as both companies provide
similar services. We saw a vertical merger stand in court last year (i.e., the
companies operated in different aspects of the industry). That may provide enough
precedent to incentivize combinations that would not have been likely previously.
view: Telecom continues to converge where a single provider ultimately
services mobile, home broadband, phone and video solutions. While the merits of
vertical integration (where a distributor also owns content) can be debated, we
think the future stakes revolve around controlling connectivity. We believe
this makes sense in a world that is becoming increasingly dependent on “anytime”
data access, regardless of location.
1 As of Jan. 9, 2020
2 Source: MPAA Theme Report, March 2019
3 Source: nScreenMedia, March 2019
4 Source: FX Networks research, December 2018
5 Source: Company reports through third quarter 2019
6 Source: Nielsen Total Audience Report (Q3 2019)
image: Maahoo Studio/Stocksy
investments are subject to credit risk of the issuer and the effects of
changing interest rates. Interest rate risk refers to the risk that bond prices
generally fall as interest rates rise and vice versa. An issuer may be unable
to meet interest and/or principal payments, thereby causing its instruments to
decrease in value and lowering the issuer’s credit rating.
involve a greater risk of default or price changes due to changes in the
issuer’s credit quality. The values of junk bonds fluctuate more than those of
high quality bonds and can decline significantly over short time periods.
Barclays US Corporate High Yield Index measures the USD-denominated, high
yield, fixed-rate corporate bond market. Securities are classified as high
yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or
referenced above are those of the author as of Jan. 16, 2020. These comments should not
be construed as recommendations, but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve
risks, uncertainties and assumptions; there can be no assurance that actual
results will not differ materially from expectations.