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Written by Chuck Roming
on 04 Sep 2017

The telecommunications industry has conventionally focused on organic growth and expanding their customer base. That, however, is set to change. With mobile penetration reaching saturation levels, companies across the board are being forced to develop new, diversified growth strategies and look towards inorganic expansion.

A number of factors are converging to disrupt the telecom sector in the U.S. These include:

  • Saturating penetration rates
  • Migration to 5G
  • A policy shift under the Trump administration that could further open the door for telecom mergers and acquisitions

Mobile Growth at the End of the Road?

Mobile phone penetration is quickly reaching a saturation point in mature markets such as the U.S. In 2016, nearly 81% of the population-260 million people-were using mobile phones.

Smartphones, with an additional revenue stream for data on top of calls and texts, have stormed the market in recent years. In fact, smartphones surpassed 80% of mobile phone users in the U.S. during 2016, and has already crossed 81% this year.

So, how can telecommunications companies handle this level of adoption in mature markets?

The answer lies in forging alliances with telecom companies in emerging markets, leading to a spate of telecom mergers and acquisitions activity across borders-especially over the past decade. However, it is critical to note here that even within emerging markets, subscriber growth is slowing, leaving telecoms to come up with new strategies for business growth.

 

Big Bucks in Store for Infrastructure Upgrades

Telecoms are set to receive a massive capital influx towards upgrading networks from 4G to 5G. There is also a push to invest in developing faster, more robust networks that can bear the load of an expected explosion in the number of connected machines from the Internet of Things (IoT) and smart devices.

According to Deloitte's 2017 Telecommunications Outlook, focus on telecom capital allocation will continue to be the key challenge for the year. The report suggests that carriers will need to upgrade their core connectivity infrastructure, which, given the shift to fifth generation (5G) mobile networks, may run into billions of dollars. They will also require significant capital resources to fund areas such as IoT, autonomous vehicles, industry verticals, M&A, and global expansion plans.

A Gartner estimate forecasts that there will be 8.4 billion connected "things" in 2017, including smartphones, computers (up by 31% from 2016), and wearable technology. By 2020, there will be nearly 20.5 billion "things" on the network. While a proportion of these will use Wi-Fi, mobile networks will have a huge role to play in our new, connected world.

 

M&As to Push an Era of New Growth

Funding this kind of technological disruption on newer, faster networks, while the user base growth declines, is not going to be easy for the telecom sector. This is the primary reason why an increasing number of companies are looking at media and content firms, and other diversified verticals as possible M&A targets.

The policy environment too is becoming more commensurate to growth. The new Chairman of the Federal Communications Commission (FCC), Ajit Pai, has often highlighted the need to maintain a lighter hold on the industry and proved it with the decision of not pursuing a full FCC review of the AT&T/Time Warner merger. Pai believes that there is a need to revamp obsolete regulations and focus on rules that promote growth and infrastructure investment; rules that expand high-speed Internet access everywhere and give Americans more choice, faster speeds, and more innovation.

The need for cash resources to fund major investments at a time when subscriber growth is slowing is forcing the telecom industry to look in new places for revenue. Add to that a lighter hand on industry regulations, and the sector is looking at a perfect confluence of events that will push M&A activities to a new level.

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