“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 year:
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.
Key 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.
Our 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.
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.
Key point: 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.
Our 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.
Our 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 deals.
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.
Our 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)
Blog header image: Maahoo Studio/Stocksy
Fixed income 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.
Junk bonds 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.
The Bloomberg 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 below.
The opinions 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.