Superstorm Sandy tests consolidating telecom sector

Carriers demonstrate resilience despite damage to key infrastructure.

By TheStreet Staff Oct 31, 2012 2:26PM

TheStreet.com logoBusinessman in car with smartphone copyright Image Source, Image Source, Getty ImagesBy Antoine Gara

 

As New York City begins to recover from widespread flooding and power outages, Superstorm Sandy may prove to be a pivotal test of the fast consolidating U.S. telecom sector.

 

As of Wednesday morning, Sandy is reported to have hit the infrastructure of the nation's largest carriers. According to Reuters, the nation's leading carrier, Verizon (VZ), may have suffered the worst damage after flooding and power outages hit its offices in Lower Manhattan, Queens and Long Island.

 

Competitor AT&T (T) is also reported to have been impacted, in addition to recently acquired Sprint (S) and industry fourth player T-Mobile, which announced a merger with MetroPCS (PCS) earlier in October.

 

According to industry analysts, Sandy may have an immediate economic impact on the nation's largest carriers. The industry was already bracing for a pivotal six-to-12 months earnings test as consolidation impacts wireless service pricing and investors get more data on the interplay between profit margins and Apple (AAPL) iPhone 5 subsidies.

 

Sandy may also delay plans of some carriers to bolster the capacity of their networks as consumers flock to high-data-use smartphones like the iPhone, Google (GOOG)-Android powered devices and Microsoft's (MSFT) recently launched Windows 8 ecosystem.

 

Late on Tuesday, Evercore Partners telecom analyst Jonathan Schildkraut put out initial calculations on the impact of Sandy, highlighting key earnings and service scenarios. 

 

"While it's still too early to determine how much the storm could impact the carriers financially, we do look at last year's storm, Irene, as a guide. Irene (in addition to Tropical Storm Leo) -- which notably impacted Verizon's total footprint -- led to roughly a 5-cent impact to 2011 EPS and slower FiOS customer growth in [the third quarter of 2011]. For 4Q12, we believe Sandy could have ramifications for VZ's FiOS net add guidance of 150-170 per quarter and 4Q EPS," wrote Schildkraut.

 

The analyst also sees a potential impact on Sprint, as it tries to use $8 billion in new capital from its acquisition by Japan's Softbank to bolster its network and draw closer to industry leaders in smartphone service. Notably, the company may see a slowing in its multiyear, multibillion dollar Network Vision service upgrade.

 

"[For Sprint], we believe the storm could insert further delays into the company's already pushed-out network vision plans (12,000 cell sites by the end of 1Q13)," wrote Schildkraut.

 

While cellular and data service has been slowed by Sandy, the storm is also likely to prove big gains made by carriers. Few areas are reporting complete outages as happened during the terrorist attacks on Sept. 11, 2001, signaling that networks have gained resilience. Amid widespread power outages, relatively steady smartphone service has been a crucial aid to many.

 

Still, the impact of Sandy will test test overall communications infrastructure in the mid-Atlantic and Northeast. TheStreet reported that FCC Chairman Julius Genachowski says Sandy has affected 25% of all cellular phone service, from major cell providers, in more than 150 East Coast counties. Broadband internet and cable providers like Time Warner Cable (TWC) and Cablevision (CVC) have also reported outages.

 

Outside of Sandy, recent earnings give telecom investors a mixed picture heading into the final quarter of 2012. AT&T's (T) generally mixed earnings released earlier in October gave new life to bearish predictions for the telecom sector amid an industry profit surge.

 

AT&T earnings confirmed some fears that surging demand for Apple devices -- namely the iPhone 5 -- may yet hit wireless earnings in spite of far stronger-than-expected third-quarter earnings posted by Verizon, also in October.

 

After Verizon's report, some skeptics on the iPhone 5's impact on wireless profits retreated from that bearish analysis. On the heels of AT&T's earnings, however, negativity on the direction of industry profitability is resurfacing

 

Notably, industry bear Craig Moffett of Bernstein Research saw AT&T's earnings as reason to believe a looming surge in smartphone upgrades may hit overall sector carrier profits, which have been steadily rising in the past year.

 

"Handset life remains perhaps the fundamental question facing telecom investors. If handset life is not sustainably extending... then recent declines in subsidies will reverse, and margins will come back down. We continue to believe this is a question of when, not if," wrote Moffett, in an October note to clients.

 

At issue is whether the carriers can use new smartphone launches to profitably steer users onto their networks. On one hand, carriers pay in the range of $500 a phone in subsidies to handset makers like Apple to lure in customers -- or to meet the terms of upgrade schedules -- in a relationship that can cost big money. Over the long term, carriers expect to make their money back on subsidized handsets by way of the monthly cost of wireless contracts, and in particular, the tiered pricing of smartphone data usage.

 

Moffett also highlighted a fast consolidating U.S. market that may increase competition on wireless leaders like AT&T and Verizon, who offer tiered-pricing smartphone data plans.

 

"With SoftBank's cash infusion into Sprint and T-Mobile's merger with MetroPCS and both companies apparently intent on using price as a key weapon in their fight for market share; it is hard to imagine that the market will not deteriorate for Verizon in the longer term," the analyst wrote.

 

For now, telecom investors await the impact from Hurricane Sandy on overall sector earnings. As telecoms deal with repairs and a big recovery effort, key themes for the industry such as handset subsidies and the impact of consolidation will loom large.

 

 

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