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Rapid technological advancement is gradually redefining the parameters of the telecommunications, cable TV and media industries. The market landscape is fast changing, as these industries are systematically converging. Will 2018 witness more mergers and acquisitions between telecom, cable TV and media companies?

The legacy local and long-distance wireline phone services have largely been replaced by wireless services. This in turn has resulted in massive deployment of airwaves and optic fiber-based networks. Now, Internet TV and online TV streaming services are replacing legacy TV viewing. This has resulted in the merger of content creation and distribution. Emergence of digital media and robust growth of digital advertisement are major catalysts to the coming together of the three industries.

Here we will briefly discuss a few factors leading to the convergence of the telecom, cable TV and media industries.

Technological Advancement

The major thrust to the broader telecom sector is coming from the industry as a result of continuous network and product upgrade, and inventions by industry players. Robust growth of smartphone and tablets along with continuous development of high-speed data-transfer technologies has acted as a key driver of the convergence.

A growing economy speeds up the demand for real-time voice, data and video manifold. Given that cord-cutting is affecting the cable TV industry, it has now become more essential for media companies to join telecom giants.

Industry Overlapping

Wireless networks are key to the growth of the overall telecom industry. Wireless network standards are continuously evolving worldwide in order to provide faster speed. As wireless networks run on radio frequency, spectrums (airwaves) have become the most sought-after commodity in the industry.

Powered with their strong WiFi network, cable TV operators are gradually entering the wireless field through MVNO (mobile virtual network operator) agreements with incumbent carriers. On the other hand, major telecom operators are entering the pay-TV industry, especially through Internet TV and online TV streaming services.

At the same time, cable TV and telecom giants are foraying into the media industry with big ticket acquisitions. Comcast became a media mogul after acquiring NBC Universal in 2011. AT&T is currently awaiting the regulatory approval for its proposed $85.4 billion cash-and-stock deal to acquire media giant Time Warner Inc. Verizon may also follow suit. It has already acquired AOL and the core businesses of Yahoo.

Mobile Video Business: Gains Ground

Internet TV is gaining a strong foothold in the United States and has emerged as a strong alternative to counter this competitive threat. Presently, the web-based digital media market is growing by leaps and bounds. Digital media brands are becoming immensely popular with the younger generation. With demand for smartphones and tablets on the rise, target customers are increasingly watching videos online, and preferring them over costlier legacy pay- TV connections.

Moreover, an increasing number of customers are using the Internet to watch videos and they want mobility of their content. This has given wireless operators an opportunity to differentiate their products by offering access to select content through their networks. By making deals directly with content developers, wireless carriers are trying to draw customers with - bundles - of content such as streaming entertainment or sporting events, possibly with no additional data charges.

Online Digital Advertisement: Solid Prospects

Advertisement on the mobile video platform is gradually shifting from simple selling of banner ads on the mobile web to automated or programmatic ad selling. Pay- TV operators are steadily adopting the data-driven advertising technique that has already become popular in the web-based advertisement arena. To derive maximum synergy from the combined video content and video distribution platform, these companies are aggressively penetrating the advertising technology market. Inclusions of dynamic ad-insertion, targeted audience advertising and data-driven TV advertisements are steps toward the same objective.

Quad Play:  Future Growth Path

Technologically, we are moving from triple-play (voice-video-data) bundled services offering to quad play (voice-video-data-mobile) bundled offering.  Video-on-demand is the new norm for telecom, cable TV and media industries. Technological changes have enabled distributors to come up with different ways of bundling and disseminating content, effective content creation methods and creating new business models. Companies are innovating newer options to push discovery of their content to consumers or help them discover it to get a competitive edge.

It is to be noted that, exponential growth of mobile data usage supported by flourishing high-end smartphone and tablet devices has changed the entire dynamics of the traditional telecom and cable TV industry. Therefore, mergers between telecom or cable TV operators with media giants have become crucial as both the industries are aggressively delivering content on online digital platform.

Repeal of Broadband Privacy Rule

On Apr 3, 2017, President Donald Trump signed a repeal of Obama-era broadband privacy rules. This has given a major boost to the ISP (Internet Service Provider) industry. The broadband privacy rules proposed by former FCC Chairman Tom Wheeler required ISPs to get consumers' explicit consent before selling or sharing web browsing data and other private information with advertisers and other companies. Since ISPs have direct access to user database, they used to sell the data to digital marketing firms for targeted advertising. This was a major source of revenues for the ISPs.

The digital advertisement market is growing exponentially and ISPs have been increasingly investing resources to cash in on bountiful opportunities. However, the FCC's previous directive stipulated that the ISP should notify customers before sharing any user data for advertising. This would have marred ISP prospects. Consequently, a new FCC body, headed by Ajit Pai, exercising lesser restrictions, certainly augurs well for the ISP industry.

Stocks in Focus

We focus on four companies with strong long-term growth potential as these are poised to benefit the most from the shift in industry dynamics toward a converged telecom-cable TV-media space. Each of this stocks carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Verizon Communications Inc. VZ : The largest wireless operator in the United States has started conducting field trials for its upcoming 5G wireless network with partners. Verizon is planning to merge its Internet video service, Go 90, into other digital platforms. At present, almost 15% of Go90's content is distributed to AOL Video.

In fact, the company has begun to distributing Go90 content across some of its Oath brands. Oath is Verizon's new company overseeing Yahoo and AOL, including more than 20 brands. Verizon has a long-term (three-five years) EPS (earnings per share) growth estimate of 2.82% and a dividend yield of 5.26%.

AT&T Inc. T : The second largest wireless operator has also emerged a major pay-TV operator after its acquisition of DIRECTV offering both legacy satellite TV, fiber-based TV and online TV streaming services. At present, AT&T is awaiting the regulatory approval of its $85.4 billion mega media merger with Time Warner Inc.

The company has strong foothold in Mexico, Brazil and a few other Latin American markets. AT&T has a long-term (three-five years) EPS growth estimate of 4.24% and a dividend yield of 5.73%.

Comcast Corp. CMCSA : The largest cable MSO (multi-service operator) in the United States entered the wireless arena in mid-2017. The foray into the wireless space will enable the company to have a platform for expanding its Internet TV service. The wireless venture is also aimed at retaining customers in this competitive world.

Moreover, the NBC Universal media division of the company is performing well. Comcast has a long-term (three-five years) EPS growth estimate of 9.39% and a dividend yield of 1.71%.

DISH Network Corp. DISH : The second largest satellite TV operator has created an extensive portfolio of spectrum, the most important component of wireless networks. The company boasts a portfolio of 80 MHz of radio frequencies of different bands which will be utilized to deploy 4G LTE wireless network in top 100 U.S. markets.

DISH Network's CEO Charlie Ergen has hinted that the company is interested in the potential deal-making to enter the wireless industry. At the same time, Ergen also stated that DISH Network has a clear plan of building a wireless network on its own. DISH Network has a long-term (three-five years) EPS growth estimate of 10.33%.

Bottom Line

Business models and the economics of the telecom, cable TV and industries are changing. Content creators and distributors are trying their best to judge the mood of the consumers to derive how to make content and advertisements more personalized. Advertisement on the mobile video platform is gradually shifting from simple selling of banner ads on the mobile web to automated or programmatic ad selling. All these forces are moving towards telecom-cable TV-media convergence.

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