Eyeing Specialty Contractors As Microsoft Addresses The Rural Broadband Problem – Forbes

Trainee engineers from BT Openreach, a unit of BT Group Plc, carry out work at the top of telegraph poles at the company’s training facility at West Hanningfield, U.K., on Thursday, Jan. 19, 2017. The U.K.’s communications regulator, seeking to spur a roll-out of fiber broadband to homes and businesses, is proposing changes to BT Group Plc’s network to ease access for competitors. Photographer: Chris Ratcliffe/Bloomberg

While some may grumble, there is little question that chips are becoming the new fabric in our increasingly connected lives. From how we communicate, shop, learn, consume content and transact on a multiple number of levels, we have become used to if not reliant upon being connected be it through wireline or wireless. We see this reflected in Cisco Systems’ recently updated Cisco Visual Networking Index: Forecast and Methodology, 2016–2021 that calls for global internet traffic in 2021 will be equivalent to 127 times the volume of the entire global internet in 2005. Let’s put some figures behind that – globally, internet traffic will reach 30 GB per capita by 2021, up from 10 GB per capita in 2016.

One of the largest areas of this traffic growth will be video traffic which is expected to triple between 2016 and 2021. Some quick math reveals that’s a compound annual growth rate of 26 percent between 2016-2021. Another way of looking at that boggles the mind is it would take an individual more than 5 million years to watch the amount of video that will cross global IP networks each month in 2021.

Another revelation in Cisco’s forecast is that smartphone traffic will exceed PC traffic by 2021. By 2021, smartphones are expected to account for 33 percent of total IP traffic, up from 13 percent in 2016. Such growth in mobile data consumption likely means greater capital spending on 4G LTE networks by the likes of AT&T, Verizon Communications and T-Mobile USA here in the US as well as other mobile carriers across the globe. It also bodes well for the deployment of 5G networks that offer richer data speed and network capacity. The buildout of those networks should drive revenue and profits at the companies like specialty contractors Dycom Industries and MasTec that build mobile as well as wireline networks.

When we examine investing opportunities at Tematica Research, we consider not only the tailwinds propelling developments, but also the headwinds and corresponding pain points as well. The simple fact is that there are parts of the country that are being left behind in the move to the digital lifestyle. Per data from the FCC, there are approximately 34 million people in the US that don’t have broadband internet access, which is defined as having download speeds of 25 megabits per second or better. Parsing the data, we find that roughly 23.4 million live in rural parts of the U.S.

The thing about pain points such as this is it creates an opportunity, and in this case, Microsoft, which has arguably lagged behind in mobile, but excelled in set top box software and gaming, has announced plans to help remedy the situation. Last week Microsoft President Brad Smith shared the company’s Rural Airband Initiative, which aims to connect 2 million people by 2022, starting with 12 states in the next year. As part of this initiative, Microsoft is looking to make direct investments in telecom companies as well as share in upfront capital costs with partners that would operate a broadband network based on unused TV spectrum. Interestingly enough, Microsoft would share in revenue share to recoup costs, and for the next five years intends to use those proceeds to further expand network coverage. We suspect Microsoft is looking to broaden the market for its services, software, and devices as well as keep pace with similar investments from the likes of Alphabet and Facebook.

If approved by the FCC, Microsoft’s plan would add a layer of incremental demand for specialty construction companies and potentially alleviate some of the capital spending plans by the incumbent network operators. As such, investors should be watching developments by the FCC to expand broadband access as they contemplate investments in these kinds of companies.

Chris Versace is the Chief Investment Officer of Tematica Research, co-host of the Cocktail Investing Podcast.


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