Throughout the world, we are seeing a wave of consolidation by communications network operators. It is occurring in response to an undeniably growing data deluge, a structural growth trend that has come about, in part, due to smartphones and tablets making it easier to access content on the Internet. Both the restructuring of the communications industry and the data deluge that’s prompting it provide opportunities for long-term investors.
Why does the trend even exist? As an example, a friend of mine signed up for Hulu Plus after becoming addicted to a television show. She found that she could watch all of the old episodes, even while traveling, with simply her iPad and connection to the Internet. Regardless of whether she is connected to the Internet over a Wi-Fi network or through her cellular connection, the data streamed to her iPad must go over a physical network during part of the transmission process. And these networks are filling up fast. Hulu’s top competitor, Netflix, accounts for about one-third of Internet traffic during peak evening hours, and that figure is growing.1
In my opinion, it is clear that more physical capacity is going to be needed to handle this deluge of data. This is one of the driving forces behind the wave of industry consolidation. Current players are seeking to raise their scale and profitability so they can afford the capital expenditure necessary to upgrade and expand their networks. And the regulators around the world are more likely now, than previously, to allow consolidation because they too see the need for infrastructure strengthening and expansion. This trend is so clear that it is even attracting new entrants. For instance, cities like Austin and Kansas City have permitted Google to lay high-speed fiber networks in their municipalities.
Clearly, the competitive landscape in the future is likely to look very different than it does today. Restructuring of this magnitude always opens opportunities for attentive investors. We’ve been cognizant of this transformation for some time, and have investments in the portfolio to potentially benefit from it.
1. Sandvine Incorporated (2014). Global Internet Phenomena Report 1H 2014.
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