Lately, the cellular operators in the United States have made acquisitions outside their core activities. Why is this? The key reason is that cellular services are a maturing market. Yet free cash flow is still high, providing funds to finance acquisitions.
Over the past 18 years, cellular service provision was the 3rd fastest growing of 400 industries in the U.S. Between 1998 and 2007, it grew around 19% per year. Since 2007, however, annual volume growth has averaged 8%, dipping as low as 5% in 2009 and 2013.
8% annual volume growth would be attractive if prices were stable. However, the price decline is the 6th steepest among the 400 industries. They declined by 3.5% per year over the 18 year period.
Combining volume with price, revenue is now growing only slightly faster than the overall economy.
Yet, cash flow is still strong—$10-20 billion each for the two largest players. This cannot last forever though, if current trends continue.
The strategic question thus becomes: are there ways to wisely invest the cash in related activities, or should it be returned to shareholders?
The answer appears to be that there are still investment opportunities through acquisitions. Just like Comcast acquired NBCUniversal to get content for its cable distribution platform, cellular operators are exploring similar opportunities. The start was Verizon’s acquisition of AOL. We can expect more such deals in media and other services close to cellular services. An added benefit is that those services have only moderate growth correlation with cellular services which likely will reduce earnings volatility.
In fact, we see the cellular (and cable) operators as strategically intent on building what we call penta-play portfolios.
With such strategies, the operators are likely to sustain continued growth. For those who do not diversify in this related fashion, we predict their slow disappearance.