Watch Out for This Major Technology Upgrade

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The smartphone industry is one of the most followed industries of the technology sector. There are a number of companies in this sector that have given investors mammoth returns in the last few years. On the other hand, the telecom industry is more known for its steady growth and dividend play. Although this perception holds true for the most part, there is a new upgrade cycle that can induce some serious capital appreciation in selected telecom stocks.

The rise of the smartphone has had a major impact on both smartphone and telecom industries. The applications such as Viber, Whatsap etc. reduce the utility of regular phone calls and increase data requirements. It will not be long before consumers would only need a data connection to complete their phone experience. This increased demand of data is directly linked to the growth of smartphones. I believe there are a number of companies which will greatly benefit from this data demand and investors can earn a lot by investing in this trend.

China Mobile (NYSE: CHL) and Sprint (NYSE: S) can greatly benefit from the rise in data demand and the shift to LTE. Sprint has the competitive advantage due to its LTE offerings whereas China Mobile will benefit from the high smartphone growth in the Chinese market. Nokia (NYSE: NOK) is another important player in this market. The company has the ability to provide quality branded smartphones at low price points and it will greatly benefit from the growth in smartphone globally and especially in China.

Smartphone Growth

According to research by Credit Suisse, the smartphone market has the potential to reach a 2.35 billion user base. This number has been calculated on the basis of affordability, among other factors. Smartphone sales estimates for 2012 are around 670 million, which reflects a penetration of around 30%. This growth in smartphones would be the key in driving data demand. The following two factors would be crucial in driving demand of data:

i)              China

The industry is expecting a major chunk of future smartphone growth to come from China. The adoption of iPhone 5 by China Mobile will give a significant boost to iPhone sales and will also result in more data demand. A recent study by Boston Consulting Group (BCG) forecasted that consumer spending in China would triple by 2013. This would mean that there would be continued demand for high power and low power smartphones. This consumer spending would result in more focus on data demand and the carriers which offer 4GLTE will see growth in subscriber base.

ii)           Low price smartphones

The second biggest factor with regards to the expansion of the smartphone industry is the availability of low price products. The current trend indicates that the industry is moving towards almost 100% penetration of smartphones. The first step to that eventuality is low priced options for consumers living in emerging markets. Nokia’s Asha series and low end Lumia products are already available to consumers who want a smartphone experience in a feature phone price. I believe the demand for these products will sky rocket pretty soon especially in Asia Pacific, China and India.

4G LTE (Long Term Evolution)

This increased data demand would give an edge to carriers offering 4G LTE. The increased data requirements due to improved smartphone processing power should drive LTE demand and also places carriers without LTE at a major competitive disadvantage. The industry is expecting 4G licenses to be issued in China during the second half of 2013 and China Mobile can greatly benefit from this cycle. The high penetration of smartphones combined with a rising consumer spending would be instrumental in driving revenues of China Mobile from its data offerings.

US carriers are also migrating to LTE and it is only a matter of time before LTE completely engulfs the market. Sprint and T-Mobile are among the largest 4G network operators in the US. Sprint has a clear lead on its local competitors in this regard with the best 4G network on offer. The company will greatly benefit from increasing data demand and also enjoys the first mover advantage.


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