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Moody’s Lowers Telecom Outlook to ‘Negative’

Credit rating agency Moody’s Investor’s Service has downgraded its outlook for the U.S. telecommunications industry to “negative” from “stable,” adding that growing price competition for wireless services and the looming entrance of cable operators into the market could reduce revenue over the next 12-to-18 months.

"Although conditions in the wireless market have been deteriorating for the past couple of years, EBITDA growth and lower capital spending resulted in strong cash flows in 2015 and 2016," says Moody's VP-Senior Credit Officer, Mark Stodden in the report. "We see this trend reversing in response to competitive pressures, with Verizon and AT&T now responding more deliberately, particularly to T-Mobile's relentless marketing and expanding market share."

Stodden cited unlimited wireless data offerings from major carriers like Verizon, Sprint T-Mobile and AT&T Wireless as evidence that they have lost their past reluctance to compete on price and are willing to absorb small losses of market share.   

As a result Moody's expects 7% growth in capital investment to fund network traffic volumes this year, while increased promotional activity should keep profit margins under pressure.  Aggregate industry EBITDA less capital expenditure is therefore expected to fall by 2% in 2017, and to be flat in 2018.

M&A activity could help alleviate competitive pressures on the sector, but Moody’s warns that among the possible combinations, only Sprint and T-Mobile would reduce competitive pressure. Other potential deals would only exacerbate the problem, according to Moody’s as would the entrance of cable operators such as Comcast and Charter Communications into the wireless market.

Comcast has targeted a mid-year date for the introduction of its wireless offering, which chairman and CEO Brian Roberts said recently not only should be profitable but save customers money, too.  Charter also plans a wireless product, but is not expected to launch a product until next year.