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US Tech Sector Outlook Negative for 2016; Media and Telecom Sector Outlooks Remain Stable

US Tech Sector Outlook Negative for 2016; Media and Telecom Sector Outlooks Remain Stable

Published on: 15th Dec 2015

Disruptive technology will continue to drive the transformation of legacy business models and the convergence of telecommunications, media and technology services in 2016, according to Fitch Ratings’ new outlook report for the sector. Fitch expects both opportunities and threats to the operating profiles of market participants from the acceleration of time shifted on demand consumption of video services, the potential impact of spectrum auctions and the ongoing disruptive effects related to the secular shift to cloud based technologies.

Fitch’s outlook for the technology sector is negative, reflecting slowing growth and the soft end-market demand profile within the sector. This combines with the accelerating transition to cloud based technologies, which will continue pressuring revenue growth prospects of companies with significant exposure to legacy technologies. Fitch also believes the rapid pace of cloud adoption may weaken long-term recurring revenue models and FCF profiles.

Event risks will be elevated during 2016, particularly within the technology sector as Fitch anticipates M&A activity to focus on enhancing revenue growth prospects and strengthening cloud-based technology capabilities. Fitch believes these transactions will be largely debt financed resulting in weaker credit profiles. Additionally activist investor related event risk remains relevant during 2016 due to revenue headwinds and elevated cash balances.

Fitch expects regulators to approve the Charter and TWC/Bright House transactions but does not believe the regulatory climate will support further meaningful consolidation in the sector over the medium term, although DISH Network may prove a wild card. Additionally the appeal of the FCC’s February 2015 order applying utility-like, Title II regulations to the Internet is likely to be resolved during 2016.

The FCC’s 600 MHz TV broadcast spectrum auction is slated to start in March 2016 via a complex auction process. This low-band spectrum has the potential to be highly valued as its favorable propagation characteristics make it well-suited to enhance and expand high-speed data coverage in suburban and rural markets. Fitch estimates total spending by current operators and new participants could be in the mid-$30 billion to high-$40 billion range.

Tags: USA 

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