"At Calamos Investments, we see a fascinating story behind this wireless market as well as compelling investment opportunities. Our process favors companies that we feel will benefit from long-term investment themes."
Wireless communication has become the most available form of voice communication worldwide thanks to the swift global rollout during the past decade of wireless telecommunications services. While developed countries were the first to adopt wireless telecom and establish high penetration rates, emerging countries have grown at a faster rate and have lower market penetration. We feel the next stage of wireless services growth will start in developed countries and focus on high-speed data communication, which will allow a global exchange of information and knowledge at low cost. These changes could benefit emerging economies as they look to increase their competitiveness, productivity and the standard of living of their citizens. At Calamos Investments, we seek to find the best investment opportunities that could benefit from these trends by seeking companies that we feel can generate high returns on capital, have financial flexibility, and are valued attractively with favorable risk and reward profiles.
In 2006, global wireless telephone penetration was 41%; more than double the 19.4% fixed telephone penetration rate and 17.4% Internet penetration rate. Today, we estimate that almost half of the world's population, or 3.3 billion people, are wireless subscribers, representing a 22% annual increase. Wireless service was once a luxury service in developed countries. There are about 2.5 times more wireless subscribers in developing countries than in developed countries. In 2007, we estimate more than $700 billion was spent on wireless services and approximately 1.15 billion wireless phones were purchased. Over the last seven years, developed country wireless penetration rates have increased from 50% to more than 90%. This increase has been driven by increases in service quality and coverage, decreases in handset and service prices (due to manufacturing and operational efficiencies), and the introduction of high-speed data services.
In developed countries, the wireless phone has become a viable alternative to a fixed wireline phone and many customers have dropped their fixed phones and chosen to only own a wireless phone. Wireless communication is enabling more personalization. Typically one wireline phone services one household with several people. Wireless networks now allow everyone in that household to have a personal phone at an incremental low cost. Some business people actually carry more than one wireless device by adding personal phones to their business phones. The wireless market includes age groups starting at the teenage level. Also, most economic classes are participating as the rise of prepaid phone service has given access to those with poor credit.
"Our process favors companies that we feel will benefit from long-term investment themes. In the case of wireless telecommunications, we see several themes that support the continued growth of this market."
Over the past several years, developed countries have built out high-speed data networks that are rapidly changing the capabilities of wireless devices. Early wireless data service was slow and focused on small-bandwidth needs. Business customers utilized these slower networks for corporate e-mail while consumers used it primarily for text messaging. With the rollout of high-speed networks, the capabilities have greatly expanded and now include Internet access, consumer e-mail, music and video. Not only have the data networks improved, but so have the wireless devices. High-end smartphones are the fastest selling segment in developed markets. These smartphones not only allow users to take advantage of the faster data network but also include technologies such as GPS navigation, wireless payment systems, word processing and spreadsheet programs, and improved cameras. These wireless devices are starting to rival computers in terms of functionality. Convergence of media and communication is blurring the lines between different consumer electronic devices and services. To realize this convergence, bundling of media and communication services (TV, fixed data, fixed phone and wireless) is occurring. The combination of more powerful devices and services is improving productivity levels both in professional and personal worlds.
We see the emerging markets following the same general adoption pattern of the developed countries, but there are several differences. Currently, developing economies, which have a lower penetration rate than developed economies (32% versus 91%), are experiencing faster growth and have a lower level of data services. It is interesting to note that wireless growth in these countries is faster than wireline growth as it is often more cost effective to setup a wireless network than a wireline network. The potential for productivity gains from developing market wireless adoption could be high because these phones may be the first easily-available access to voice telecommunication in these areas. People are able to start or expand their current businesses and are better able to communicate with family and friends. With the expansion of data networks, people will be able to access vast amounts of information that was previously difficult to obtain.
At Calamos Investments, we see a fascinating story behind this wireless market as well as compelling investment opportunities. Our process favors companies that we feel will benefit from long-term investment themes. In the case of wireless telecommunications, we see several themes that support the continued growth of this market. People want access to everything, anywhere, anytime, the world is starved for entertainment and information, technology enhances productivity, and the global marketplace and global competition continue to emerge. The long-term trends are bolstered by short-term trends of increasing high-speed data spending and convergence in developed countries. Developing countries likely will continue to see increasing penetration rates and increased usage with data penetration to follow.
There are many different types of companies that can benefit from this market opportunity. While wireless service providers are the most obvious beneficiaries of these trends, there are manufacturers of wireless infrastructure equipment and handsets. Software companies develop programs to manage the infrastructure and run the handsets. Media and advertising companies could also benefit as their content is distributed through these new channels.
Although these companies have different business models and different levels of industry competition, Calamos Investments uses a common framework for assessing and valuing these companies. Our process favors companies that we see as generating high and improving returns on capital, have strong brands and value-added product/services, reinvest back into their business to remain competitive, and have experienced management and the financial flexibility to appropriately respond to this rapidly changing environment. These factors help us to determine the inputs to our economic profit model, which provides a business valuation estimate and scenarios to assess the risks and rewards. The primary drivers of the model are return on capital, capital growth and risk expectations, which we believe are the determinants of business valuation. We assess all securities of the company to determine which meet the risk and reward targets for our different strategies. This rigorous process will narrow this wide field of investment opportunities to those that we believe provide the best risk and reward.
Two examples of companies that fit this process are America Movil and Nokia. America Movil is the leading wireless service provider in Latin America with over 153 million subscribers, a 23% increase from the prior year. Operating margins improved in 2007 with improved fixed cost leverage and returns on capital are high at more than 30%. The company has opportunity to further grow its subscriber base through increased wireless penetration in these developing markets, as it currently has only a 20% share of its covered population. In addition, the company is just starting to roll out its highspeed data service. Nokia is the world's largest manufacturer of wireless devices with an estimated 38% market share and 26% unit growth in 2007. The company's strong brand, highly productive research and development program, and efficient manufacturing and distribution systems generate returns on capital that are above 30%. The company services the entire spectrum of products allowing them to benefit from growth in both the developed and developing economies.
Although we focused on numerous positive growth drivers of the wireless telecom industry in this article, there are also risks to wireless growth and the return potential of these companies. Increased competitiveness, price wars, an economic downturn, over-investment in infrastructure, and product cycle risk are but a few. Our investment process seeks to assess and manage these risks while seeking to generate superior returns.
Biography
John Hillenbrand, CPA, Senior Vice President, Strategy/Sector Analyst, is a member of the Calamos Investment Team since 2002 with 16 years of investment experience. He is responsible for researching companies in the consumer discretionary and telecom services sectors and for evaluating portfolio strategies and investment opportunities. John is a graduate of Loyola University of Chicago. He earned his MBA with a concentration in Analytic Finance from the University Of Chicago Graduate School Of Business.