One of the most interesting changes which has occurred in the U.S. economy in recent years has been the rise of business to consumer e-commerce. From nowhere, it has blossomed into an approximately $170 billion industry with Amazon.com being the biggest e-commerce vendor. Amazon though is a well-known story to investors.
A more interesting tale may be to look at how e-commerce is completely changing the world for delivery companies like United Parcel Service (NYSE: UPS) and FedEx (NYSE: FDX). Just take a look at the numbers for UPS for example. Residential deliveries have jumped from about 20% of US volumes in 2000 to almost 40% last year.
The growth of e-commerce has been a mixed blessing for these two companies. Sales have increased as more and more consumers buy goods from e-retailers. However, due to the logistical challenges, delivering these type of packages from house-to-house is not a very profitable business especially for companies whose main business had been delivering many large packages to business customers.
Delivering small packages to individual homes squeezed profit margins at the delivery companies. The “last mile” can make up 75% of overall supply chain costs for these firms. Today executives at both UPS and FedEx admit that they have been wrestling with this problem since the early 2000s, but that finally they are getting a handle on it. And they may be right.
FedEx was the first delivery company to really come to grips with solving the problem. The solution? Dump the problem (low-value packages) onto third-parties. In 2004, FedEx acquired a company whose business was to drop off low-weight packages with the U.S. Postal Service for final delivery to individual homes.
This fits right in with FedEx's business model. A large number of packages is delivered to one site – the post office – reducing expenses. And it is a growth business. In the fourth quarter of 2011, average daily volumes at FedEx SmartPost grew 17% to 1.7 million. UPS rolled out a similar product in the U.S. and Europe last year.
Both companies have also tackled the chronic problem of missing customers at home and being forced to re-deliver packages. In October, UPS launched UPS My Choice which alerts customers before their packages arrive. This product both increased driver productivity and consumer satisfaction. FedEx has offered a similar service for several years through its Home Delivery service.
These type of innovative products may be just the beginning of a series of products developed by UPS and FedEx to improve their customers' experience. It is likely we'll see more mobile apps being used as a delivery tool soon, for instance.
Of course, one question remains with a big part of the companies' strategy. What happens when the Postal Service further reduces its services due to fiscal restraints. Piggybacking on top of the US Postal Service may not work in the long term and another solution will have to be found.
This article for originally written for the Motley Fool Blog Network. Be sure to check out all of my daily articles for the Motley Fool at http://blogs.fool.com/.
Wednesday, March 28, 2012
Thursday, March 22, 2012
The Global Battle for the Digital Wallet
The struggle to become to the digital wallet of choice for consumers around the world continues...and with good reason.
The market for digital payments made over mobile devices was forecast to be worth roughly $240 billion in 2011 and that number is expected to triple over the next five years. The expansion will be fueled by the growing number of mobile devices with NFC (near field communications) capabilities. Samsung already has the Galaxy Nexus that has NFC chips and other handset companies are expected to come out with similar devices this year.
It has been the limited number of NFC-enabled smartphones and reluctance of the part of some retailers that has held back the growth of the digital wallet. But some major retailers, such as McDonald's, have now introduced terminals that customers can use to make a payment digitally.
One of the major players in this sector is Google (Nasdaq: GOOG) with its Google Wallet. The problem for it so far is that it has only major wireless carrier as a partner – Sprint Nextel. In addition, it has an agreement with Mastercard and Citibank. The two largest wireless carriers in the United States – Verizon and AT&T – have combined forces to soon come out with their own version of Google's wallet, Isis. The two companies have partnered Isis with a number of payment technology companies and with all four of the major credit card companies.
Of course, the battle for the digital wallet extends far beyond the United States' borders. So it is interesting to note the moves that major U.S. companies like Visa (NYSE: V), the world's largest payment processor, are making overseas. Visa has already made clear that it believes the future of payments across the globe will be electronic banking services.
In a brilliant move, Visa recently announced a global partnership with one of the world's biggest mobile providers – Vodaphone Group ADR (NYSE: VOD) that will allow Vodaphone subscribers to pay for transactions using their smartphone. The mobile digital wallet service will be available in all 40 countries that Vodaphone operates in. The company has approximately 370 million customers, many of whom live in fast-growing emerging economies.
Initially, customers will have to set up a pre-paid account in order to make payments. But the goal is to soon open up the platform to other financial institutions that offer Visa cards. And in order to encourage the growth of such payments, Visa has made the transactions fees for these transactions less than for charge or debit card payments.
It is still early innings in the game to lure consumers to the digital wallet, so there is no clear leader right now. Although Visa's deal with powerhouse Vodaphone may have given them an edge globally. It may turn out that there is no real 'winner' in this sector. The only sure thing to say right now is that with so many players pushing the technology, it will should aid the wide adoption of it by consumers. As research firm Forrester forecast, by 2016 many consumers will simply leave their physical wallets at home and shop with their phones.
This article was originally written for the Motley Fool Blog network. Make sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
The market for digital payments made over mobile devices was forecast to be worth roughly $240 billion in 2011 and that number is expected to triple over the next five years. The expansion will be fueled by the growing number of mobile devices with NFC (near field communications) capabilities. Samsung already has the Galaxy Nexus that has NFC chips and other handset companies are expected to come out with similar devices this year.
It has been the limited number of NFC-enabled smartphones and reluctance of the part of some retailers that has held back the growth of the digital wallet. But some major retailers, such as McDonald's, have now introduced terminals that customers can use to make a payment digitally.
One of the major players in this sector is Google (Nasdaq: GOOG) with its Google Wallet. The problem for it so far is that it has only major wireless carrier as a partner – Sprint Nextel. In addition, it has an agreement with Mastercard and Citibank. The two largest wireless carriers in the United States – Verizon and AT&T – have combined forces to soon come out with their own version of Google's wallet, Isis. The two companies have partnered Isis with a number of payment technology companies and with all four of the major credit card companies.
Of course, the battle for the digital wallet extends far beyond the United States' borders. So it is interesting to note the moves that major U.S. companies like Visa (NYSE: V), the world's largest payment processor, are making overseas. Visa has already made clear that it believes the future of payments across the globe will be electronic banking services.
In a brilliant move, Visa recently announced a global partnership with one of the world's biggest mobile providers – Vodaphone Group ADR (NYSE: VOD) that will allow Vodaphone subscribers to pay for transactions using their smartphone. The mobile digital wallet service will be available in all 40 countries that Vodaphone operates in. The company has approximately 370 million customers, many of whom live in fast-growing emerging economies.
Initially, customers will have to set up a pre-paid account in order to make payments. But the goal is to soon open up the platform to other financial institutions that offer Visa cards. And in order to encourage the growth of such payments, Visa has made the transactions fees for these transactions less than for charge or debit card payments.
It is still early innings in the game to lure consumers to the digital wallet, so there is no clear leader right now. Although Visa's deal with powerhouse Vodaphone may have given them an edge globally. It may turn out that there is no real 'winner' in this sector. The only sure thing to say right now is that with so many players pushing the technology, it will should aid the wide adoption of it by consumers. As research firm Forrester forecast, by 2016 many consumers will simply leave their physical wallets at home and shop with their phones.
This article was originally written for the Motley Fool Blog network. Make sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
Monday, March 19, 2012
Sales of $100 Smartphones Set to Soar
The number of entry-level smartphones, selling for less than $100, sold this year is forecast to soar to 300 million, more than doubling the total number in use globally to above 500 million. This forecast comes from Deliotte which also said that there were already roughly 200 million such phones in use worldwide, with most of those having been sold just last year. Deliotte also predicts that due to the soaring number of smartphones sold the number of applications available on these devices will also double to more than two million.
New low-cost chip technology is what is bringing about this whole new world of low-cost smartphones, especially in the emerging economies like China and India where smartphones are now becoming affordable to everyone.
In places like India, high prices for phones have been the main barrier to widespread use of mobile devices. In fact, Apple (Nasdaq: AAPL) sells less phones in India – with 602 million active phone subscribers – than it does in Norway! But it is the cheaper smartphones which sell in India, where it is forecast that smartphone shipments will grow 70% annually through 2015.
This shift toward low-cost smartphones is even more evident in China which surpassed the United States in the third quarter of 2011 to become the world's biggest smartphone market. The Asian brokerage firm CLSA says China's smartphone market will more than double to more than 150 million units in 2012.
In western markets high-end smartphones, like the iPhone from Apple, in the $600-$800 range, dominate. In China, however, such phones account for only one-fifth of total phone sales. The remaining four-fifths of sales that sell in the $100-$150 range and, after subsidies from phone operators, cost very little.
This move toward low-cost smartphones in emerging markets may be the last hope for Finnish mobile phone company Nokia ADR (NYSE: NOK) which has lost its once preeminent position in the industry to rivals like Samsung and Apple. Nokia does have an opening here since Apple's iPhone is perceived globally as a premium product and well out of the reach of many consumers in the emerging markets.
Nokia's management is well aware of the opportunity which lies before it. At the Mobile World Congress in Barcelona last week, Nokia management did state that one of the company's strategic goals was “connecting the next billion” of the global population to the internet through smartphones.
Nokia and its new partner Microsoft (Nasdaq: MSFT) are in particular focusing on China. According to IDC, the most popular operating system there is Android. But Microsoft thinks Chinese consumers are just using Android because it happens to be on the cheaper smartphones. If it offers a better experience through Nokia smartphones, Microsoft thinks it will quickly have the most popular phone software in China. The company is also targeting China by opening mobile application stores there.
Microsoft's partner Nokia believes the smartphone which will revive its fortunes is the Nokia Lumia 610. It believes this model will be at the forefront of the new growth engine for the industry, low-cost smartphones. The 610 should sell well in the emerging markets where Nokia is still a leader. But it remains to be seen if the phone can be profitable enough to turn around Nokia's declining fortune.
The article was originally written for the Motley Fool Blog Network. Please be sure to check out my daily articles for the Motkey Fool at http://blogs.fool.com/tdalmoe/
New low-cost chip technology is what is bringing about this whole new world of low-cost smartphones, especially in the emerging economies like China and India where smartphones are now becoming affordable to everyone.
In places like India, high prices for phones have been the main barrier to widespread use of mobile devices. In fact, Apple (Nasdaq: AAPL) sells less phones in India – with 602 million active phone subscribers – than it does in Norway! But it is the cheaper smartphones which sell in India, where it is forecast that smartphone shipments will grow 70% annually through 2015.
This shift toward low-cost smartphones is even more evident in China which surpassed the United States in the third quarter of 2011 to become the world's biggest smartphone market. The Asian brokerage firm CLSA says China's smartphone market will more than double to more than 150 million units in 2012.
In western markets high-end smartphones, like the iPhone from Apple, in the $600-$800 range, dominate. In China, however, such phones account for only one-fifth of total phone sales. The remaining four-fifths of sales that sell in the $100-$150 range and, after subsidies from phone operators, cost very little.
This move toward low-cost smartphones in emerging markets may be the last hope for Finnish mobile phone company Nokia ADR (NYSE: NOK) which has lost its once preeminent position in the industry to rivals like Samsung and Apple. Nokia does have an opening here since Apple's iPhone is perceived globally as a premium product and well out of the reach of many consumers in the emerging markets.
Nokia's management is well aware of the opportunity which lies before it. At the Mobile World Congress in Barcelona last week, Nokia management did state that one of the company's strategic goals was “connecting the next billion” of the global population to the internet through smartphones.
Nokia and its new partner Microsoft (Nasdaq: MSFT) are in particular focusing on China. According to IDC, the most popular operating system there is Android. But Microsoft thinks Chinese consumers are just using Android because it happens to be on the cheaper smartphones. If it offers a better experience through Nokia smartphones, Microsoft thinks it will quickly have the most popular phone software in China. The company is also targeting China by opening mobile application stores there.
Microsoft's partner Nokia believes the smartphone which will revive its fortunes is the Nokia Lumia 610. It believes this model will be at the forefront of the new growth engine for the industry, low-cost smartphones. The 610 should sell well in the emerging markets where Nokia is still a leader. But it remains to be seen if the phone can be profitable enough to turn around Nokia's declining fortune.
The article was originally written for the Motley Fool Blog Network. Please be sure to check out my daily articles for the Motkey Fool at http://blogs.fool.com/tdalmoe/
Thursday, March 15, 2012
US Casino Companies Look to Hit It Rich in Asia
Macao is the only place in China where gambling is legal. The former Portuguese colony now generates about six times more annual gambling revenues than does Las Vegas. In fact, the gaming industry there has expanded more than 17-fold in the past decade. The leaders in the American gaming industry including Las Vegas Sands (NYSE: LVS), Wynn Resorts (Nasdaq: WYNN) and MGM Resorts International have been foremost among the players in that market.
But when it comes to the Asian gambling market as a whole, Macao is just the tip of the proverbial iceberg. Singapore has shown even more dramatic growth than Macao since gambling was legalized in 2009. It has two casinos currently – Resorts World Sentosa owned by Malaysia's Genting and Marina Bay Sands owned by Las Vegas Sands. Just these two casinos alone had revenues last year of $6 billion, which put them roughly on par with Las Vegas as a whole!
No wonder then that the chairman and CEO of Las Vegas Sands, Sheldon Adelson, said last year that Singapore had transformed the way companies like his looked at Asia.
Asian countries too are looking at gambling in a whole new light. Both Japan and South Korea have viewed Singapore's success with envy. Both countries have had qualms about the gambling industry in the past but are reconsidering their positions due to Singapore showing how the gaming industry can co-exist with tight government regulations and control.
In Japan, legislators are moving slowly toward legalizing casinos. But there remains strong opposition to casinos, so do not expect action there for at least two years. If casinos do open in Japan, they should flourish. The country already has more than 5 million slot machines and 12,000 pachinko halls. The first casinos there are expected to generate at least $10 billion in their first two years.
Japanese billionaire Kazuo Okada, which made his fortune in Japan with pachinko machines, is in the midst of a feud with Steve Wynn of Wynn Resorts. The reason for the feud that many observers point to is the fact that Mr. Okada, who owned 20% of Wynn Resorts stock, was going to open a casino in the Philippines without Wynn. With the Philippines being such a tiny market, imagine how they'll fight over the big markets in Asia!
Mr. Okada is planing to do just that. He plans to invest $4 billion into a casino resort in South Korea, beating both Wynn and Sands to the punch. South Korea currently has only poorly-run, state-owned casinos.
Taiwan is another potentially lucrative market for the casino operators. The government there passed legislation which allowed casinos to be built on three islands located in the Taiwan Strait, near China. And then there is the possibility of mainland China with cities like Beijing, Shanghai and Hong Kong on the list as potential casino sites.
Vietnam too has attracted a lot of interest from foreign casino operators. There have been some casinos operating in the country for about two decades. Las Vegas Sands is planning a project located near Ho Chi Minh City. MGM Resorts International is also in Vietnam, agreeing to manage a property that is being built at a new beach resort, again near Ho Chi Minh City.
With the growing riches in Asia and all of the casino projects already underway or to be started within a few years, the future looks brighter than the Las Vegas Strip for the American casino companies finding their fortune in Asia.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
But when it comes to the Asian gambling market as a whole, Macao is just the tip of the proverbial iceberg. Singapore has shown even more dramatic growth than Macao since gambling was legalized in 2009. It has two casinos currently – Resorts World Sentosa owned by Malaysia's Genting and Marina Bay Sands owned by Las Vegas Sands. Just these two casinos alone had revenues last year of $6 billion, which put them roughly on par with Las Vegas as a whole!
No wonder then that the chairman and CEO of Las Vegas Sands, Sheldon Adelson, said last year that Singapore had transformed the way companies like his looked at Asia.
Asian countries too are looking at gambling in a whole new light. Both Japan and South Korea have viewed Singapore's success with envy. Both countries have had qualms about the gambling industry in the past but are reconsidering their positions due to Singapore showing how the gaming industry can co-exist with tight government regulations and control.
In Japan, legislators are moving slowly toward legalizing casinos. But there remains strong opposition to casinos, so do not expect action there for at least two years. If casinos do open in Japan, they should flourish. The country already has more than 5 million slot machines and 12,000 pachinko halls. The first casinos there are expected to generate at least $10 billion in their first two years.
Japanese billionaire Kazuo Okada, which made his fortune in Japan with pachinko machines, is in the midst of a feud with Steve Wynn of Wynn Resorts. The reason for the feud that many observers point to is the fact that Mr. Okada, who owned 20% of Wynn Resorts stock, was going to open a casino in the Philippines without Wynn. With the Philippines being such a tiny market, imagine how they'll fight over the big markets in Asia!
Mr. Okada is planing to do just that. He plans to invest $4 billion into a casino resort in South Korea, beating both Wynn and Sands to the punch. South Korea currently has only poorly-run, state-owned casinos.
Taiwan is another potentially lucrative market for the casino operators. The government there passed legislation which allowed casinos to be built on three islands located in the Taiwan Strait, near China. And then there is the possibility of mainland China with cities like Beijing, Shanghai and Hong Kong on the list as potential casino sites.
Vietnam too has attracted a lot of interest from foreign casino operators. There have been some casinos operating in the country for about two decades. Las Vegas Sands is planning a project located near Ho Chi Minh City. MGM Resorts International is also in Vietnam, agreeing to manage a property that is being built at a new beach resort, again near Ho Chi Minh City.
With the growing riches in Asia and all of the casino projects already underway or to be started within a few years, the future looks brighter than the Las Vegas Strip for the American casino companies finding their fortune in Asia.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
Tuesday, March 13, 2012
Starbucks' Overseas Operations Percolating
In 2008 Starbucks operations in the United States were not in good shape, forcing its founder Howard Schultz to return to the company and revitalize the business. Mr. Schultz was largely successful in his effort, resulting in roughly a sixfold gain in the stock since then.
But this focus on the U.S. came at the cost of ignoring its stores in the other regions of the world. Its European stores in Starbucks' first fiscal quarter accounted for less than a tenth of total revenues.
So now Starbucks is launching the same sort of effort towards its stores in Europe. Sales and profits for stores in this region continue to grow but their performance badly lags that of the company overall. For instance, operating margins at these stores are only 6.5%, well below the Americas' region operating margin of 22%.
The company has started a very aggressive marketing campaign which includes a promotion for free drinks. Starbucks is also rolling out a number of new offerings on its menu which cater to local tastes such as a lighter espresso in France. This campaign is sure to crimp operating margins over the short-term. The hope is that over the longer term, these changes will turn the tables on the European competition which has had little to fear from Starbucks since 2008.
However, Starbucks is not struggling in all of its overseas markets. Its Asian operations are percolating, with operating margins more than double that of Europe, on half the revenues.
The star market for Starbucks in Asia is China, where it operates more than 500 stores. Its chairman Howard Schultz called the Chinese market “the most profitable in the world”.
And with good reason. Operating margins in China came in at 34.6% in the first quarter, more than 5 times that of Europe. Its Chinese stores typically generate between one-half and two-thirds the sales of U.S. stores but are more profitable than those in the United States where operating margins were 21.8% in the first quarter. That is thanks no doubt to cheaper labor, rent and utilities.
Starbucks certainly has plenty of room for growth in the Asian region. Revenues from Asia accounted for a mere 5% of total sales (the Americas accounts for 75% of total sales) although sales in the region did rise 38% in the latest quarter from the same year-ago period.
The company has plans for aggressive expansion in the region. Foremost among the target markets will be China where there will be a rapid roll-out of stores. Mr. Schultz said, “We will open thousands of stores in China over the next few years.”
Starbucks also has its sights set on Asia's other emerging economic giant, India. It recently announced an $80 million 50/50 joint venture with Tata Global Beverages to bring its coffees to India. India is definitely a growth market. Its food services retail market generated about $8.2 billion last year and is forecast to grow more than 10% annually over the next five years by retail market consultancy, Technopak.
The goal of its Indian venture (which plans to have as many 50 stores open by year end) is to eventually equal the success the company has enjoyed in China. But it will face stiff competition from domestic rivals such as Cafe Coffee Day which is backed by U.S. private equity firm KKR. Not to mention all the small, local tea stalls that sell the Indian favorite, chai – a sweet, milky tea.
It is interesting to note that Starbaucks' biggest rival – Dunkin Donuts, part of Dunkin Brands Group (Nasdaq: DNKN) – also recently announced its entry into the Indian market with a local partner, Jubilant FoodWorks. Jubilant is the local partner for Domino's Pizza in India.
Dunkin will open its first store in June, several months ahead of the planned opening of the first Starbucks store. The company, however, will not focus on the coffee part of its business. Instead, it will focus on food and brand itself as an all-day eatery. Dunkin believes it will face less competition in this niche of the Indian market.
The goal of both Starbucks and Dunkin is to reduce the revenue dominance of the U.S. market and have rapidly growing sales overseas, particularly from the large emerging economies of China, India and others. Shareholders surely hope they succeed.
This article was originally written for the Motley Fool Blog Network. See all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
But this focus on the U.S. came at the cost of ignoring its stores in the other regions of the world. Its European stores in Starbucks' first fiscal quarter accounted for less than a tenth of total revenues.
So now Starbucks is launching the same sort of effort towards its stores in Europe. Sales and profits for stores in this region continue to grow but their performance badly lags that of the company overall. For instance, operating margins at these stores are only 6.5%, well below the Americas' region operating margin of 22%.
The company has started a very aggressive marketing campaign which includes a promotion for free drinks. Starbucks is also rolling out a number of new offerings on its menu which cater to local tastes such as a lighter espresso in France. This campaign is sure to crimp operating margins over the short-term. The hope is that over the longer term, these changes will turn the tables on the European competition which has had little to fear from Starbucks since 2008.
However, Starbucks is not struggling in all of its overseas markets. Its Asian operations are percolating, with operating margins more than double that of Europe, on half the revenues.
The star market for Starbucks in Asia is China, where it operates more than 500 stores. Its chairman Howard Schultz called the Chinese market “the most profitable in the world”.
And with good reason. Operating margins in China came in at 34.6% in the first quarter, more than 5 times that of Europe. Its Chinese stores typically generate between one-half and two-thirds the sales of U.S. stores but are more profitable than those in the United States where operating margins were 21.8% in the first quarter. That is thanks no doubt to cheaper labor, rent and utilities.
Starbucks certainly has plenty of room for growth in the Asian region. Revenues from Asia accounted for a mere 5% of total sales (the Americas accounts for 75% of total sales) although sales in the region did rise 38% in the latest quarter from the same year-ago period.
The company has plans for aggressive expansion in the region. Foremost among the target markets will be China where there will be a rapid roll-out of stores. Mr. Schultz said, “We will open thousands of stores in China over the next few years.”
Starbucks also has its sights set on Asia's other emerging economic giant, India. It recently announced an $80 million 50/50 joint venture with Tata Global Beverages to bring its coffees to India. India is definitely a growth market. Its food services retail market generated about $8.2 billion last year and is forecast to grow more than 10% annually over the next five years by retail market consultancy, Technopak.
The goal of its Indian venture (which plans to have as many 50 stores open by year end) is to eventually equal the success the company has enjoyed in China. But it will face stiff competition from domestic rivals such as Cafe Coffee Day which is backed by U.S. private equity firm KKR. Not to mention all the small, local tea stalls that sell the Indian favorite, chai – a sweet, milky tea.
It is interesting to note that Starbaucks' biggest rival – Dunkin Donuts, part of Dunkin Brands Group (Nasdaq: DNKN) – also recently announced its entry into the Indian market with a local partner, Jubilant FoodWorks. Jubilant is the local partner for Domino's Pizza in India.
Dunkin will open its first store in June, several months ahead of the planned opening of the first Starbucks store. The company, however, will not focus on the coffee part of its business. Instead, it will focus on food and brand itself as an all-day eatery. Dunkin believes it will face less competition in this niche of the Indian market.
The goal of both Starbucks and Dunkin is to reduce the revenue dominance of the U.S. market and have rapidly growing sales overseas, particularly from the large emerging economies of China, India and others. Shareholders surely hope they succeed.
This article was originally written for the Motley Fool Blog Network. See all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
Thursday, March 8, 2012
US Leads Way in Telecom (LTE) Innovation
There is a transformation occurring in the telecommunications industry, particularly in the United States, thanks to consumers' movement to smartphones and tablet PCs. These popular new phones and tablets, like the iPhone and iPad from Apple (Nasdaq: AAPL) and various devices powered by the Android operating system from Google (Nasdaq: GOOG), are forcing telecoms operators like Verizon (NYSE: VZ), AT&T (NYSE: T) and others to upgrade their networks.
As evidenced in 2007 with AT&T's network problems due to the launch of the iPhone, carriers need to upgrade their networks to cope with the tidal wave of mobile data unleashed by data-hungry advanced smartphones and now tablets. Unlike the first generation of such devices, today's gadgets have fueled a surge in mobile data usage thanks to their ease of use, ultra-fast processors and a proliferation of 'cool' third-party apps.
This need for U.S. carriers to upgrade their networks over the next few years was pointed out by the recent market and traffic data report from telecommunications equipment company LM Ericsson ADR (Nasdaq: ERIC) which predicted that global mobile data traffic will expand tenfold by 2016. Even the Federal Communications Commission chimed in saying that the country's wireless carriers will face a 275 megahertz “spectrum deficit” by 2014 if no new spectrum is opened up for use.
Not only that but it's well known that wireless carriers are losing a good amount of money on a growing number of subscribers that are heavy data users. The solution for U.S. wireless carriers?
At least a partial one is 4G or LTE (Long Term Evolution) technology which uses scarce spectrum much more efficiently than older 2G or 3G technologies and thus allows companies like Verizon to better handle the massive and growing data loads. It gives wireless firms a scalable technology that will drive down the cost of delivering data to subscribers for them.
U.S. telecoms companies have wisely already begun the shift towards LTE technology. All four leading US mobile firms including Sprint and T-Mobile are spending billions of dollars toward having LTE networks up and running by the end of 2013, several years ahead of schedule. In a few years, LTE networks will be absolute necessity for telecom operators since more and more smartphones on the market are LTE smartphones.
This move toward LTE technology is sure to continue in the years ahead. Several months ago, Juniper Research released a report which forecast that the number of LTE subscribers would reach 428 million by 2016. An impressive number, but that is only 6% of all global subscribers. Juniper expects a sharp bump in consumers' use of LTE to begin in 2013 as LTE networks are rolled out by the phone companies.
As telecom companies do so, it will allow them to free up some 2G and 3G spectrum which they intend to use for the next generation of technology. Current LTE technology in a few years time will be followed by the next generation of LTE technology called LTEAdvanced. This technology is projected to deliver average download speeds in the range of 100 megabits per second which should no doubt make smartphone and tablet users very happy.
And as these new technologies lower the cost of delivering mobile data to subscribers, it will also give a payback to the likes of Verizon and AT&T on their multi-billion dollar investments into LTE.
This article was originally writeen for the Motley Fool Blog Network. Check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
As evidenced in 2007 with AT&T's network problems due to the launch of the iPhone, carriers need to upgrade their networks to cope with the tidal wave of mobile data unleashed by data-hungry advanced smartphones and now tablets. Unlike the first generation of such devices, today's gadgets have fueled a surge in mobile data usage thanks to their ease of use, ultra-fast processors and a proliferation of 'cool' third-party apps.
This need for U.S. carriers to upgrade their networks over the next few years was pointed out by the recent market and traffic data report from telecommunications equipment company LM Ericsson ADR (Nasdaq: ERIC) which predicted that global mobile data traffic will expand tenfold by 2016. Even the Federal Communications Commission chimed in saying that the country's wireless carriers will face a 275 megahertz “spectrum deficit” by 2014 if no new spectrum is opened up for use.
Not only that but it's well known that wireless carriers are losing a good amount of money on a growing number of subscribers that are heavy data users. The solution for U.S. wireless carriers?
At least a partial one is 4G or LTE (Long Term Evolution) technology which uses scarce spectrum much more efficiently than older 2G or 3G technologies and thus allows companies like Verizon to better handle the massive and growing data loads. It gives wireless firms a scalable technology that will drive down the cost of delivering data to subscribers for them.
U.S. telecoms companies have wisely already begun the shift towards LTE technology. All four leading US mobile firms including Sprint and T-Mobile are spending billions of dollars toward having LTE networks up and running by the end of 2013, several years ahead of schedule. In a few years, LTE networks will be absolute necessity for telecom operators since more and more smartphones on the market are LTE smartphones.
This move toward LTE technology is sure to continue in the years ahead. Several months ago, Juniper Research released a report which forecast that the number of LTE subscribers would reach 428 million by 2016. An impressive number, but that is only 6% of all global subscribers. Juniper expects a sharp bump in consumers' use of LTE to begin in 2013 as LTE networks are rolled out by the phone companies.
As telecom companies do so, it will allow them to free up some 2G and 3G spectrum which they intend to use for the next generation of technology. Current LTE technology in a few years time will be followed by the next generation of LTE technology called LTEAdvanced. This technology is projected to deliver average download speeds in the range of 100 megabits per second which should no doubt make smartphone and tablet users very happy.
And as these new technologies lower the cost of delivering mobile data to subscribers, it will also give a payback to the likes of Verizon and AT&T on their multi-billion dollar investments into LTE.
This article was originally writeen for the Motley Fool Blog Network. Check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
Monday, March 5, 2012
Chesapeake, Debt and Natural Gas
Perhaps no company prospered more during the early stages of the U.S. shale gas boom than Chesapeake Energy (NYSE: CHK). Its strategy was to aggressively buy drilling rights in relatively unexplored shale fields. This gave Chesapeake a very strong position in dry natural gas shale plays such as the Barnett in Texas and the Haynesville in Louisiana.
This strategy of buying acreage, however, in combination with a decline in natural gas prices from $6 per million BTU in 2010 to less than $2.50 per million BTU today, has left the company with a much heavier debt burden than most of its peers. The debt has been a drag on the stock's performance with it dropping by 25% in the second half of 2011.
The company pledged to reduce its debt by the end of 2012 by $800 million, to $9.5 billion. This is still a very high two-thirds of its market capitalization. More ominously, Chesapeake does not expect to generate enough cash from its operations to fund planned drilling and completion capital expenditures until 2014.
So the company has adopted a two-pronged approach to the problem. It is cutting back on some dry gas drilling activity and it is also disposing of some of its hydrocarbon assets.
Chesapeake recently reported it may sell up to $12 billion in assets as it seeks to plug its funding gap. It said earlier this week it was close to a deal to sell future output from the liquid-rich Granite Wash in the Texas panhandle. The company is also contemplating disposing its entire interest in the Permian Basin region of Texas, an area the company has yet to explore heavily, but thought to be rich in oil and 'wet' gas. Chesapeake would rather be selling some of its dry gas assets, but the price of natural gas is so low right now, there are few if any buyers for such assets.
The company last month also announced a planned 8% cut in gas production and a 67% cut in the number of rigs drilling gas wells. This number will drop from an average of 75 rigs in use in 2011 to only 24 by the second quarter of this year. This is a significant move since Chesapeake is the second largest natural gas producer in the United States. It accounts for 9% of the country's production and contributed a high proportion of the growth in gas production in the last decade.
The good news for Chesapeake is that other companies have joined them in cutting back on gas drilling activities. According to Baker Hughes (NYSE: BHI), the number of rigs drilling for gas in the United States fell for the fifth week in a row to 720 last week. This is the lowest level since October 2009 and down more than 23% from its October 2011 peak of 936. But more cutbacks need to happen for the industry to enjoy a rebound in prices.
The COO of Baker Hughes, Martin Craighead, said he expects the gas rig count to keep falling “until there is a meaningful increase in gas prices”. Most in the natural gas industry believe the 700 level in rigs will be crucial. The belief is that once the rig count is below 700, gas production will begin to fall and prices will stabilize then within a 5-6 month period.
The price of gas is now below the cost of production in some parts of the United States, so it logical to conclude that other large producers such as EOG Resources will follow Chesapeake's lead. Other companies like Canada's Talisman Energy have already sharply cut rig drilling in Pennsylvania's Marcellus Shale region.
Chesapeake and its shareholders must hope that others in the industry will follow them in slashing gas production. Such actions should raise gas prices and lend a little stability to its financial situation. After all, it can't simply keep selling all of its assets until its well of assets runs dry.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
This strategy of buying acreage, however, in combination with a decline in natural gas prices from $6 per million BTU in 2010 to less than $2.50 per million BTU today, has left the company with a much heavier debt burden than most of its peers. The debt has been a drag on the stock's performance with it dropping by 25% in the second half of 2011.
The company pledged to reduce its debt by the end of 2012 by $800 million, to $9.5 billion. This is still a very high two-thirds of its market capitalization. More ominously, Chesapeake does not expect to generate enough cash from its operations to fund planned drilling and completion capital expenditures until 2014.
So the company has adopted a two-pronged approach to the problem. It is cutting back on some dry gas drilling activity and it is also disposing of some of its hydrocarbon assets.
Chesapeake recently reported it may sell up to $12 billion in assets as it seeks to plug its funding gap. It said earlier this week it was close to a deal to sell future output from the liquid-rich Granite Wash in the Texas panhandle. The company is also contemplating disposing its entire interest in the Permian Basin region of Texas, an area the company has yet to explore heavily, but thought to be rich in oil and 'wet' gas. Chesapeake would rather be selling some of its dry gas assets, but the price of natural gas is so low right now, there are few if any buyers for such assets.
The company last month also announced a planned 8% cut in gas production and a 67% cut in the number of rigs drilling gas wells. This number will drop from an average of 75 rigs in use in 2011 to only 24 by the second quarter of this year. This is a significant move since Chesapeake is the second largest natural gas producer in the United States. It accounts for 9% of the country's production and contributed a high proportion of the growth in gas production in the last decade.
The good news for Chesapeake is that other companies have joined them in cutting back on gas drilling activities. According to Baker Hughes (NYSE: BHI), the number of rigs drilling for gas in the United States fell for the fifth week in a row to 720 last week. This is the lowest level since October 2009 and down more than 23% from its October 2011 peak of 936. But more cutbacks need to happen for the industry to enjoy a rebound in prices.
The COO of Baker Hughes, Martin Craighead, said he expects the gas rig count to keep falling “until there is a meaningful increase in gas prices”. Most in the natural gas industry believe the 700 level in rigs will be crucial. The belief is that once the rig count is below 700, gas production will begin to fall and prices will stabilize then within a 5-6 month period.
The price of gas is now below the cost of production in some parts of the United States, so it logical to conclude that other large producers such as EOG Resources will follow Chesapeake's lead. Other companies like Canada's Talisman Energy have already sharply cut rig drilling in Pennsylvania's Marcellus Shale region.
Chesapeake and its shareholders must hope that others in the industry will follow them in slashing gas production. Such actions should raise gas prices and lend a little stability to its financial situation. After all, it can't simply keep selling all of its assets until its well of assets runs dry.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
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