Archive for April, 2010
1Q10 results and forward guidance from players on the wireless value chain have been largely uninspiring. While we are very bullish about the future of wireless technology, and in particular, the promise of 4G, we are more sanguine about the near term prospects for an immediate recovery in global demand. Replacement sales to existing subscribers make up more than 85% of the global device market. These sales are extremely sensitive to the subsidies that are provided by carriers – drops in subsidies cause users to hold onto their phones longer and to choose cheaper devices when they do replace. Global mobile device demand was very slow to recover from the 2001 recession, largely, because carriers were cautious in returning subsidies to pre-recession levels. We believe that carriers, facing sluggish industry subscription growth, will remain conservative on device subsidies and that recovery in mobile demand may lag the overall economy by more than a quarter or two.
Cable operators face a panoply of threats that, taken individually, may seem distant and minor, but considered collectively, could reverse industry growth and seriously strain profitability. First, we believe that share gains in highly profitable residential telephony will reverse, as the trend toward mobile-only households accelerates. Second, we expect that multiple 4G wireless roll-outs will bring further competition for residential broadband, both pressuring prices and taking market share. Third, web-based video technology is improving rapidly just as the tools to access it via the television are becoming more widespread. We believe on-line television will soon begin to siphon viewership from traditional cable and shift the balance of power in negotiations for content away from multi-channel video operators, bringing significant pain even if the sea-change of internet related subscriber churn is a decade or more away. As such, we anticipate that the returns for cable and satellite TV providers will be amongst the worst in the TMT universe over the next few years.
Narrow (below corporate level) application of MLR limits, and/or limiting premium growth to less than the rate of medical cost growth, work against regulators’ and the public’s interests. Thus neither practice is likely to be common; and insurers’ share-price reaction to these concerns appears over-done
If MLR limits are too narrowly applied, winning contracts cannot offset losing contracts, and insurers must price all contracts so that none lose. Gross premiums rise, reducing insurance uptake rates; and, beneficiaries’ excess paid-in capital is held prisoner for at least the duration of the contract period.
Incurring these two costs produces no gains – after rebates, MLRs under narrow limits net to the same figure as would have been achieved under broad application (corporate level) of MLR limits
If MLR limits are narrowly applied AND premiums cannot be raised in response, private capital exits geographies with such restrictions, reducing both competition and consumer choice. Private insurers’ ROIC’s already are below SP500 averages
State regulators are unlikely to carry through on isolated threats to hold premium growth below rates of underlying cost growth. Obvious effects include simultaneously reducing reserves and raising underwriters’ risk; less obvious, states that rely heavily on non-profits (e.g. Massachusetts) face the likely outcome of their non-profits having to seek capital – which almost surely means converting to for-profit
We provide further explanation and analysis of the pricing effects of the Independent Medicare Advisory Board (IMAB), showing that all of the IMAB’s 2015 – 2019 cost savings must come from roughly one-quarter of the Medicare cost base, and that innovators (brand pharma, biotech, devices, +/- capital equipment) are the most likely targets
We project that IMAB policies will reduce the Medicare sales of innovators by 11 to 19 percent between 2015 and 2019, and show why we believe this estimate is conservative
To view this entire report and to see other available research see “Prior Research”
The FCC’s recently released “National Broadband Plan” makes recommendations that would accelerate the adoption and deployment of 4G wireless networks by freeing 300-500 MHz of spectrum and stimulate dramatically more aggressive competition amongst providers, including entirely new entrants. This is unambiguously bad for network operators, not only in wireless, where rivalry is likely to force spending on spectrum licenses and network build-outs and pressure pricing, but also for fixed line and cable TV, as the performance trajectory of 4G makes it a clear alternative to fixed broadband and a possible long term competitor to multi-channel television.