Telecom sector gives way to communication services

After the close of business on September 21, 2018, the telecommunication services sector will be renamed “communication services.” We explain what’s driving this change and explore what it means for investors. 

When people talk about sectors, they’re usually referring in shorthand to the Global Industry Classification Standard (GICS)—a joint effort by Morgan Stanley Capital International (MSCI) and S&P Dow Jones Indices to maintain a common and consistent way to think about groupings of companies around the world. Today, this standard consists of 11 sectors, 24 industry groups, 68 industries, and 157 subindustries.

At the highest level, all of the businesses in a given sector are involved in the manufacture or distribution of the same or similar types of products and services. Of course, on closer examination, it’s quickly apparent that sectors are internally complex and anything but static. Today’s change—which was telegraphed well in advance of the event—involves the renaming of the telecommunication services sector as communication services. It's a perfect example of sector evolution at work.

Why the switch to communication services?

The composition of communication services recognizes important changes in the media and social media landscape, which itself reflects and sustains shifting patterns of how people are using technology to communicate and consume information, products, and services. To that end, this sector includes a number of components from the information technology and consumer discretionary sectors—notably, a variety of household names among the internet elite, such as Facebook, Netflix, and Alphabet (Google). The new sector effectively merges these companies into a single sector that includes the “old guard” of telecommunication services.

Of course, the old guard has itself evolved in an effort to stay abreast of the technological times. The Verizons and AT&Ts of the world have hybridized—becoming telecom/internet companies that, through mergers and acquisitions, now own major media assets in addition to their established cable and mobile networks. The creation of the new sector has therefore been referred to as a “broadening” of the old sector, and it also reflects the broadening of business models—and what’s at stake—for the 600-pound gorillas of telecom.

Are you engaged? What matters to companies in communication services

Desperate to compete in the digital economy, particularly in mobile and social media communications, old-guard telecoms and their competitors in communication services are fighting for advertising dollars. And the battleground for this fight is the consumer’s attention span.

In my view, the old guard will be at a disadvantage. The internet giants may prove the most successful at delivering the most relevant forms of engaging content, the most targeted advertising platforms, and staggeringly large and dedicated followings. It’s been said that Facebook, for example, occupies one out of every five minutes of consumers’ collective smartphone experience. And the growth of Facebook’s monthly active user base would appear to give the company a massive competitive advantage in terms of offering advertisers the widest possible reach for their marketing campaigns. 

By contrast, some of the old-guard telecoms have seen their formerly unique programming capabilities struggle to compete for consumers’ attention. Nickelodeon, which is now part of media giant Viacom, exemplifies children’s programming that gained in popularity in the 1980s and 1990s. But in today’s world of streaming content—which Netflix, for example, has helped pioneer—scheduled content has lost its primacy and must compete with everything else all at once. Live sports and news are notable exceptions that appear able to survive and thrive in our new normal landscape of on-demand media.    

Technology loses some FAANGs but keeps its bite

With companies like Facebook and Alphabet leaving the information technology sector, some may wonder whether that will dull the edge of technology’s growth profile. I don’t see much chance of that occurring given what remains in tech. Apple stays, as do software giants such as Microsoft and a variety of players focused on cloud services—although the biggest name in cloud services (Amazon) remains in the consumer discretionary sector. Tech also keeps its industries focused on equipment, including communications equipment (Cisco, for example), and the semiconductor industry. As a share of the S&P 500 Index, information technology will certainly be smaller, but it will still retain many facets of its growth profile.