By Adam J. Crawford, Junior Analyst
A transformation is happening in the world of telecommunications: a technology improvement known as "LTE" now allows for the transfer of data to mobile devices at speeds equivalent to home Digital Subscriber Lines (DSL) Internet connections. This has created a transitional market in mobile phones and tablets that is projected to rapidly accelerate in the coming years.
What Is LTE?
Originally, copper wires strung from pole to pole established the connection between telephones. Today, wireless networks usually establish that connection, using towers and antennas to relay sound and data by radio waves.
Wireless networks evolved technologically over the years; each evolutionary stage has come to be identified as a "generation." The first generation (1G) - introduced in the 1980s - used analog radio signals. The second generation (2G) - launched in 1991 - was digital and introduced data transmission capability.
3G burst onto the scene in the US roughly a decade ago. It was a huge leap forward. 3G networks use a different radio frequency than 2G. They also use different equipment in order to achieve much higher data-transfer rates. Consequently, 3G expanded smartphone capabilities so that email, media streaming and/or downloading, and web browsing are now practical mobile functions.
Finally, there is 4G. There's a bit of confusion surrounding this wireless standard, as several technologies have been branded as 4G that are actually just enhanced versions of 3G. The true 4G network, called "Long Term Evolution" (LTE), was first introduced in the US by Verizon in 2010. (Actually, its full name is "3GPP Long Term Evolution for the Universal Mobile Telecommunications System," or "3GPP UMTS LTE" for short. That's still a mouthful, so the standard is generally referred to as "UMTS LTE" or just plain "LTE.") Since then, AT&T, Sprint, and T-Mobile have launched LTE networks.
LTE is a huge leap forward in terms of speed. By way of analogy, think of the current network as a two-lane highway and the LTE network as a 20-lane superhighway. These additional "lanes" ease congestion, allowing data to travel at a rate that is, on average, ten times faster than on 3G networks. In one PC magazine test, in a handful of cities around the US, 4G users achieved sustained data speeds up to 15.75 MB. That's beyond what a cable Internet subscriber in most markets could expect just five years ago (and better than what many still settle for today).
Mobile tech will probably never supplant wire- and cable-based data systems for applications that demand the utmost in speed. And even LTE cannot deliver that seamless, all-encompassing experience people have come to expect at home.
However, it's taking some intermediate steps. LTE will utilize a technology known as MIMO (multiple in, multiple out), which means that devices have multiple connections to a single cell. That increases the stability of the connection, reduces latency, and increases the total throughput of a connection. MIMO is what allows 802.11n WiFi to reach speeds of 300-400 Mbps, far higher than mobile's capabilities. But expect mobile to close the gap.
In terms of hardware, as network speeds and smartphone functionalities increase, a rapid shift toward upper-end phones is expected. As you can see in the table below, while the total market for mobile phones is projected to only see roughly 5% compounded annual growth over the next three years, the LTE-compatible phone is predicted to grow at an astounding 90% annual rate. 3G market growth is forecast to be a relatively flat 9%, while 2G sales are expected to see an actual decline. LTE, which is currently 3.3% of the total mobile phone market, will capture roughly 19% by 2015.
Source: Canaccord Genuity
A similar shift in demand is also happening in the tablet market. According to Strategy Analytics, 53% of tablets shipped globally this year will be LTE compatible. That represents an enormous jump from just two years ago, when only 2.5% of tablets shipped globally included LTE connectivity.
And mobile phones and tablets are just the tip of the iceberg.
Further down the road, LTE could play a key role in "pervasive computing," or as it is commonly called, the "Internet of Things." This is the next era in computing, whereby virtually anything can be connected to the Internet. As you can imagine, this potential is huge... just how huge, nobody knows for sure. Cisco projects that there will be 50 billion items connected to the Internet by 2020, but some analysts predict that number may be as high as 500 billion.
Under the Radar
The implications of the LTE revolution are substantial. By 2015, annual sales of LTE-compatible cellphones alone are expected to be $ 150 billion. What will be added through adoption rates for tablets and pervasive computing is anyone's guess. Merrill Lynch calls LTE "the key investment theme for 2013."
So who stands to benefit from this megatrend? Well, there are the obvious names: carriers such as Verizon and AT&T; handset makers such as Apple and Samsung; and semiconductor companies such as Qualcomm and Broadcom.
But there are also a few smaller, lesser-known companies that will cash in on the LTE gold rush. Because they are smaller and purer plays, LTE will move the needle for these companies more than for the behemoths. Though it takes a lot of digging to unearth such under-the-radar investments, we discovered one that we recommended in the November issue of BIG TECH, and we continue to search for more companies that are undiscovered or undervalued, and to beat the market to the spot.
Source: Casey Research
