Will This New Law Dismantle the Telecom Industry?

Recently, the National Transportation Safety Board suggested that legislation should be enacted that bans phone usage while driving. While there are certain merits to this idea, could this law spell trouble for the telecommunications industry?

Telecom has recently started to gain revenues from data usage rather than subscriptions, and the car is one of the prime places that citizens tend to use phones. Whether people are stuck in traffic jams or are waiting for a long red light, using the phone to check a quick email or send a short text message is extremely common. Next time you're at a red light, check to see if the person next to you is perusing his cell phone. That is, if you're not doing that yourself.

In the grand scheme of things, large-cap telecom companies like AT&T T, Verizon VZ, and Sprint S will most likely not be significantly affected. On the other hand, small-cap and mid-cap companies that rely on users consistently using 3G and 4G technologies could be adversely affected. After all, users who forget how much 3G they use tend to go past the limits and have to pay extra fees.

Clearwire Corp CLWR specializes in providing 4G technologies to a variety of clients. Its biggest customer, however, is Sprint. While contracts with Sprint are currently locked in, its other contracts might be more variable. As a mid-cap company, the majority of its clients are likely to be small companies as well. If so, its contracts could be at stake, especially considering that it is the end of the year.

Unlike many other small companies, Clearwire actually has international clients, so its revenues may not be completely decimated by US laws. Clearwire also needs to watch out for the fact that car passengers may also be limited in their activities as well. If the legislation passes, then passengers may not be able to access their information in cars.

It does not stop there, but what about users who are on trains or busses? How will technology be able to differentiate between a moving bus versus a moving car?

FiberTower FTWR provides infrastructure services to 2G, 3G, and 4G providers. If the cell phone laws were to be enacted, it would be up to companies like FiberTower to regulate data usage for people in vehicles. As mentioned before, how would a data towers differentiate between a driver and a passenger in any given car. Furthermore, how would FiberTower determine whether the user is in a bus or a train, where it is safe to use cell phones and similar technologies?

Another thing to consider is that huge burdens will be placed on FiberTower if it were forced to develop technologies to accurately regulate data usage. It would have to increase research & development as well as physical overhead. It would also fail to record any revenues from this.

Creating an added system of regulation would also probably cause back ups in system performance and would probably annoy customers. Benzinga reached out to the company to inquire if legal changes would result in any direct problems for the company, but spokespeople were unable to definitively comment on the situation.

Towerstream TWER is a telecom company that transmits information over public and private radio networks. It also supports traditional mediums like 3G and 4G technology, but also supports non-traditional technology. In this company's case, new legislation may not actually make a huge difference. While certain revenue streams could be affected, it appear that the majority will not be affected.

Moreover, it specializes in disaster recovery and backup solutions, which are services that take time and are not typically tapped into when on a car ride. Moreover, the company currently operates in 12 cities, all of which are large and contain high level of foot traffic. Places like New York, Chicago, and Los Angeles are buffered by smaller amounts of drivers and contain a multitude of taxis, so Towerstream not be severely affected by new legislation.

Shenandoah Telecom SHEN is a holding company that oversees subsidiaries that are both regulated and unregulated. It not only works with telephones, but also internet communication and cable television. Like the aforementioned companies, it is diversified, so not all revenue streams will be affected by legislation. However, certain streams will most likely be at risk.

The company does not only focus on data streaming, however. It also specializes in voice and video communication as well, which are technologies typically not tapped into by people in moving cars.

Shenandoah also operates in three states - Virginia, West Virginia, Maryland - which may or may not be positive for the company. Depending on traffic patterns, these states may have the amount of people to affect driving habits.

Leap Wireless LEAP is one of the few companies that may not be affected by the new legislation. The reason is Leap Wireless' simple contracts. It charges customers a flat rate for unlimited service.

Otelco OTT is another small-cap telecom company that has added revenue streams that may protect it from new laws. First, it caters to retail as well as corporate clients. It also operates in satellite and internet-based television services. It is well diversified that does not completely rely on wireless phone services for its revenues. Benzinga also reached out to this company, but they were unable to comment on legal matters.

If the new law were to pass, it is likely that some of its revenues will diminish, but they certainly will not decline to the same extent as other companies out there. It is also protected in the sense that it operates in a few states, most of which do not have extremely high traffic levels, at least compared to the rest of the US.

Investors need to know that some companies have a very real possibility of losing revenues as a result of new legislation. There is currently limited technology to strictly enforce the law, so there may be added damage as far as car-based users go. Investors should also realize that small-cap companies are more likely to be affected by the legislation, so it may be more lucrative to focus on them rather than a large company to place bets.

Regardless of what the Government does, traders will be able to profit from any comments made about the law. While the overall economy may not fluctuate, independent traders can make money if they pay attention to the news. If traders keep up with the news, they may be able to capitalize on short-term movements in the equity markets.