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As people spend more and more of their waking hours in the warm glow of their phone or computer, it’s no wonder that usage of mobile and broadband Internet bandwidth is growing exponentially, creating new opportunities—and challenges—for cell carriers, cable and fiber optic network service providers and the technology companies that support them.

Demand Drives Innovation and Investments in Mobile Bandwidth

“In the United States, we’re seeing subscriber growth starting to level off for cell carriers, so more and more bandwidth usage is being driven by consumers’ use of mobile applications, and especially by mobile video,” said Tom Westdyk, Group Head and Managing Director, CIT Corporate Finance, Communications, Information Services & Technology. “As a result, cell carriers are seeing capacity bottlenecks appear in areas of high population density.”

In fact, as reported by Internet Retailer, mobile devices were responsible for 31% of all web traffic in 2013, and Cisco predicts that more than two-thirds of global mobile data traffic will be video by 2018.

The cell carriers are pursuing many options to address growing demand for bandwidth. One of the most important will be gaining access to additional wireless spectrum.

“The big four mobile operators are expected to aggressively pursue additional spectrum for their users in the next round of spectrum auctions. The Federal Communications Commission is currently in the process of arranging those auctions, which will reallocate spectrum currently set aside for over-the-air TV providers to mobile operators,” said Tom.

To help resolve the spectrum crunch, cell carriers are also investing in infrastructure. “Most cell towers are built and managed by independent companies, such as Central States Tower, a CIT client, that then lease space on the towers to wireless carriers,” said Tom. “These companies are building new towers at a rapid clip. New generations of cell technology require more towers to cover the same geography and customer base, so demand from the carriers is accelerating.”

In cities, the carriers are also looking to additional solutions to their bandwidth challenges.

“CIT recently provided financing to ExteNet Systems, a company that builds Distributed Antenna Systems designed for metropolitan areas where it’s often not possible to build more towers. Cell carriers leverage the antenna systems to fill in their coverage in areas with heavy usage,” explained Tom.

A Broader Information Superhighway:Tom Westdyk on trends in wireless and broadband Internet

“[M]ore and more

bandwidth usage is being

driven by consumers’ use

of mobile applications,

and especially by mobile

video.”

Tom WestdykGroup Head and Managing Director CIT Corporate Finance, Communications, Information Services & Technology

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“At the same time, cell carriers are continuing to move away from unlimited data plans in an effort to encourage consumers to manage their use of wireless bandwidth and maximize revenue from heavy users,” he added. “In addition, network service providers are expanding their WiFi coverage, spawning an industry of companies that build out WiFi hotspot networks. As a result, consumers are relying more on WiFi when they’re out and about, helping to manage demand for cellular data.”

The Rise of the Machines: The Internet of Things

An accelerating development that promises to create even more demand for wireless data is the proliferation of machines that can use wireless connections to communicate, creating what’s being called the “Internet of Things.” According to Business Insider, 1.9 billion devices are currently connected to the Internet—a number that is expected to rise almost fivefold to nine billion by 2018. CNN reports that the volume of data these devices are expected to transmit could surpass that of mobile phones and tablets by 2020.

“The Internet of Things refers to devices that can speak to each other, an end user or to a network hub,” said Tom. “The proliferation of nearly-ubiquitous wireless coverage—both cell and WiFi—has made this type of interconnectivity possible. So far, we’ve seen applications in the home, such as wireless thermostats that can be controlled from a user’s phone, and also commercially, where wireless-enabled sensors can monitor a fleet of delivery trucks or equipment throughout a factory and send back data that can be used to optimize operations.”

“Fortunately, these devices promise to be smart enough to time the transmission of their data to when data traffic is at its lowest, reducing the strain on the network,” added Tom. “One of the biggest challenges for companies will be to manage and analyze all of the data generated by the Internet of Things. CIT lends to software developers that help companies analyze large quantities of data, including information from devices, and deploy the findings to run more efficiently, cut costs and provide better services.”

Cutting the Cord? Not So Fast: Outlook for Cable and Fiber-Optic Broadband

Cable and fiber-optic network service providers are also seeing consumer habits evolve and are responding with their own technological and business changes.

“There has been a lot of discussion of the fear of ‘cord-cutting’ among millennials, more and more of whom are happy to stream their TV and video content over the Internet rather than watch traditional cable TV,” said Tom. In fact, Leichtman Research Group found that the U.S. pay-TV industry experienced a small loss in net subscribers in 2013, the first year that this has occurred.

“However, the same company that provides consumers their TV service is most likely the company they’ll turn to for broadband Internet access, so the net number of cable and fiber-optic customers isn’t likely to fall,” he added. “Furthermore, broadband Internet is a higher-margin product than TV for the network service providers and is likely to become even more so as the fees they pay to television networks continue to increase.”

“One of the biggest

challenges for companies

will be to manage and

analyze all of the data

generated by the Internet

of Things.”

“[T]he same company

that provides consumers

their TV service is most

likely the company they’ll

turn to for broadband

Internet access, so the

net number of cable and

fiber optic customers

isn’t likely to fall.”

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Even so, network service providers are making changes to accommodate the rising demands on their networks. “Though broadband Internet is by its nature less constrained than cell data, content providers and network service providers are still working on ways to accommodate the rise in usage of their networks driven largely by video,” said Tom. “In particular, they’re collaborating to host bandwidth-intensive content closer to the customer by building data centers near the cable headends that reduce transport costs for the provider and improve the customer streaming experience.”

There’s also been a great deal of discussion and debate about new rules expected to be issued by the Federal Communications Commission (FCC) on net neutrality, or how actively network service providers are allowed to manage the traffic on their networks and treat certain types of content differently than others. “While there’s still much to be determined, it looks like the FCC, in its rule-making, is inclined to protect the underlying openness of the Internet, and the FCC Chairman has made some bold statements recently about the protection of access to the Internet,” said Tom. “It seems likely that the FCC will continue to look to see that any agreements struck between content providers and network service providers, such as the recent deal between Netflix and Comcast, don’t handicap smaller, newer content providers.”

Overall, while creating new challenges, the rise in consumers’ demand for wireless and broadband data and ever-increasing reliance on their phones and tablets point to a bright future for wireless carriers, network service providers and companies who support them.

“CIT looks forward to continuing to finance the companies that build the towers and technology that make cell networks work, assemble the backbone of the Internet and crunch the data that makes industry more productive,” added Tom. “Our customers are playing a crucial role in the accelerating changes in communications, and we’re proud to support them as they push forward the boundaries of technology.”

To learn more about CIT Corporate Finance, Communications, Information Services & Technology, visit cit.com/cist. Members of the press who have an interest in speaking with Mr. Westdyk can contact Curt Ritter at Curt.Ritter@cit.com or Matt Klein at Matt.Klein@cit.com. For additional insights and perspectives from CIT executives on the middle market industries they support, visit cit.com/perspectives.

“[I]t looks like the FCC,

in its rule-making, is

inclined to protect the

underlying openness of

the Internet[.]”

July 2014