RESEARCH INSIGHT

THE NEW GICS

COMMUNICATION
SERVICES SECTOR
An Overview of the Telecommunications Transition

Neeraj Dabake, Craig Feldman

September 2018

SEPTEMBER 2018
 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

EXECUTIVE SUMMARY
On Sept. 28, 2018, the Global Industry Classification Standard (GICS)1 will undergo its biggest
structural change so far, when the Telecommunication Services sector significantly broadens
and is renamed Communication Services.
This change reflects the fact that the way people communicate, share information and
entertain themselves has significantly and fundamentally changed as a result of the rapid
convergence between technology, media and telecom. Companies themselves have
responded to this changing dynamic by bundling many services such as cable, internet and
telephone. This is evidenced by the increased amount of mergers and acquisitions (M&A)
activity and consolidation in these industries. The change to the GICS structure looks to
capture this new market dynamic by refining the concept of communication from a content
and medium perspective.
In addition to the companies currently classified in the Telecommunication Services sector,
the new Communication Services sector will include companies from the Information
Technology sector that are in the business of facilitating communication, including Alphabet
and Facebook, as well as media companies moved from the Consumer Discretionary sector,
including Disney (Walt) and Comcast Corp.
In addition, the traditional definition for the Internet Software & Services sub-industry is no
longer meaningful, with the segment becoming very diverse as it has evolved to include new
business models using internet technology to cater to a variety of end users and industries.
The GICS change reflects this shift, notably moving online retailers, such as Alibaba Group
and EBay from Information Technology to the Consumer Discretionary sector.
The change will be implemented in the MSCI Indexes starting from the November 2018
Semi-Annual Index Review. Following the change, the Communication Services sector will
have a weight of 8.2% in the MSCI ACWI IMI, compared to the Telecommunication Services
sector which is currently the smallest sector in the index with a weight of 2.5%.

1
GICS is the global industry classification standard jointly developed by MSCI and Standard & Poor’s.

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

INTRODUCTION
On Sept. 28, 2018, the Global Industry Classification Standard (GICS) will undergo its biggest
structural change (in terms of market capitalization impact) since its inception. At that time,
the Telecommunication Services sector will significantly broaden and be renamed
Communication Services. It will include companies that facilitate communication and offer
related content and information through various mediums.
Since its inception in 1999, the GICS structure has continuously evolved to reflect the
changing nature of markets, and to continue to provide an industry framework and basis
widely used for investment research, portfolio management and asset allocation. The nature
and pace of change, facilitated by the rapid advance of technology, has never been as drastic
as in recent years. When “tweet” means sending a message on Twitter, Facebook “friends”
far outnumber real-world friends and binge-watching television series on Netflix becomes a
top weekend pastime, it is apparent that the way people communicate, share information
and entertain themselves has significantly and fundamentally changed. Many of these
companies didn’t even exist when the GICS structure first came into existence.
Companies themselves have responded to this changing dynamic by bundling many services
such as cable, internet and telephone. This is evidenced by the increased amount of mergers
and acquisitions (M&A) activity and consolidation in these industries. Some have also
created interactive entertainment content and aggregate information that is delivered
through multiple platforms, such as cable, internet and accessed on mobile phones.
The GICS structure change looks to capture this new market dynamic by refining the concept
of communication from a content and medium perspective.

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

HISTORICAL EVOLUTION
A look at the historical evolution of the weights of the various sectors in the MSCI ACWI IMI
confirms this trend. While the weight of traditional telecommunication companies has
dropped over the last 10 years, the information technology sector has ballooned. People
have increasingly shifted from using telephones to other means of communication, including
Facebook and Twitter, which are all part of the existing Information Technology sector.

Exhibit 1: Information Technology Sector Outweighs Telecommunication Services

20%

16% Information
Technology
12%

8%
Telecommunication
Services
4%

0%

In addition, using traditional definitions such as the existing Internet Software & Services
sub-industry is no longer meaningful. The segment has become very diverse as it has
evolved to include new business models using internet technology to cater to a variety of
end users and industries. While the internet started as an alternate means of reaching out to
customers or keeping in touch with others, it has become the default medium of conducting
business and accessing content. The GICS changes reflect these shifts, notably moving online
retailers from the Information Technology to the Consumer Discretionary sector.
Exhibit 2: Weight of Internet Software & Services Sub-industry
5%

4%

3%

2%

1%

0%

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

SUMMARY OF GICS CHANGES

The key highlights are summarized in Exhibit 3.

Exhibit 3: Redefining Sectors and Sector Components

TELECOMMUNICATION SERVICES INFORMATION TECHNOLOGY CONSUMER DISCRETIONARY
e.g. Ebay,
TELECOMMUNICATION SERVICES SOFTWARE AND SERVICES Alibaba Group RETAILING MEDIA

e.g. AT&T, e.g. Alphabet, e.g. Comcast,

Verizon, Facebook, Disney,
China Mobile Baidu Netflix

TELECOMMUNICATION SERVICES MEDIA & ENTERTAINMENT

COMMUNICATION SERVICES

Communication Services: In addition to the companies currently classified in the

Telecommunication Services sector, this newly named sector will include companies from
the Information Technology sector that are in the business of facilitating communication, as
well as media companies moved from the Consumer Discretionary sector.
Information Technology: This sector will now include only companies where technology is
the key driver of the business and not just a medium of delivery. For example, companies
such as Microsoft and IBM whose fundamental business models are based on specific
software or hardware will remain. On the other hand, companies such as Facebook and
Twitter, which use the internet only as a medium to facilitate communication, will move out.
Consumer Discretionary: In addition to the carve out of media companies moving to the
Communication Services sector, this sector will include online retailers moved from the
Information Technology sector, reflecting the fact that technology is just the medium in
which they operate.

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

HISTORICAL CHARACTERISTICS
In simulated historical performance, the new Communication Services sector significantly
outperformed the Telecommunication Services sector, especially over the last few years as
many of these companies delivered outsize returns and FAANG (a popular acronym that
stands for Facebook, Apple, Amazon, Netflix and Google) became a household term.2

Exhibit 4: Performance of Communication Services vs. Telecommunication Services

250 Performance in Gross USD

200

Communication Services
150

100
Telecommunication Services

50

When it comes to the impact on valuation metrics, our analysis shows that as of Aug. 31,
2018, the new Communication Services sector had a much lower dividend yield compared to
the Telecommunication Services sector which has historically had among the highest
dividend yield among all sectors. Additionally, even though the dividend yield of the
Information Technology sector increased slightly, it still had the lowest dividend yield among
all sectors.

2
This report may contain analysis of historical data, which may include hypothetical, backtested or simulated
performance results. There are frequently material differences between backtested or simulated performance results
and actual results subsequently achieved by any investment strategy.

The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or
simulation. Past performance — whether actual, backtested or simulated — is no indication or guarantee of future
performance. None of the information or analysis herein is intended to constitute investment advice or a
recommendation to make (or refrain from making) any kind of investment decision or asset allocation and should not be
relied on as such.

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

Exhibit 5: Sector Dividend Yields may Shift

5%

4%

3%

2%

1%

0%

This trend is evident in historical valuation ratios as well. The simulated Communication
Services sector had a consistently lower dividend yield and higher price to forward earnings
(P/E) relative to the Telecommunication Services sector, with the gap diverging even further
in recent years.

Exhibit 6: Dividend Yield & P/E of Communication Services vs. Telecommunication Services
1.6

Relative P/E Fwd

1.2

0.8

Relative Yield
0.4

0.0

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

MSCI INDEX IMPACT

These changes will be implemented in the MSCI Indexes starting from the November 2018
Semi-Annual Index Review. In terms of sector weights in the MSCI ACWI IMI,3 the
Communication Services sector will have a weight of 8.2%, compared to the
Telecommunication Services sector which is currently the smallest sector in the index with a
weight of 2.5%. While the weight of the Consumer Discretionary sector will decrease
marginally, the Information Technology sector weighting will drop from 18.9% to 14.9%.

Exhibit 7: Sector Weight Shifts

35%

30%
14.9%
25% 18.9% Info Tech

20%

15%
10.7%
10% Cons Disc
12.4%
5% 8.2%
2.5% Comm Serv
0%
Existing New

The Communication Services sector will experience the largest turnover (69%), with the
addition of 301 companies at the MSCI ACWI IMI level. The MSCI ACWI IMI Information
Technology sector will see a drop of 118 constituents and a turnover of 21%.

Exhibit 8: Securities Turnover

Sector Current #sec Pro forma #sec Additions Deletions Turnover
Communication Services 138 439 301 - 69%
Information Technology 1051 933 - 118 21%
Consumer Discretionary 1376 1192 17 201 18%

3
Based on data as of Aug. 3, 2018

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

The composition of the new Communication Services sector in the MSCI ACWI IMI also
provides an interesting insight into the magnitude of the change. Seven out of the top ten
companies in the sector will come from the Information Technology and Consumer
Discretionary Sectors, with only AT&T, Verizon Communications and Softbank Group Corp
from the Telecommunication Services sector still remaining within the top ten.

Exhibit 9: Top Holdings Changes

Weight in Comm Weight in Tele
Existing Sector
Serv sector Serv sector
Alphabet Information Technology 17.2% -
Facebook Information Technology 9.6% -
Tencent Holdings Li (CN) Information Technology 5.7% -
AT&T Telecommunication Services 5.3% 17.1%
Verizon Communications Telecommunication Services 4.9% 15.9%
Disney (Walt) Consumer Discretionary 3.9% -
Comcast Corp A (New) Consumer Discretionary 3.7% -
Netflix Consumer Discretionary 3.4% -
Naspers N Consumer Discretionary 2.4% -
Softbank Group Corp Telecommunication Services 1.6% 5.1%

CONCLUSION
As noted, the GICS structure continues to evolve to reflect the rapidly changing industry
landscape. The GICS structure last changed in 2016 when the real estate sector was carved
out from financials. While this latest evolution does not change the number of sectors, it is
an even bigger change in terms of magnitude. It depicts the new age of communication,
reflecting the rapid convergence between technology, media and telecom.

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

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 THE NEW GICS COMMUNICATION SERVICES SECTOR SEPTEMBER 2018

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