Wednesday, October 19, 2005

Future of Telecoms

It could finally be time to divest landline telecoms (e.g.; Verizon, SBC, BellSouth) as a core portfolio holding. Their prices have plummeted (down 26%, 14% and 11% respectively) vs. the S&P 500 (down 2%) so far this year. The price declines have made telecoms' 5% dividends look attractive, but dividends cannot make up for the capital depreciation and the long-term fundamentals of the businesses are in jeopardy.

The behemoths re-agglomerated (in stages, the cellular stage being nearly complete now) after being separated in the 1982 antitrust split-up of AT&T. The problem is the shift in future business dynamics in the form of viable substitute services. Cellular revenues and profits have been driving telecom companies for the last few years and propping up the landline business. DSL has not manifested profits.

Landline telecoms were always a portfolio staple because they owned the last mile and the residential customer. For the first time, it actually seems possible that traditional carriers (also called ILECs) can be displaced. Residential customers need voice and data. With cellular phones, Skype, open source PBX Asterisk and other Internet-based telephony services, local landline service can disappear; an unofficial estimate of US VoIP users in 2005 is 2 million. With wireless broadband, currently early stage but with increasingly likely widespread availability in a 5 year timeframe, DSL can be supplanted. Cable internet service currently has a one third market share.

Business customers need voice and data too and have traditionally been customers of large global carriers (IXCs) like AT&T and Sprint. However, AT&T and Spint have also gone the way of the dinosaur with their respective mergers with SBC and Nextel.

The FCC summer 2005 decision that cable internet and DSL are "information services" not "communications services" is backwards and protectionist (carriers are no longer required to interconnect independent service providers; e.g.; SBC could kick Earthlink DSL customers off their lines) but is ultimately probably of little relevance given the overall weak competitive position of traditional carriers and the small revenue and profit percentages DSL provides; telecoms have the more urgent challenge of the complete erosion of the landline voice business. Unless traditional carriers finally peek out of their litigation core competence and start providing wireless broadband (very hard for them to do because it cannibalizes traditional services), they may finally go bankrupt. Maybe rumored new entrants like Google or more likely other telecom carriers offer high-quality cost-effective wireless broadband networks and help the US regain competitive position on the international broadband stage.


dawnology said...

I am a child of this industry and began my illustrious career at AT&T (does anyone remember that company?) Seems like the big play now are the companies which are acting as brokers standing between the Fortune 500's and the carriers...the enterprise CIO's are embracing these non biased parties and looking for negotiating direction and an outside party to make sense of the mess. Wireless is still at it's infancy (wait until you can download the new Black Eyed peas video to your blackberry in 30 seconds!)....I'm jumping back in to this game!

LaBlogga said...

Indeed, the mighty AT&T is all but a relic; to be swallowed up in the SBC merger by the end of the year. I agree with your point about CIOs looking for direction and I wish wireless data would accelerate faster too!