The mobile-phone industry took a cold bath this week. News that sales of handsets fell at their fastest rate in history – down 13% in the first quarter – has sunk the notion that a mobile is indispensable for hard-up consumers. Having spent the past decade courting new users from Beijing to Bangalore, mobile giants such as Nokia and Ericsson are suddenly out of fashion and under threat – sales of rival Apple’s iPhone rose a remarkable 123% last year.
But one group isn’t about to go out of fashion: the big US cable and phone firms. They are sitting on one of the most valuable assets in the US – the huge network of fibre-optic cables that carries phone calls, broadband and cable TV to millions of homes across the country. Americans are now putting this network under formidable pressure as internet traffic surges 60% a year.
Telecoms firms blew a fortune laying fibre-optic cables across the US at the end of the 1990s, and are still spending £40bn a year upgrading them, but the last mile of cable to most US homes is still made of copper. The popularity of bandwidth-hungry YouTube videos and online movies means those old coaxial copper wires are struggling to handle demand.
But the likes of AT&T and Verizon are in no hurry to replace these older wires. With capacity on the network being eaten up – American think tank Nemertes Research reckons user demand will outpace capacity by 2010 – they’re happy enough not to quell fears that the internet is about to grind to a halt.
In fact, they can use the impending bandwidth crunch as an excuse to cap the amount we download and lift the price of their services. The telecoms giants argue that rationing bandwidth is fair because people who use less of it then benefit as costs are shifted onto internet hogs who are slowing everything up for everyone.
Nonsense, says Ryan Signal in Wired – highly active customers pose no risk of increasing broadband costs. Look at Time Warner Cable, whose high-speed data costs actually declined 12% last year despite a 10% jump in subscribers. The trouble for consumers is big US telecoms firms have a stranglehold on the market.
Americans effectively choose between four providers, who control 70% of the market for phone, cable TV and internet access. Customers pay for that lack of competition. As Jack Goldsmith and Tim Wu point out in Who Controls The Internet?, the average American spends as much on cell phones, cable TV and internet connections as they do on energy.
So although Barack Obama may have set aside $7.2bn in broadband grants to foster competition in the industry, he’s unlikely to upset the natural order. After all, this isn’t the car industry. Having learned hard economic lessons in the late 1990s, big telecoms firms have been more cautious since – hoarding cash and cutting costs. So they can afford to turn down Obama’s money if they don’t like the terms.
All of this spells higher phone, TV and internet bills for Americans and a lot more profit for the providers. We tip one industry titan below.
Update: There was good news this week for Lynas Corp, as Chinese, state-owned China Nonferrous Metal Mining agreed to take a majority stake in the Australian rare earths miner for $185.7m. But having risen 143% since we tipped it in April of this year, now seems a good time to take profits.
The best bet in the US telecoms sector
“If you don’t own Verizon, you shouldn’t be allowed to call yourself an investor,” says Porter Stransberry on DailyWealth.com. The firm’s “$40bn fibre network will dominate the flow of data in the US for at least the next 50 years”.
Formerly a hard-wired phone-line company, Verizon (NYSE:VZ) generates 55% of its operating profit from its wireless division. The company has 86.6 million subscribers, giving it a comfortable cushion over rivals AT&T (78.2 million) and Sprint (49.3 million).
Stripping out its acquisition of Alltel, the largest American wireless carrier, the company still added an impressive 1.3 million new retail customers last quarter. Wireless sales in the last quarter also jumped 30% year-on-year to $15.1bn.
“Bad economy or not, people are still signing up to its high-speed internet-and-TV platform by the busload,” says Anders Bylund on Motley Fool. One issue for Verizon is that rival AT&T has exclusive network access for Apple’s iPhone. But sales of the Verizon-exclusive Blackberry Storm are holding up.
For an $88.2bn company, long-term debt of $37bn looks very manageable, given Verizon’s extremely strong operating cash flow. The 6% dividend yield also looks pretty stable.
Verizon trades on a forward p/e of 11.4.