Telecommunications Growth Rings In the 1990s
Investors are giving telecommunications stocks--those of the seven regional Bell phone companies and others--higher relative prices than other issues.
And a stock market wary of debt-ridden companies is nonetheless supporting a very high stock valuation for McCaw Cellular Communications, even as it borrows to buy more mobile phone properties.
Why? Because the market obviously sees technological change and new business potential exploding in telecommunications. What is still called the phone business--an overly limiting term--will almost certainly be the great growth industry of the 1990s.
Meanwhile in the 1980s, telecommunications provides an exciting illustration of how a growth industry really works--with new companies and old seizing opportunities, technology improving and markets expanding all the time. Consider events last week alone in the United States and overseas:
- Pacific Telesis--the San Francisco-based Bell operating company--and a consortium of British, French and German organizations, won the right Thursday to provide mobile telephone service in West Germany, the first European country to authorize a mobile phone system.
- US West, the Denver-based Bell regional, opened the East European market by agreeing to provide mobile phone service in Budapest, and later to all of Hungary’s 10 million people. US West also announced that it was part of a six-nation group that would lay fiber optic telephone lines across the Soviet Union--subject to approvals from the Western allies on security grounds.
- McCaw Cellular, a smallish firm based near Seattle, agreed to pay almost $4 billion to clinch its position as the largest U.S. provider of mobile phone services--which operate on principles of two-way cellular radio that police and fire departments have used for years, according to “Telecommunications, the Business Perspective,” a primer on the industry by Thomas Housel and William Darden.
McCaw, which has less than $500 million in revenue, will increase its debt to a staggering $3 billion to gain control of cellular franchises in New York, Los Angeles, Houston, Dallas, and Philadelphia and spread its operations nationwide. That larger scope may provide the cash flow and economies of scale to make its gamble pay, says Bradford Peery, a telecommunications analyst with his own firm in San Francisco.
But if McCaw fails, other buyers will jump to acquire its cellular properties. The business is booming, growing 50% a year in some areas, as usage of car phones increases. All seven Bell companies, the local phone systems that became independent with the 1984 break up of AT&T;, are expanding their mobile operations in the United States.
Significant new opportunities opened up last week with PacTel’s West German deal. Other countries plan mobile systems, and U.S. companies will have an edge in experience and technology in competing for the business.
And prospects in Eastern Europe and the developing world, where existing phone systems are dreadful, could be even greater. Modernizing the phones has to be a priority if those societies are to develop. But stringing wires for traditional telephone networks is costly; the short-term solution in many cases will be mobile systems, which are cheaper and faster to install.
So market possibilities in the Middle East and Africa, in Latin America, much of Asia and the Soviet Union are awesome.
And so are technological possibilities, which go well beyond the simple telephone, says Leslie Riseberg, director of system technology for GTE Corp. Mobile communications means “you’ll have a personal information system in your pocket at all times,” Riseberg predicts--a device combining phone, computer and video.
It is visions of such technological possibilities that help account for today’s fierce bidding for cellular properties. The bidders know that against all expectations a business in the billions has grown in half a decade from little more than people’s need and desire to communicate. Cellular phones were experimental as recently as the 1984 Los Angeles Olympics; AT&T; didn’t see the potential and let the regional Bells have the cellular operations.
For all its success, cellular is only a foretaste of things to come when fiber optic cable is installed in U.S. homes--a process that will take place between 1992 and 1995, says GTE’s Riseberg. Fiber, which is being tested in Cerritos homes now, promises enormously expanded communications abilities--two-way video, computers you can talk to.
It’s the kind of thing that was science fiction 30 years ago--and actual fiction as well. Incredibly, the fiber optic tube that today can carry voice and data around the world--and also slip in to inspect or operate on the human body--results from the 1960 invention of the laser at Hughes Research Laboratories and the 1970 breakthrough by Corning Inc. of a tube that could carry light without absorbing it.
Yet in 19 short years, the fiber optic cable has helped MCI and United Telecom (US Sprint) bring competition to long distance--which means that it played a role in breaking up the old monopoly phone system. And that means, in turn, that it had a role in creating the competitive U.S. phone companies that are emerging in world markets.
What it will do in the next decade depends only on people’s need and desire to communicate. The possibilities are limitless.
