Telephones, Technology and Opportunities for Growth
Several years ago, expert investor Jim Rogers said stay away from the telephone industry because deregulation would cause a competitive free-for-all with little profit for any company.
Which only shows that you should never listen to expert investors.
The telephone industry, now called telecommunications, has in recent years expanded to become a driving force of our time. Earnings and stock prices of the traditional Bell and other telephone companies have risen consistently. Last year, communications funds achieved the second-highest total returns, after technology, according to researcher Morningstar Inc.
The technology of the telecommunications industry has exploded. Data transmission over phone lines, driven by Internet usage, has expanded rapidly. Mobile telephones have developed into a global industry.
Indeed, companies in the U.S. and abroad had been vying to pay $56 billion to acquire AirTouch Communications, the San Francisco-based leader in cellular telephony, a firm that didn’t even exist as a separate company five years ago. On Friday, Bell Atlantic dropped out of the bidding war, leaving Britain’s Vodafone Group as the winner.
And a wave of pending mergers--Bell Atlantic and GTE; SBC Communications and Ameritech; and AT&T; and Tele-Communications Inc., a cable television company--have boosted stock prices and swelled interest in the industry.
But the mergers have swelled confusion too, and fears that the old Bell system monopoly is being reassembled.
Nothing could be further from the truth. Historic changes are occurring in telecommunications. Understanding those changes is important whether you’re investing or simply using the telephone.
The reality is that the Internet is advancing more rapidly than almost anyone predicted. And the merger-happy regional Bells, far from assembling a new monopoly, are scrambling for survival.
Phone companies are already forming joint ventures with Internet companies. Typical of such alliances is America Online’s agreement last week to offer improved Internet access in Eastern states through a partnership with Bell Atlantic.
AT&T; is now pushing headlong into data and Internet services. It is acquiring TCI in order to deliver data, voice and video to homes through cable lines. In the last year, AT&T; also bought IBM’s data network for $5 billion and formed a $10-billion joint venture with British Telecom to provide data services to multinational companies worldwide.
“The strategy of ATT’s new management is a good one,” says analyst Guy Woodlief of Prudential Securities. Chairman Michael Armstrong, appointed in 1997, recognizes that the business is changing. The volume of computer data traffic is now greater than voice traffic in the U.S., notes Geoffrey Yang of International Venture Partners, a Menlo Park, Calif., venture capital firm. That is driving a technology shift because traditional phone lines are not as efficient at transmitting data as new packet-switched lines, which allow millions of bits to move simultaneously.
A good analogy is that a traditional phone line is like a one-car, one-lane road while a packet line is a multi-car, multilane highway.
The shift to data is bringing new companies into telecommunications. Cisco Systems, the San Jose-based supplier of equipment for Internet lines, is focusing more on selling to phone companies. It recently got a $100-million contract to help AT&T; build a communications infrastructure for its cable lines.
And competitor Lucent Technologies, once the venerable Western Electric division of AT&T;, last week agreed to pay $20 billion to get into the Internet equipment industry by acquiring Ascend Communications.
Qwest Communications of Denver and Level 3 Communications of Omaha are spending billions to build fiber-optic systems connecting 40 U.S. states with links to other countries. Sprint also is building a similar network. Such systems will be able to deliver communications services to business at half of today’s costs or less.
At least two Bell companies, Ameritech and US West, have already seen possibilities in the new lines. Both tried to get into long-distance phone service through an alliance with Qwest yet preserve their monopolies on local service. The Federal Communications Commission wisely nixed the deals.
The phone business has reached a phase of mortal combat. To get around local access phone charges, which can account for 40% of the cost of a call, AT&T; and MCI WorldCom have acquired Teleport Communications and Brooks Fiber, upstart firms that resell local phone service at a discount.
Yet through all the shakeouts and competitive battles, the stock prices of telecommunications companies keep rising. The Bell companies are selling at historic highs, and AT&T; is too. Cisco is at a high for its short history, and AirTouch, of course, has been bid to its highest price ever.
One reason is the industry’s revenue growth--20% a year for data and Internet services, 5% a year for the whole $240-billion U.S.-based telecom industry. Another reason is that the field is still developing, and any company or many can have hopes of winning big.
The Internet remains an experimental business for many reasons, including an inability to precisely charge for services. Unlike telephone companies, which charge specifically for a call across town or across the globe, Internet service providers such as AOL and Pasadena-based EarthLink can only charge users a flat monthly fee. And most businesses haven’t figured out how to make money on the Net.
The regional Bell companies and GTE see opportunity here because they know how to charge for services. Indeed, many analysts see cash-rich phone companies acquiring Internet firms, creating consolidated giants--the kind of industry suggested by the Bell Atlantic and SBC merger strategies.
The industry will develop by “the golden rule--he who has the gold, rules,” says telecom consultant Peter Bernstein of Infonautics Consulting, a Ramsey, N.J., firm.
But it’s even more likely, given the patterns of modern industry, that small companies will spring up with new technologies. In Redwood City, Calif., just such a company, Narus Inc., has invented a method to measure and charge for specific uses on the Internet. Narus will introduce its method, called semantic traffic analysis, during the first quarter, says founder Ori Cohen. Other companies are sure to come up with similar innovations.
What does all this merging and inventing mean for the telephone’s future? The AirTouch bidding war is significant. It indicates that mobile phones increasingly will provide basic telephone service.
Meanwhile, the traditional home telephone will become a multimedia instrument, communicating on the Internet and sending and receiving a host of data, from medical information to videos of relatives and friends.
And what do all those changes mean for investment? Great opportunity. You don’t have to be an expert to see that.
James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
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Telecom’s Payoff
Major telecom stocks have more than doubled since the end of 1994. In terms of price appreciation alone, MCI Worldcom has been the standout performer (up 672%), followed by SBC Communications (177%), AT&T; (146%) and Bell Atlantic (114%). The Standard & Poor’s 500 index has gained 178% in price in the same period. Annual closes and latest:
AT&T;, Friday: $84.25
Bell Atlantic, Friday: $53.13
SBC Communications, Friday: $55.94
MCI/WorldCom, Friday: $75.06
Source: Bridge
