From New York Times [1]
Cable and Phone Companies Compete, but Both Thrive
November 1, 2006
By Ken Belson
Investors cannot seem to decide what to do with the stocks of phone and cable companies. Last year, they dumped the shares on the hunch that those industries would be hurt as they moved onto each other’s turf.
They also figured that newcomers like Skype, Vonage and Google would upend both industries by offering cheap video, broadband and voice services.
This year, every major phone and cable stock has risen. BellSouth, for example, is up 66 percent, and Comcast has risen 57 percent. Investors now appear to view the battle for phone, broadband and television customers as something other than a zero-sum equation; perhaps, the thinking goes, cable and phone companies can divide the pie and still prosper.
The question to ask now is, which of these views will prevail in 2007? The string of solid earnings reports released in the last two weeks suggests that phone and cable stocks may have room to rise.
The four Bell companies — AT&T, BellSouth, Qwest Communications International and Verizon Communications — reported higher revenue and profits, driven by mobile phone, broadband and television products. Even Qwest, the weakest of the four, said yesterday that it was on track to report its first profitable year of operations, excluding one-time gains.
Qwest, like the other Bell operating companies, also benefited from a slowdown in the slide in prices for corporate communications services, as mergers took two big players out of the market. The potential for blockbuster mergers that could drain companies of cash has also diminished. Among the big deals on the horizon are AT&T’s pending $80 billion purchase of BellSouth and Verizon’s potential buyout of the 45 percent of Verizon Wireless that it does not own.
Things are equally rosy, if not rosier, at Comcast, Time Warner Cable and Cablevision, which have been signing up hundreds of thousands of new customers for their phone services. They have also enjoyed strong demand for digital video players and other extra services.
No doubt, the Bell operating companies have been losing traditional phone customers by the fistful, and satellite companies and cable companies have been taking customers from each other. But as all of these companies sell a greater variety of products, they can generate more revenue even if their customer base shrinks.
“Every type of communication service provider, whether it’s cable, satellite or phone companies, are basically all in a big firefight,” said Arnie Berman, the chief technology strategist at Cowen & Company. “But at the end of the day, you’ll end up with these companies having small numbers of subscribers who will spend more per month.”
Mr. Berman and other market watchers say companies that invest in technology that will give them a leg up during the next decade will be among the winners next year. Verizon, for example, is spending roughly $20 billion to build a top-level fiber optic network, while Comcast is adding hundreds of hours of content to its video-on-demand service.
For investors, figuring out when to bet on the next new technology is not easy. Vonage, the Internet phone company that seemed like a world-beater for several years, flopped when it went public in May. Verizon’s stock was pounded last year because investors felt the company had spent too much on its fiber project.
It often takes several years for new technologies to start paying dividends, which means even companies that appear to be behind the curve have a chance to catch up.
“People think it’s black and white, but there’s really a mix of products as we move away from older technology,” said Richard C. Notebaert, chief executive of Qwest, whose shares are up 53 percent this year. “There have been all these technologies that never panned out. If you can’t get singles and doubles, home runs don’t matter.”
One thing Mr. Notebaert and other industry executives and analysts agree on is that consumers increasingly prefer to have a single device that gives them access to e-mail, phone calls and other channels of communication, and they want to use this device anywhere, anytime.
Several investors are betting that the companies that sell equipment to cable, phone and wireless companies to make this happen, including Cisco, Tellabs and Redback Networks, may be the ones to watch next year.
“I’d never want to suggest that it was 1999 or 2000 again,” said Sean Dalton, a managing general partner at Highland Capital Partners, a venture capital firm that invests in smaller communications, technology and life science companies. This time, he said, “companies are succeeding on the fundamentals.”
Though stock prices of phone and cable companies are far from the peaks they hit half a decade ago, some analysts are starting to ask whether they are now relatively high, given the companies’ growth potential. Telecommunications companies still have some room to expand since only about 35 percent of Americans have broadband lines at home and 75 percent have cellphones. But those rates are rising fast, which may mean this year’s stock price increase will continue, but at a slower rate.
“The game is signing up customers to more than one service, but what happens when adding wireless and broadband customers peaks?” said Daniel Berninger, senior analyst at Tier 1 Research. “As time goes on, it gets harder and harder to grow. And if the company doesn’t grow, your investment doesn’t go anywhere and you might as well buy Treasuries at 5 percent.”