The Cost Of Phone Calls Is Headed Toward Zero - 24/7 Wall St.

Ten years ago, in 2000, I attended a technology stock conference here in Boston.

One of the keynote speakers was John Chambers, chairman of the Internet equipment routing company Cisco. At the time Cisco was one of the "hot" tech stocks*, so the meeting room was packed.

If you ever have the chance to hear Chambers, you should. He speaks in the native drawl of West Virginia, where he grew up, and has an admirable ability to frame complex technology discussions in simple, down-to-earth language.

He made a number of good points in his talk, but two in particular still resonate with me a decade later.

First, he was critical of the Japanese government for spending its fiscal stimulus funds on infrastructure projects like repaving highways and straightening out rivers. Chambers argued this was a waste of money, and that the government should instead be investing in Internet and IT projects. While his comments were of course dismissed at the time (since Cisco would obviously be a beneficiary), can anyone look at Japan's economy today and not believe that perhaps much of their stimulus spending could have been better spent?

The second point was one that has also stayed with me, and one that has saved me and my clients a considerable amount of money.

During the talk, Chambers said: "All you have to know about telecommunications is: Voice will be free."

By this he meant that the price of phone calls and any other telecommunications would eventually move to zero.

This didn't mean that the cost of providing the services would be free. No, what Chambers was implying was that the huge costs of providing static-free, reliable telecommunications would doubtlessly rise, but it would be very hard for any company to make any money doing so.

And so it has come to pass. Today only two telecommunications companies in the United States - Verizon and AT&T - have any profits at all. However, these profits are the result of landlines, and not cellphones, where every company today is losing money. As the subscriber base erodes for landline phone service (do you know anyone under the age of 30 that installs a phone in their home or apartment?), the future for all telecommunications companies looks bleak.

As I have been discussing frequently on this blog for the last few months, I believe the investment theme for the coming years will be income. Investors will be demanding more income in the form of dividends from their stock investments for a variety of reasons, but mostly because an aging population is going to need income to live on. Moreover, with the disappointing stock returns of the past 12 years, it will be harder for corporate boards to argue that they can invest their cash better than their shareholders can.

Today, in most client portfolios, I have largely avoided investing in any telecommunication stocks or bonds. I believe these companies are in big trouble: huge infrastructure costs, large legacy health care and pension liabilities, and a declining revenue base. The stocks look attractive due to the high dividend yields they currently sport, but I think that the combination of rising costs and declining prices is a recipe for longer term disaster.

The recent announcement by Google that it will now offer free phone service to its Gmail customers is another step in the "voice will be free" environment that John Chambers discussed 10 years ago. As this post from the blog 24/7 Wall Street discusses, it will probably be only a matter of time before other Internet providers begin to offer similar services.

The Cost Of Phone Calls Is Headed Toward Zero - 24/7 Wall St.


*One Wall Street analyst was so in love with Cisco that he claimed that the company would soon be the first corporation worth $1 trillion. Now, 10 years later, Cisco stock is off by more than two-thirds, and the company has a market cap of $121 billion. However, Cisco continues to be one of the dominant players in the Internet equipment space, proving once again that company fundamentals and stock prices do not always move in the same direction.