Friday, January 14, 2011

Warning to Investors: Voice Will Be Free

About 10 years ago I was at a technology conference here in Boston. The keynote speaker was John Chambers, CEO of Cisco.

Chambers made a statement then that has stuck in my mind:

"If you remember one thing from my talk today, it should be this: Eventually Voice will be Free."

What Chambers meant was while the demands for telecommunications - both voice and data transmission - were doubtlessly going to rise exponentially, the cost of transmission would be driven relentlessly to zero.

Because of Chambers' comment - and also based on doing a lot of fundamental research - I have largely avoided investing in the telecom area, both on the stock side as well as the bond.

Frankly, I believe that names like Verizon and AT&T are going the way of General Motors and Chrysler - large corporations saddled with huge legacy liabilities (pension and health care) and whose products are basically unprofitable. I don't know when, but I believe that at some point in this coming decade we will start to read more about the financial woes of the telecom companies.

I ran across this article from Fortune which described investors in the telecom sector as "chumps". Here's why (I have added the emphasis):

..Since 2000, Americans have gained the power to communicate in ever more ways while somehow paying less to do it. The nation's telecom tab is down 22%, in inflation-adjusted dollars.

And yet over the same decade, the expansion in consumers' communication power was unprecedented. Two major telecom services that were largely used by the wealthy in the 20th century have spread to the masses. Cell phone use tripled between 2000 and 2010; now virtually every adult has one. And the number of high-speed residential Internet connections jumped from 2 million to 74 million. All this happened as the nation's total telecom bill shrank.

How was that possible?

Thank digital technology, fierce competition—and investors willing to build networks at an economic loss. When Craig Moffett of Bernstein Research recently tried to add up the economic value produced between 2000 to 2010 by AT&T (T), Comcast (CMCSA), Verizon (VZ), Echostar (SATS), and the like—the total he came to was horrifying. So far in the 21st century America's telecom networks have destroyed nearly $200 billion.

Every single type of network—cable, cellular, satellite, take your pick—has destroyed wealth for its investors.

Telecom investors: The 21st century's biggest chumps? - Fortune Tech

Like so many industries in the past - think airlines and autos as prime examples - simply knowing that a product may be popular in the future is not sufficient to make them attractive investment opportunities.