How To Pick The Best Telecom Stocks
The telecom industry can quickly change from one year to the next. There can be several years in which it is a safe, reliable investment haven with a dependable customer base and steady, reliable revenue and profit streams; a couple of years later the industry could see an upheaval as it responds to technological innovation, regulatory changes, intensifying competition and merger and acquisition activity. As a result of this industry's tendency to change, it can be tough for investors to make heads or tails of it. To help make sense of things, here is a quick glimpse of some of the industry dynamics and key metrics to judge the performance of companies operating in the telecom space. (Gain some insight on how innovation can affect a company's stock; read Which Is Better: Dominance Or Innovation?) Market Dynamics Blurring Industry Lines Technological changes are transforming the communications market. The lines that once divided telephone companies from cable TV providers, wireless players and internet service providers are now blurred. Any definition of the industry must include all these market players. Cable companies offer broadband internet and phone services over their high-speed video networks. Wireless companies, the same companies eating away at the traditional land line telephony business, also deliver high-speed internet to mobile handsets. In response, traditional telephone companies are expanding their bundles to "triple play" and in some cases "quadruple play" offerings that combine fixed line and mobile telephone, internet and digital TV services. Commoditization and Pricing Pressure Because the companies' services are so similar, they are increasingly competing based on price. Smaller companies will pop up and attempt to compete on a lower cost base. In the mid-2000s, companies such as Skype and other voice-over-internet providers offered services that were almost free. While lower prices are certainly good news for customers, they put enormous pressure on established companies' revenues and profitability. Innovation Facing competition and threats from new technology, companies need to keep investing in innovative technology. For example, in the decade entering 2009, telecom players poured money into advanced fiber optic and broadband wireless technology to increase the capacity of their networks and improve their ability to deliver voice, data and video. At the same time, telecom operators rolled out web-based consumer-focused applications, such as online banking, to stay ahead of the pack. As shown, innovation often involves large capital expenditures and plenty of risk. (For more on company innovation, see Which Is Better: Dominance Or Innovation?) M&A Competition and commoditization pressures often spark consolidation in the industry. Barely a month went by in 2008 without news of another multibillion dollar merger, acquisition, partnership or alliance in the sector. AT&T (NYSE:T) merged with BellSouth Corp. in 2006 to become the world's largest full-service telecom operator. The 2008 merger of Verizon (NYSE:VZ) and Alltel created the largest wireless communications firm - based on number of subscribers, which was approximately 80 million - at that time. Telecom consolidation is driven largely by the need for scale efficiencies, made more urgent as telecom players increasingly compete on price. Size and scale give telecom companies a larger geographic coverage plus expanded offerings, which can serve to hedge against a downturn in any specific service segment. At the same time, mergers remove competitors, leaving players with the opportunity to cut costs with less fear that competitors will spend more or cut prices to steal away customers. (Strategic acquisition is becoming a part of doing business. Meet the key players in M&A Competition Is Cutthroat For Acquirers.) Regulatory Challenges Telecom investors can't afford to ignore the role of...
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