Investors Can’t Beat Cell Phone Monopoly
It would be hard to ignore what’s happening in modern telecommunications. Recently, ATT decided to go after its rival, T-Mobile in what would be a multi-billion dollar deal. In doing so, it effectively removed one of four of the still remaining cell phone companies in the United States. We’re now left with ATT, Verizon, Sprint (which is in serious financial trouble).
So what’s this mean for consumers? It means we’re going to get screwed. What’s it mean for ATT shareholders? They’re going to clean up!
What Makes ATT So Attractive
In taking T-mobile off the market, ATT’s share of the wireless market becomes massive. Here’s how each company stacked up at the end of 2010, in millions of subscribers:
ATT – 95.5 million cellular subscribers
Verizon – 102.2 million
Sprint – 50 million
T-Mobile – 33 million
In combining both ATT and T-Mobile, ATT will have a total of 128 million customers, 26 million more than Verizon and 78 million more than Sprint. Combined, the emerging Verizon and ATT duopoly will have 230 million out of 280 million contracts and pre-paid users. That’s roughly 80% of the total cell phone market, and more than enough to ensure that cash-strapped Sprint doesn’t have much room to compete.
Cell Phone Industry
The cell phone industry is great for well financed companies like ATT because the hottest, newest phones are pawned off to the highest bidder. At launch, the iPhone was originally pitched to Verizon, which passed it up on the basis that $600 was simply too much. ATT ate it up, giving Apple tons of cash and ample subsidies to make the $600 phone more palatable to the consumer.
Now the iPhone is heading off to Verizon, but only after several years of an ATT monopoly of the very popular device. Soon, Sprint will be the only company left without it, and the only company that desperately needs a core product, but it simply doesn’t have the cash to bring Apple to its customers.
The Case for ATT
The case for ATT is simple: it has a monopoly once again, just like it had in the 1980s, except this time it doesn’t really matter if the merger is approved. Anyway you break it down, ATT’s family talk plans and free minutes for calls to and from ATT devices means it keeps its customers who have ATT just because everyone else does, too. Verizon has the same.
ATT however, has a much better balance sheet. While sales growth rests at a stagnant 2% annually, it’s trading for a PE multiple of 13 but with excellent ROA of 8% annually. Dividend yields are a fat 5.6% per year. How can you not love a company like that?