WRFest 2Mar08(Technology): Telecom, Media & Entertainment
There's not necessarily any major new sources of growth in the Telecommunications industry in the
sense that major new capabilities are appearing. At the same time there is a fundamental, tsumanic structural change going on with changes in the nature of the underlying network. That basic change is the shift of all forms of Telecom network infrastructure to the new platform, VoIP. Or Voice-over-IP where IP is Internet Protocol. Actually it's much broader and more complex than that and isn't happening all at once but we tried to capture some of the simple characteristics in the accompanying chart. Many of the results of which you can see for yourself.
For example with the writer's strike when's the last time you watched TV ? Being a victim of what Comcast laughingly thinks of as it's customer service it's been at least two years for me. But that hasn't caused me to miss any programs I was particularly interested in. Many of my favorites happen to be available on-line for free. And then there's always DVD rentals. Both of which are being supplemented and perhaps replaced by downloadable audio and video files. Apple is now the largest music retailer in the country for example thru its' iTunes store. This is going to go on for a while and not only continue the changes you see around you but accelerate them. It'll also change the industry - actually it'll change several industries from Telecom & Cable to Telecom equipment to Semi-conductors to the entire Media & Entertainment complex. A decent start on understanding it is to understand the structural shift.
All the different networks (Voice, Data, TV/Video) grew up with their own separate network infrastructures and technologies. The old-line phone companies started with PSTN, or Public Switched Telecom Network, which required physical lines in part and a dedicated point-to-point service capability based on central switches. The DoD was worried about survivability in event of nuclear war so funded the creation of the Internet which created TCP/IP which was a data oriented technology. Cisco got it's start as the first of the major, or at least successful, IP datacomm equipment providers and rode that rocket from the early '90s. It's since undergone many major evolutionary changes. As the IP networks matured the phone companies started moving traffic onto IP backbones even when the line into your house was the old stuff. When ATT split and though the new national company would dominate that was a badly mis-placed guess that VoIP was mature enough that they could give up those local connections. That was about five+ years to early but now VoIP does very well thank you and Cisco is the new major player (Avaya having let it get three steps). Meanwhile there grew up the Fat Pipe wars between the Telecom and cable companies over who'd control the network to the house line. The cable guys started with the advantage that their pipes were fatter and already carried video but they've been "challenged" by, among other things, customer service. But more and more endpoint devices are being hooked to this massive new network which should be good for the Telcom equipment providers and their chip suppliers. Alcatel/Lucent, Nortel, Siemans and Ericsson ought to be in great shape but aren't. Interesting.
In parallel with this you got things like the AOL/Time-Warner merger on the theory, as well founded as Mike Armstrong's at ATT, that everything was moving to the Net. Pre-mature again and badly under-executed. But with iTunes and other things more and more traffic is going that way. One of the real breakthrus btw was Bob Iger's takeover of the Disney CEO's job because, instead of continuing a rear-guard fight, he jumped on the Internet bandwagon. Ironically doing for the Disney that Eisner had almost destroyed what Eisner had, in turn, done twenty years earlier in taking over.
So as you read the stories below bear in mind that we have a)network backbone convergence, b) wireline displacement to wireless to be followed by IP displacement, c) Fat Pipe Wars with huge investment demands and, on top of the telecom stack d) the Application/Content wars. Which is why the Media industry is going thru more changes in the last two years than it has in decades, perhaps since the early 20thC in some ways. And oh yeah, this also sorta explains why the iPhone was and is so revolutionary. You see the old line phone companies had kept control of their networks and rationed the services and content. Apple broke that control and opened up the world. Which makes Google's "Alien" open-source phone platform a serious threat to their control as mobile service moves to IP networks. Whee.
So as you read the stories below keep all this backstory in mind !
Telecom Readings
Sprint chief tries to halt customer exodus Unfortunately for him, the big story coming out of Sprint Nextel's fourth quarter earnings is more of the same: mobile phone customers continue to leave in droves. The No. 3 wireless shop is expected to report that more than a half million users have cancelled their service as of the end of the year. Worse, say analysts who've been watching the monthly defection rate, the company is on track to lose more than a million subscribers this quarter ending March 31. But Hesse appears powerless in the face of an alarmingly accelerating erosion of the company core wireless customer base. Sprint lost 337,000 subscribers in the third quarter, then double that in the fourth quarter. And now, though the company isn't likely to disclose it, it's on track to double that pace again. Sprint posts $29.5 billion loss, Sprint Posts $29.5 Billion Loss, Eliminates Dividend, Borrows $2.5 Billion, Recharging Sprint
Media and Entertainment
Consumers Spend Almost Twice as Much Time Using the Internet as Watching TV If you have an Internet connection, chances are you are spending much more time surfing the Web than watching TV. A new IDC study of consumer online behavior found that the Internet is the medium on which online users spend the most time (32.7 hours/week). This is equivalent to almost half of the total time spent each week using all media (70.6 hours), almost twice as much time as spent watching television (16.4 hours), and more than eight times as much time as spent reading newspapers and magazines (3.9 hours). The data also show that consumers tend to use the media they grew up with. The older the respondents, the more they consume TV, newspapers, and magazines; the younger they are, the more the Internet displaces usage of traditional media. Using search engines (84% of respondents), mapping and navigation services (83%), personal research (77%), and using email (76%) are the most frequent online activities. The types of devices employed to access the Internet will continue to diversify, and Internet usage will become more mobile. In addition to desktops, laptops, and mobile phones, a new category of "web gadgets" such as the Amazon Kindle, the Nokia N800, and the Apple iPod touch will use WiFi to access the Internet.
- First, Newspapers. Now, TV Could TV be the next industry to become Internet roadkill? The amount of time Americans spent watching video online grew 34% last year, and while that's not been entirely at the expense of TV viewing, it sends shivers down network executives' backs.
Barrons Review: Is the Magic back at Disney? We've held onto The Walt Disney Co. (DIS) for quite some time. I've mentioned it in a positive vein repeatedly -- over a year ago on PBS with Paul Kangas, and then again here (Tribune Media), and even a year before that on the Pixar takeover. Why? A few years back, our quant tool (an earlier version of the FusionIQ software) had Disney highly ranked (12/05/2006). Since then, the shares have performed rather well, especially as the US dollar weakened. But back in 2005/06, analyst coverage was rather neutral. Well, it turns out that the fundie guys missed the boat, while the unbiased quant assessment turned out to be much better at stock picking. Since last year, however, there has been a deterioration of the many factors that go into the quantitative ranking of Disney: The short and intermediate term trend was broken, money flow slowed down, and institutional ownership slipped. The quant ranking of DIS started to drop to bearish levels (below 70), prompting us to exit the positions in our managed accounts. Fast forward to this weekend's edition of Barron's: They had a glowing cover story titled "The Magic is Back" about Walt Disney and its prospects for the future. Problem is, its a few years late to the party. Rather than merely assume Barron's cover story is a contrary indicator, we decided to run Disney through the system to generate a new unbiased metric. As seen in the chart below, Disney's master quant ranking is now down to only a 58 out of a possible 100. Maybe there is some magic left in the kingdom, but objectively speaking, its not showing up in our system.