Published April 15, 2014
Pop Quiz: What fits in your pocket, annoys others not partaking, is addictive, and costs more every day?
If you answered cigarettes, you’re right. But another correct answer is smartphones.
We’re not the first ones to make this comparison. But from an investment point of view, it’s useful.
The similarities between smartphones and cigarettes came to mind recently. I was reading a Wall Street Journal article describing that while the conventional wisdom is that aggressive competitive moves by T-Mobile ((TMUS)) and Sprint ((S)) ought to be driving prices down, mobile-phone bills continue to climb. According to the story, the average monthly revenue per postpaid user across the U.S. wireless-service industry has climbed from $55.80 in the first quarter of 2010 to $61.15 at the end of 2013. That’s a nearly 10% increase.
What other technology-based service or product has risen in price during that time? Cable TV? Nope, going down with “cord cutters.” Tablets? Not with Samsung ((SSNLF)) carving into Apple’s ((AAPL)) market share. Basic DRAM memory? On a price-per-gigabyte basis, DRAM prices have been halved in the last four years.
For our firm’s flagship tech portfolio, we typically follow the lead of our quantitative model, which ignores the specifics of a particular company’s product or service, focusing instead on its financial performance and market share trends.
But I admit I was surprised recently to observe that we own no less than six wireless service providers in our 50-stock Crabtree Technology portfolio. These include Verizon ((VZ)), Turkcell ((TKC)), Atlantic Tele-Network ((ATNI)) and a few more. The fact that we own six phone companies is almost happenstance – we didn’t go looking for them. Instead, with their huge cash flow and generally steady market share, they found us.
And what about market share? With four major wireless providers in the U.S., and typically only one wireless carriers in any given international region, is market share really changing hands?
Not literally. But in a subtle yet very real way, wireless providers are taking market share. This was made brilliantly apparent by blogger Steve Cichon. In a post this past January, Mr. Cichon pointed out that almost everything found in a 1991 newspaper ad from Radio Shack had been absorbed into a modern smartphone and contemporary wireless service.
Answering machine. CB radio. Alarm clock. Video camcorder. Calculator. CD player. Personal computer. And, of course the land-line and “Mobile Cellular” phones themselves.
Amazing. The wireless industry isn’t swapping much market share among its players, but overall, they’re taking “dollar” share from other industries.
I usually answer by saying that tech is interesting because of cool new products, or the way it profoundly changes our world in positive (GPS navigation) and sometimes not-so-positive (texting-while-driving) ways.
But it’s also honest to say that the “thing” about technology is our devices change, but our needs don’t. We need to communicate, so it used to be smoke signals, the telegraph and CB radios. Now it’s mobile phones. Tomorrow it might be telepathy. But underneath, it’s communication. Even cigarettes are not immune to this dynamic, as some smokers leave behind tobacco for electronic cigarettes because nicotine is, well, addictive. Smokers need it, distasteful though that may be to some.
So as investments, wireless service providers seem like a sweet deal: pricing power leading to plenty of cash flow and taking share from seemingly unrelated businesses. Oh, and customers displaying clear signs of addiction. And now, apparently, a growing number are using more than one smartphone: one each for work and play. Life is great for wireless service providers. What could possibly go wrong?
Lots of things. Starting with the self-inflicted wounds common to monopolists and oligopolists, like hubris and myopia. Then there are the here-and-now threats, such as over-the-top texting services like WhatsApp, which rely simply on the broadband connection and not a dedicated texting service plan. These would seem like a major threat to the wireless carriers.
But at the end of the day, the carriers ultimately have the network, without which none of these cool services can happen. In other words, the carriers have assets for which others will need to pay. WhatsApp has $19 billion of Mark Zuckerberg’s money, but they don’t have a network. And telepathy isn’t an option. Yet.
The jury is still out on whether cell phones cause cancer, something long accepted as a certainty for smoking. But as addictions, smoking and smartphones usage appear to be headed in opposite directions: the former marginalized; the latter taking up more and more of our time and money.
So thank you for talking. And texting. And binge-watching “Orange is the New Black” on your smartphone.
Meanwhile, got a light? There’s an app for that, by the way. And the Radio Shack ad didn’t even mention flashlights!
DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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