As businesses mature and head for the grave they often become big dividend plays.
We've seen it in tobacco, we've seen it in newspapers, and we're seeing it in copper-based phone networks. Both the copper leaders, AT&T (NYSE:T) and Verizon (NYSE:VZ), are now analyzed as safe dividend plays.
Where they have invested in fiber, the two companies can compete head-to-head with cable for broadband Internet subscribers. But the old DSL technology – when combined with voice telephone service – is now seen as obsolete. For most consumers, fast broadband means cable, not telephony.
So you don't evaluate these two stocks based on growth or on wires. You evaluate them based on their mobile networks. The only purpose Plain Old Telephone Service (POTS) seems to retain is as something government can tax, on a per-minute rate, to subsidize “universal service” that already exists.
Google (NASDAQ:GOOG) made the point of how stupid this is in a recent agency filing, with a few graphs. It showed voice traffic as a very small part of the larger Internet market, and asked why then the agency is focused on imposing per-minute fees on IP traffic.
Ironic that Google was making this point because, over the last year, shares in both Verizon and AT&T have out-performed those of Google. AT&T now has a higher market cap than Google, for the first time in years.
The reason is that Verizon and AT&T can monetize their services through bills, while Google has to monetize its service through ads. This is the heart of Google's financial problem. Social networks drive customers further down the sales funnel than mere ads and Google is ill-equipped to make people pay for services.
The question is how long this might continue. Despite its perceived problems, Google is still generating one dollar in operating profit for each three dollars in revenue, while Verizon and AT&T have ratios closer to one for each 10.
AT&T and Verizon have both imposed bandwidth caps on wired and wireless Internet customers in many markets. They say it's to reduce congestion. But it really emphasizes their government-sanctioned role as gatekeepers, as bottlenecks consumers must get through in order to reach core Internet bandwidth, the kind Google has so much of it's giving it away.
Copper can still do a job. Cable networks remain mostly copper. Take out voice and a copper line with DSL technology can still deliver several megabits-per-second of service to any home, with Voice Over IP riding as a low-bandwidth service. You can charge for broadband and give voice service away.
We continue to move from an era of Internet Scarcity to Internet Abundance. This was the real tension at the heart of Google's FCC filing. As the voice networks continue to milk their monopoly positions for all they are worth, the time when it makes sense for an Internet player to buy one grows nearer.
Disclosure: I am long GOOG.