Verizon Feels The Squeeze

Dec. 7.11 | About: Verizon Communications (VZ)

As I've said here before phone companies like Verizon (NYSE:VZ) are a bad bet because, by building out entire networks, they waste enormous amounts of capital that can't be recouped in a world that has moved to an Internet business model.

This is true for both wired and wireless systems. Both now sport a negative return on invested capital. This forces phone companies to act like monsters, doing things like creating artificial shortages of spectrum aimed at forcing tech companies to pay its ransom if they want to continue doing business with their own customers.

It also means playing hardball with all sides.

  • The present spat over Google Wallet is not about security or user experience. It's about money. Verizon wants a cut on every transaction made with the wallet, just as it has long sought to take a cut on every bit sent through a wireless device on its network. When forced to retreat from the per-bit scam by new phone technology, it moves on to transactions.

  • Verizon is trying to “compete” with Netflix by launching a streaming movie service, again turning its bits into more profitable “services” and control customers. But in this case it won't just face services like Netflix but hardware vendors like Microsoft.

  • Verizon is playing hardball with its workers, firing strike leaders in an attempt to weaken workers' positions in future negotiations.

This is a key point in analyzing such efforts. Verizon may be able to squeeze out software by refusing to support it. It may be able to squeeze out some streaming revenue, or squeeze more from workers. But it can't stop manufacturers from installing workarounds on their hardware – once that happens it's just a matter of time before the company retreats.

For investors the message is as clear as I can possibly make it. Avoid phone companies. Their business model is broken. They will try to convince you otherwise – and they have a lot of gullible friends in the media and in Washington who are anxious to help (or are paid to). But these are newspaper companies, they're cigarette companies. Unless and until they become Internet companies, they're dead money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.