There Is No Telecom Business

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Includes: AMZN, CHTR, CMCSA, CTL, GOOG, GOOGL, LVLT, NFLX, S, T, VZ
by: Dana Blankenhorn

Summary

There is no such thing as a telecommunications business, just a bit-moving industry.

Phone carriers, cable carriers, and wireless carriers compete directly today.

Vertical integration is the next frontier.

Seeking Alpha Editor Michael Hopkins has written a summary of Connecting With Telecom that deserves an important response.

There is no such thing as the telecom business. There are only bit carriers.

By that, I mean telecommunications - all the services defined by that term - is being replaced by the Internet. Telephone services, data services, TV programs, and channels - they're all running on the same protocol today. You may have a private network or an internal network, but it's basically inter-networking. It's the Internet. We are talking, then, of moving bits.

When you see everything as just bits, the landscape becomes clear. TV cable is the dominant carrier of bits in the last mile. The wires are fatter, so the copper carries more bits. Fiber can be added in loops, gradually, and each upgrade brings more bits to the customer. The loops may be shared, so if everyone is online at once, contention is an issue, but you deal with contention by just plunging fiber deeper into the network, gradually.

Comcast (NASDAQ:CMCSA) and Time Warner Cable (TWC) thus have a dominant position in the bit business. They have, in many ways, replaced the old telcos as virtual monopolies within their territories.

Now, don't feel too sorry for the telcos. Most of them did what AT&T (NYSE:T) and Verizon (NYSE:VZ) did, they found another way to deliver bits that the cable guys could not copy. They became wireless carriers. (Sprint (NYSE:S) descends from carriers too small to interest the Bell System.) All the old regional bells save US West are now part of a larger mobile company. (US West is part of CenturyLink (NYSE:CTL).) These companies have a shared monopoly, one they purchased from the U.S. government, buying up spectrum as it was auctioned off.

Their wired infrastructure is practically vestigial, except where they spend billions for fiber upgrades, or something else important, the Internet core. The movement of bits between cities is something Enron once tried to make a market in. They were broken by Wide Division Multiplexing, which lets any optical fiber owner use colors as separate channels for their data traffic. Even the "big two" can't dominate the core. Neither is a Tier 1 carrier. That honor goes to Level 3 (NASDAQ:LVLT).

The Alphabet formerly known as Google (NASDAQ:GOOG) (NASDAQ:GOOGL) deserves a mention, because they are creating competition for cable and phone companies with their Google Fiber builds. What Google has found in the process is that increasing last-mile connectivity isn't about technology so much as it is about running trucks. Running trucks is expensive. This is the Internet ground war, perhaps the last true market battle (that isn't just marketing) out there.

But it's important to note that Google is actually helping the incumbents in this battle. Before Google Fiber enters a city, the company demands that the regulations limiting competition, and inhibiting fiber truck runs, be torn down. When these rules are torn down for Google, they're torn down for everyone. AT&T has been using the example of Google effectively, bringing "fiber to the press release" in many markets in order to get rid of rules on what it can do, and what it can charge, for the bits it delivers.

Because of high capital costs, the last-mile of wired bit delivery is going to be a shared monopoly. Some places will just have a phone company, others a phone and cable monopoly, others adding Google Fiber. But wireless complicates things. As WiFi speeds have increased, as more spectrum has been sold, and as carriers have learned to use and reuse that spectrum more effectively, the difference between low-bandwidth services like phone calls and high-bandwidth bits we think of as "TV" have become absorbed into the general bit competition. This is the only reason we can talk about this as a "market."

Beyond the bits, the battle between carriers is over services, gaining exclusive control over what the bits turn into. That's impossible in voice - the service is too low-bandwidth to be worth considering - but it is not true in what we call TV. Thus, the real battle is joined, the big last-mile bit companies moving into owning the "content" that the bits devolve into.

In that battle, of course, the last-mile boys have many competitors. Clouds are one competitor, with Amazon.Com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). So are existing networks, and media companies. But in the end, the capital of the carriers, and the low profits to be had in content, are going to move content toward the carriers.

You'll know the move is underway in earnest very easily. A second carrier is going to start bidding on sports rights. (Comcast already does this.) Vertical integration is the next carrier frontier.

Just don't call it telecommunications. Everyone is a bit player.

Disclosure: I am/we are long AMZN, CMCSA, GOOGL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.