Most telcos and carriers’ finances are scary, but you have to believe that people will keep their phone service even when the economy tanks. In addition to DT, I also have TEO, which is small but doesn’t seem to have a lot of debt, pays a big dividend (there’s a catch with it, and I don’t know it, but I don’t have a lot invested there).

I would invest in TEF ahead of T or VZ, but their finances are a little scary… Not that familiar with other telecoms.

I do believe the capex will slow down, as the rate of technology changes slows down, and they saturate the market. They still are not close to mass adoption of smartphones, so that might take a few years.

Question 3 – People overpay for all kinds of stuff, I don’t see why bad service should be exempt.

I think people invest in those businesses for the dividends, and the potential for growth. I do own shares in many telecoms (including T-Mo’s parent), but they are less ethically challenged than the big two, and in countries that have more potential for growth.

Connectivity is a commodity, but the sellers don’t see it that way, and insist on packaging it with things that people are forced to buy. If the carriers and cable companies had their way, all networks would be walled gardens, where they control the content being distributed over it. I think it’s crazy, especially when it comes to distributing video entertainment, as there is less risk and lower cost in letting third parties sell content over your network, rather than trying to pick winners. I agree that neither VZ nor ATT is the company I would want to manage a commodity, but they know how to use political and economic power to maintain control of the commodity they sell.

I don’t’ think high-speed rail should be universally deployed everywhere in the U.S., but it makes sense for short distances that are now mostly served by air. While I like the idea of traveling across the country in 10 hours on a train, that may be hard to justify, but a 90 minute train ride from LA to SF is not, or between NY and DC.

And you don’t have to sell me on electric vehicles. :-)

The rest of the country? Rail service isn’t economic. Worse, it is only barely more energy efficient (at typical ridership levels) than medium-haul air travel. Some hints, even, that the latest generation of hybrid and electric vehicles will be MORE energy efficient than mass transit.

Hints at the dilemma here, but isn’t a terribly new idea:

http://www.smartplanet.com/blog/smart-ta kes/without-ridership-public-transit-fai ls-at-energy-efficiency/12623

Ultimately the best way to save energy on travel is to travel less. Whether you choose a car, train, or airplane matters far less than the distances involved.

(1) Why is the capex persistently so high?

(2) Is it reasonable to expect that capex will fall off at some point, relative to revenue? (I don’t for a minute believe that the technology cycle is about to halt.)

(3) How the heck do the majors expect to continue charging consumers 50% more than T-Mobile for service that is barely if at all better? (And if their rates drop by a third, those fat dividends will have to go.)

Clearly somebody must see reasons to invest in these companies at these prices. Either they understand the business better than I do or they are fooling themselves with short-sighted earnings estimates and market comparisons. Time will tell.

In any case, I see connectivity as something of a commodity. Doesn’t particularly matter what the nameplate is on the carrier, just the technology in play and the level of investment in building it out. Much better to invest in brands than commodities, especially since I don’t believe in the ability of either Verizon or AT&T to successfully manage a commodity business.

TFF, I can’t say what the costs of deploying 3G/4G networks are, but I know how much it costs to add a DSL line – less than six months of revenue. Since DSL only requires incremental capex (i.e., it uses existing wiring), it will cost less than deploying fiber. However, I believe Google has estimated that deploying fiber in suburban markets would cost less than $900 per line – easily paid off in less than three years, if not two (and they are putting their money where their mouth is, in Kansas City).

I know you’re not talking about DSL and fiber, but rather 3G and 4G, but they only have to run wires to one tower for thousands of potential subscribers (and with each new generation of wireless technology, they won’t have to run new wires, if they were smart enough to run fiber there in the first place). I don’t believe adding LTE base stations to existing towers is going to cost all that much.

What is the lifetime of a 3G network? Hasn’t that technology already been pushed to the discount rack, after just five or six years? Technology businesses must necessarily amortize their costs MUCH faster than railways.

Europe (EU) freight rail moves fewer ton-kilometers than Canada, and a fraction of the U.S. About 70% of EU freight moves by truck, and for the EU trucking share increased (and rail freight decreased) from ’95 – ’06. Rail freight in Europe is rather analogous to passenger rail in the U.S.

http://www.railfreightportal.com/General -Statistics

LightSquared was going to build an LTE network that they would wholesale out – but it was dependent on using spectrum that supposedly interferes with GPS operations, so their plan is in doubt now. One of their big customers was going to be Sprint, which unfortunately invested in WiMax for 4G, because they didn’t want to wait for LTE (they were essentially punished for trying to accelerate the adoption of technology). Sprint just backed out of that deal, as it doesn’t look like LS is going to make it happen.

realists50, I get your comparison to railroads, but it’s not entirely fair. The railroads in the US refuse to modernize, which is why they run so much slower than they do in other countries. None of them want to invest in new rails, maybe in the other countries, the government subsidizes that, but the U.S. stubbornly insists on only (seriously) subsidizing air and auto travel.

To compare both of them to a company in a different capital-intensive industry, Union Pacific’s ROE is 18%. Recall that upon purchasing Burlington Northern, Buffett described the railroad business as a good business but not a great business, due to capital requirements. Railroads are also less vulnerable to technology changes than mobile telecom.

FWIW, the capex approximates the depreciation. Thus their capital supply isn’t really expanding (at least not on a dollar-value basis), it simply costs that much to maintain and upgrade. Not so much “investing for the future” as “running as hard as they can to stay in the same place”.

TMobile offers clearly better deals — which tells me, as an investor, that Verizon and AT&T will have trouble extracting more money from their client base. If prices start to come down, or prices flatten while data demands rise, then they are in trouble.

There is definitely some redundancy of infrastructure when running parallel networks, at least if you desire national coverage in a country as sparsely populated as the US. Europe is far more densely populated, so the dynamics might be different?

Hadn’t heard about LightSquared, but competition kills profits in capital-intensive industries. Look at the airlines. Has there been a single five-year period since deregulation in which there wasn’t at least one major airline going through Chapter 11? Similar dynamics to managing communication networks.

If they spend $16B this year, that should be enough for all their current customer needs. Do they need to spend another $16B next year, just to keep those customers happy? I don’t think so, and if they do, it’s not sustainable, and they definitely shouldn’t be paying dividends. And is that $16B just for wireless service? Or is that for all of their businesses?

I agree with you on the explanation of write-offs – they’re hardly questioned.

I use T-Mo also, and was not thrilled with the prospect of becoming an ex-customer.

I don’t know if there’s too much competition. It seems to work o.k. in other countries. I think having multiple land-line service providers makes no sense, as infrastructure is duplicated, but in wireless service, there is no redundancy of bandwidth, as they all just provide the minimum needed for their subscribers. You will need 2x the bandwidth for 2x the wireless customers, but you don’t need two sets of wires/fibers for 2x the wireline customers. There is enough economies of scale for even the smallest of the national carriers, as long as they know what they’re doing (I think T-Mo’s problems are their horrible marketing, as not enough people realize they offer the best deal, and best customer service, IMO.)

I was really hoping LightSquared would succeed, as it would enable more virtual operators, and then the competition would be reduced to who is the most efficient retailer of service.

I also suspect that some of Verizon’s repeated “one time” writeoffs over the past few years have resulted from premature obsolescence of equipment. I have a very hard time reading explanations of writeoffs, though. Are they intentionally obscure?

Agreed that the marketing practices feed into the technology cycle, but this is precisely the dynamic that makes wireless carriers poor investments. They will throw a $600 phone at a customer, which will consume another $1000 of network upgrades, in the hope that they will begin to make a profit after the two-year contract is up. Except two years later, they (or another carrier) throws ANOTHER $600 phone and $1000 of network upgrades at that customer. This is terrific for Apple (and I expect them to profit more from wireless than all the carriers combined). This is a very bad dynamic for the carriers.

I must not have been clear in my mention of T-Mobile. Of *course* the acquisition would have squelched competition. Might have rapidly driven Sprint out of the business as well, leaving just the big two.

A monopoly or duopoly can be profitable in this kind of a business. But with four legitimate national carriers (use T-Mobile myself — honest pricing!), all will be challenged to turn a steady profit.

We have too much competition for the market to be profitable for the companies. Too little for the good of the consumer.

They encourage the obsolescence of technology by bundling equipment and service – this masks the true cost of the equipment, and gives customers incentives to upgrade phones every two year (they still charge for the subsidy after it’s been paid off by the subscriber). That also allows equipment prices to stay high – margins on smart phones are probably double that of PCs, mostly because of the lack of true price competition. A state-of-the-art smartphone sells for over $600, and there’s no reason so many people in this country should be devoting so much of their money to one every two years, but they do, because they think it’s only $100 or less. The carriers are accelerating the rate of technology advancement.

I strongly disagree with you on the T-Mobile deal – that would have been horrible for competition. T-Mo is the lowest priced carrier, and offers far better service than ATT. They were the only carrier offering unbundled service, where you could pay less per month if you brought your own phone. The ATT deal was a naked attempt at eliminating an obstacle to higher fees. We don’t have too much competition, the problem is that too much of the market is controlled by two dominant companies, and that inhibits true competition.

If wireless industry profits don’t grow, it will only be because of the carriers inept management.

Very high fixed costs to build out a network, costs that must be recouped within 3-5 years before the technology is out of date. Low marginal costs for adding a new customer. (At most you need to split some high-activity cells.)

Moreover, there is no brand loyalty. People hate the telecoms for poor service and byzantine billing practices. They have to compete on price and service quality, both of which have negative implications for the bottom line.

Verizon’s CapEx is running $16B-$17B a year, against net income that has been less than half that. Sure, the CapEx is matched against depreciation, but they are investing very heavily in their network — and much of that will be outdated and worthless in five years. Much the same situation for AT&T, though with a little more debt on the books.

Growth companies? Sure, I expect that wireless usage will grow. But will profits grow? Networks are a natural monopoly, and we have too much competition in the markets right now. AT&T buying T-mobile would have been a step in that direction, but you saw how THAT went.