Over the coming weeks there will be a lot of US financial analysts (those that are left after the bloodletting) whose minds are concentrated, trying to work out if the telecommunications and media sub-sectors will be hit by the looming US recession.
AT&T’s figures on October 22nd will be perhaps the first under the spotlight. Last time it reported there had been published rumors that U-Verse net adds would be way off, and that mobile growth had started to tail off. But the giant was more than healthy, trading a reduction of $800 million in lost voice revenues for an increase of $1.3 billion in mobile revenues and a 4.7% total revenue rise and net income much improved.
U-verse TV subs rose by enough to not worry anyone and AT&T said it was on track for 1 million subs by year end, and will need something over 200,000 for the coming quarter to make that a reality. This was triple play finally beginning to work, with a quadruple play (fully bundled) just around the corner. iPhone was also good.
In this type of economy every stock is innocent until guilty is hinted at, and all that managed to do back in July was sustain AT&T’s share price, not the market. The same is likely to happen again. And five days later Verizon will probably pass it’s own test and retain and sustain its own share price. The market however will still be falling due to the condition of financial institutions everywhere in the US, and many other places.
Verizon will be followed by Comcast, DirecTV, Dish and Liberty Media and anyone else you can think of. Sprint and Motorola will inevitably be in there somewhere.
The truth is that handsets, flash memory, flat TV screens and quarterly subscriber adds for Pay TV and all forms of telephony are all going to come under increasing scrutiny and eventually one of the numbers HAS to be sub-standard, and the result will be yet another panic sell-off.
These are all interlinked, and they are also all linked to consumer spending in some way, and the question everyone is asking is how can a failure of confidence on Wall Street bring it all crashing down?
At the bottom of all the financial equations which are killing Wall Street is the issue of who is insuring what contracts and mortgages against default? And how are those defaults being marketed, and underwritten. It is not that there are a lot of mortgage defaults, it’s that their effect is much larger on financial organizations because of bets they have made in them.
None of that has anything to do with Tech or Media, but the headlines they create have, because they scare consumers out of spending.
The main recession indicators are 1) payroll and employment, 2) industrial output, 3) Personal income. They are all related. Fire people and they make less and spend less. Fire bankers and it doesn’t have that affect, at least not directly.
However recession is not an exact science. Convince people there’s a recession coming and they spend less, output has to drop, people earn less and there are layoffs. Result recession. You can attack this equation from any angle.
You don’t even have to stop consumers from spending, just convince the finance director at AT&T or these other giants, that cutting spending is prudent and you have a slowing in the build out of U-Verse, so less net adds, so slightly lower profits. Slow down the roll-out of 3G and you have less areas where the new iPhone will work, so less sold, so more people staying on fully subsidized devices. Apple has already lowered its estimate by 4 million iPhones, so surely this must be happening, right?
Well we don’t think so. The handsets business is a global one, so Samsung, Nokia, Sony Ericsson and Motorola are all going to do well or badly based on how well their device mix fits multiple economies around the globe. Motorola did well last quarter against the odds simply because it managed this well. If it continues to manage it well this quarter, then even falling US mobile additions would not see it in disaster territory.
Also the Flash memory business is already suffering from huge overproduction, and is in a slump. That means that handset, and TV sets and set tops and PCs which either already use or are threatening to use lots of Flash memory, are going to have at least one major component with falling costs. So their profitability could be assured even if they are not seen to be growing.
Flash memory itself mostly affects Korean, Chinese and Japanese firms, and that’s already in their price. In the US it is only AMD, Intel and Micron that could suffer and of course SanDisk, which offloads much of its manufacturing risk to Toshiba in Japan. AMD is already suffering, Intel has other revenues to lift it up, and Micron is the only potential downwards US surprise and it’s not a widely held stock.
Flat TV screens are being installed as standard these days. CRT TVs and rear projection screens are less available every day. That means that LCD and Plasma screens have to ship in higher and higher numbers and witness the same type of price erosion that Flash experiences, due to overproduction once again. Companies like Samsung and Sony and Panasonic will bear the brunt of this, but actually they will dictate the market price and make it operate within their tolerances, because they make such a large percentage of this stuff out of the world’s supply. In the US the retail element of these devices might suffer some margin loss and a reduction in total revenue volumes, but the numbers of devices will continue to grow significantly. Nothing should attract Wall Street scrutiny in this sector.
Which leaves us with the quarterly subscriber adds. That might be a problem.
If US consumers downgrade from top of the line pay TV services to a cheaper variant – from cable to satellite, from 300 channels to 100, then that will show where exactly?
Comcast and DirecTV will get the adds they need, but show a smaller increase in ARPU for that quarter, which will mostly come off the bottom line. But since Comcast is only growing by shifting to digital from analog and by stealing AT&T and Verizon fixed phone lines, the overall Comcast equation will be unlikely to attract any more gaze from Wall Street that it already has. Same for Cablevision. Given AT&T’s new interest at DirecTV and its last quarter’s strong performance, again there are no likely falls here.
Dish is already in trouble and we have predicted doom and gloom and it’s already in the share price.
That leaves the RBOCs, Sprint and other cellular operators and of course Clearwire.
The falling stockprice at Clearwire may see the deal with Sprint, Google and the cable operators getting repriced (our friends a JRPG tell us this has a high likelihood), but the deal remains strategic enough for all the parties that it will not unravel. The quality of the launch services at Xohm, which we believe will be exceptional, will be enough to bring this merged entity’s price up over time.
Which brings us to the cellular efforts of Sprint, AT&T and Verizon, as it is their cellular efforts that make or break their numbers. Most of the handsets that they ship have little to do with the consumer. Every so often a contract customer is renewed and they have offers of new devices to keep them sweet. The retail element of these operations will reflect consumer spending, but this is likely to emerge in the price of the devices which are on the market, not the number of devices sold.
But apart from devices AT&T Mobility and Verizon Wireless still have the ability to send the wrong messages to the markets with changes to their capex.
Operator capex is likely to come under pressure. Its been under pressure all year and most carriers will look at the headlines and put everything on hold until the current panic is over. They will then reassess priorities. A prudent CFO will be praised for this by Wall Street, but the act of slowing spending will cause embarrassment at Alcatel and Nortel and possibly Cisco. This will reflect to a lesser extent on Ericsson and Siemens Nokia Networks. But this will not come into their figures for at least two more quarters, by which time any crisis may have already happened or be so bad that this will no longer be a factor.
The main impact will be in the US and other developed markets and what cellular operators will do is get more services and value out of existing networks, which means more spending on HSPA and EV-DO upgrades. LTE will be pushed out and AT&T has already said it LTE roll-out is five years away. Cable operators could do the same, delaying upgrades to DOCSIS 3.0.
This whole scenario makes ‘open’ applications welcome, since operators can differentiate their services but offload device subsidies using almost NO capex. Churn will be combated by more bundles, fixed voice with mobile voice, PCs and data services, free wi-fi for broadband customers etc..
But in a market like the US where under 85% of people have mobile handsets, saturation is a few years away, probably 5 years, and the major cellular operators will be able to acquire more customers at least, even if greater ARPU is harder to come by. They should also be able to offload costs.
Consumers may not spend again until the news headlines are no longer full of dire predictions for the world’s great economies. However they will not throw away their handsets, their iPods or their TV sets and pay TV services. And despite a general cautious tone coming from the world’s CFOs, the chances of a major US or even global recession will not gain impetus from the telecommunications or media segments.
Finally there are enough reasons for market share to be changing in these markets currently and as long as CFOs don’t blame their own shortcomings on the economy, unlike the statements from Netflix this week (see separate story) then the inherently good business of annuity revenue subscription services are not going to contribute to Wall Street’s overall malaise.