Cell phones are the new cigarettes

By Jon Markman

When you get in your car, you reach for it. When you're at work, you take a break to have a moment alone with it. When you get into an elevator, you fondle it.

Cigarettes? Cup of coffee? Nope, it's the third most addictive substance in modern life, the cell phone. And experts say it is becoming more difficult for many people to curb their longing to hug it more tightly than most of their personal relationships.

With its shiny surfaces, its sleek and satisfying touch, its mysteries and air of sophistication, the cell phone connects us to the world even as it disconnects us from people three feet away. In just the past couple of years, the cell phone has challenged individuals, employers, manufacturers and therapists in ways its inventors in the late 1940s never imagined.

The costs are becoming ever more evident, and I don't mean just the monthly bill. Dr. Chris Knippers, a counselor at the Betty Ford Center in Southern California, reports that the overuse of cell phones has become a social problem for tens of thousands of Americans not much different than other harmful addictions: an obstacle to one-on-one personal contact, and an escape from reality.

Sounds extreme, but we've all witnessed the evidence: The guy at a restaurant who talks on the phone through an entire meal, ignoring his kids around the table. The woman who yaks on the phone in the car, ignoring her husband. The teen who text-messages all the way home from school, avoiding contact with kids all around him.

Is it just rude, or is it a pathology? And pardon my own manners, but what's the investment angle?

Farewell, friends

Jim Williams, an industrial sociologist based in Massachusetts, notes that cell-phone addiction is part of a set of symptoms in a widening gulf of personal isolation. He cites a study by Duke University researchers that found one-quarter of Americans say they have no one with whom to discuss their most important personal business. Despite the growing use of phones, e-mail and instant messaging, in other words, Williams says studies show that we don't have as many pals as our parents. "Just as more information has led to less wisdom, more acquaintances via the Internet and cell phones have produced fewer friends," he says.

If the mobile phone has truly had these effects, it's because it has become incredibly pervasive. Consider that as recently as 1987, there were only 1 million cell phones in use. Today something like 200 million Americans carry them. Almost three-quarters of American households have at least one, and many have three to five. About half of teens aged 13 to 16 have one. They far outnumber wired phones in the United States.

Most emerging countries in Asia and Africa have skipped right over wired phones and launched straight into the wireless age. Naturally, India and China are the two fastest growing markets: Nearly 6 million people signed up for cellular service in India in August alone; the one-month total in China was around 5 million.

In Spain, where a population of 41 million people has more than 35 million cell phones, authorities complain that obsessive-compulsive behavior has afflicted teenagers disproportionately. Newspapers are filled with stories of young users spending so much class time making calls, receiving text messages and surfing the Web that they flunk out. A Spanish wire service reports that up to 15% of Spanish teens sleep with their mobile phones to make sure they can answer messages overnight. And to pay bills approaching $1,000 a month, some have turned to crime.

Over in Australia, a researcher at Queensland University concluded that cellular addiction stems from the fact that many users consider it to be a "security blanket" that improved their sense of self-worth and thus became obsessive in their perceived need to be near one. Maybe that's why 300 million phones were sold last year with digital cameras fitted inside -- which is way more than the number of stand-alone digital cameras sold.

If you think an uptake this rapid and extensive has something more going for it than mere usefulness and security, you're right. A sales job of historic proportions has helped, as cellular companies have invested vast sums of money in Madison Avenue techniques to persuade us to hook up. More money is spent marketing cell phones, in fact, than any other object in America, including cars, tobacco and laundry detergent. A recent study in Advertising Age reported that the top three "mega brands" of advertising today are Verizon Communications (VZ, news, msgs), Cingular and Sprint of Sprint Nextel (S, news, msgs), with a total of $6.5 billion spent between them in 2005. The only advertisers in the same league are General Motors (GM, news, msgs), Ford (F, news, msgs) and Procter & Gamble (PG, news, msgs).

Can you hear me now?

The result, investors should note, has been a steady increase in U.S. spending on our 850 billion minutes of cellular service per month. The average American's monthly cellular bill is around $49.30, or nearly $600 per year -- a figure that has fueled record revenue gains for providers. In the 12-month period ending June 2006, the industry posted total revenues of $118 billion.

Now if you'd like to invest in some of these companies to get back some of your $600 a year, I have some recommendations.

For the risk-takers in the crowd, look overseas for the fastest growing cellular companies selling at reasonable valuations. One of my top choices is China Unicom (CHU, news, msgs) of Beijing, which sells service through 300 subsidiaries to more than 112 million subscribers in every corner of that vast country. Unicom has grown earnings at a steady clip of 17% to 22% for years and yet the price-earnings multiple is a reasonable 18. Shares, now going for $10.65, should fetch $13 by next year, up 22%. Another top choice is NII Holdings (NIHD, news, msgs), which provides Nextel wireless services to businesses in Mexico, Brazil, Argentina and Peru. Growing at better than 30% a year, it trades at a steep and undeserved discount to peers, at 22 times next year's earnings per share. Now selling for $65, I think it will hit $79 next year.

Back home, for the more conservative investors, two great choices are telecom giant Verizon Communications and chip giant Qualcomm (QCOM, news, msgs). Verizon is the strongest and most undervalued of the major telephone networks, and has done an outstanding job of rising above its humble wire-line roots to craftily challenge rivals in providing both video and wireless services. Shares should rise in tandem with improving earnings, potentially hitting $45 next year, or 20% above their $38 price today. Qualcomm has suffered association with its less capable semiconductor peers for seven years, but as the clouds for tech stocks lift you should see its shares trek toward at least $51 from their current perch at $39.80, which would be a 28% move.

I'd love to provide some more picks, but my phone is ringing. Catch you later.

Fine Print

To keep up on news about the wireless industry, visit the CTIA trade association Web site. It has some nice features like an explanation of how wireless works and an industry timeline. … To learn more about Verizon Wireless, click here. … To learn more about China Unicom, visit its English language Web site. … Read more about NII Holdings here. … Qualcomm has a lot of valuable insights on third-generation wireless technology at its Web site.

Jon Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman did not own or control shares of companies mentioned in this column.