No doubt you've noticed the pitched battle between telecom giants AT&T (T, news, msgs) and Verizon (VZ, news, msgs).
The feud has been fought out recently on TV. Verizon struck first with its stinging criticism of AT&T's 3G network coverage with its "There's a map for that" commercials. AT&T responded with ads featuring actor Luke Wilson touting its exclusive deal to support Apple's (AAPL, news, msgs) hot iPhone, a supposedly faster network and the ability to talk and surf the Web at the same time.
The public hostilities may be ending. AT&T has launched a "Rethink Possible" campaign that encourages dreamy visions of what ubiquitous Internet access can do. Verizon says it will turn its focus on business users.
But the fierce battle between the top two wireless carriers in the United States -- Verizon serves more than 89 million subscribers; AT&T serves 81.6 million -- is just getting started.
If we look closely, I think there's a clear leader.
Protection and payoff
From a pure portfolio perspective, both of these companies deliver relatively high dividends: You're paid more than 6% a year for owning them. They're also very defensive, meaning that they tend to move to their own beat, ignoring the ups and downs of the overall market.Citigroup equity strategist Tobias Levkovich says telecoms have the lowest statistical relationship of any industry group to the rest of the market.
These factors mean either one offers a significant measure of protection to your portfolio.
Both companies will report first-quarter earnings results this week, with AT&T on April 21 and Verizon on April 22, so watch for some market chatter on these companies and their prospects. Analysts expect results to be largely unchanged at AT&T, whereas Verizon probably will report earnings per share of 56 cents, down from 63 cents a year ago.
But the real key to deciding between them is what is shaping up to be the biggest technology cycle of the past 50 years: mobile Internet. That's what their future growth prospects are riding on, so we first need to understand what's at stake in this battle.
2 billion users worth fighting for
A team of Morgan Stanley researchers led by Mary Meeker has spent considerable time on the subject, publishing a research note nearly 700 pages long. The key takeaway: Within five years, there will be more mobile Internet users than desktop Internet users.Five trends are converging to drive the increase: faster mobile broadband network speeds, the popularity of social networking, online video, voice-over-IP technology and gotta-have-it mobile devices such as the iPhone and the Motorola (MOT, news, msgs) Droid. And it's more than just phones. Tablet computers, netbooks, GPS units, e-readers and wireless home appliances are all participating.
The background here is that each major technological advance since the 1960s has won over a larger share of the population than the last. Better processing power, improved user interfaces, smaller form factors, lower prices and expanded services all helped this along.
It started with mainframe computers, which sold about 1 million units and benefited companies such as IBM (IBM, news, msgs). Then came the minicomputer in the 1970s, of which about 10 million were sold, thanks to the likes of Hewlett-Packard (HPQ, news, msgs). Then we got the PC, which moved more than 100 million units by 1993 and enriched Intel (INTC, news, msgs) and Dell (DELL, news, msgs), among others. Desktop Internet reached 1 billion users by 2005 and gave us Google (GOOG, news, msgs) and Baidu (BIDU, news, msgs).
| Name | Category | Recent price | Forward P/E ratio |
|---|---|---|---|
Wireless carrier | $29.54 | 11.86 | |
Wireless carrier | $26.24 | 11.03 | |
Phone platform | $248.92 | 17.86 | |
Content and services | $595.30 | 21.21 | |
Wireless towers | $37.52 | 89.33 |
Now, mobile Internet is expected to reach 2 billion users by 2015 and continue to swell in the years that follow, according to the Morgan Stanley research.
Not only is mobile Internet more convenient, but it is powered by big changes in the way we interact with our machines. The computer-user interface has changed from text to graphics to touch. The key input device has changed from keyboard to mouse to fingers. And the primary use is shifting from content creation to communication and content consumption.
This is also changing the way we shop and consume. Books didn't change much over 500 years, but now you can get them delivered wirelessly in 60 seconds. Instead of buying game cartridges, music CDs or DVDs, you can stream the entertainment over the air. We're starting to see developers push that medium with new innovations, from unlocking a rental car to scanning coupons with a phone.
Clearly, the mobile Internet is the most lucrative new market in the technology space right now. And, Verizon and AT&T are pitched against each other in a heated fight for that market. At the same time, they -- and other phone companies -- are trying to fill a gap left by the slow death of the land-line telephone business. It's kill or be killed.
Between Verizon and AT&T, which will come out on top?