We have long argued that the future of the telecommunications industry will be dominated by the company that most efficiently delivers fully converged digital telecom services on a single platform. We have also argued that the Regional Bell Operating Companies, or RBOCs, have an entrenched competitive advantage over cable companies: their cellular phone customer base. A study released this week by the CFI group shows that the RBOCs have an additional competitive advantage we have postulated, but have been unable to quantify. That advantage is higher customer satisfaction and better customer service. While these are not traits traditionally associated with "the telephone company," the RBOCs are no longer traditional. The cable companies, however, still suffer from their reputation for poor customer service.
In an Ahead of the Curve column on December 29, 2004, "Telecom Single Source: The Coming Battle," we argued that the future of the telecommunications industry would belong to the company that most effectively develops a truly converged telecom product.
These services include the following:
The convergence of the first three items on this list has been called the "triple-play" of telecom services.
Recent investor focus has been on whether the cable companies' version of triple-play or the telecom version of triple play services would be the most successful in the marketplace.
We have long argued that the "triple-play" argument was an extremely short-termed viewpoint. Eventually, when cellular phone service becomes integrated with triple-play services, the RBOCs will have a nearly unbeatable advantage over the cable companies. The "quadruple-play" era will be dominated by AT&T and Verizon.
The primary reason for this, we argued, was that the cable companies simply do not have the capacity to attract existing cellular phone customers to any service that they may choose to offer as a quadruple-play service. There is little churn in existing wireless customer bases now and the market in the US is nearly fully penetrated.
Furthermore, the only remaining wireless provider of significance, Sprint, is rapidly losing market share to AT&T and Verizon.
On top of this, we have argued, the cable companies' entire network system will face extreme capacity constraints as new services are developed. The coaxial cable infrastructure, even though universally upgraded to digital delivery, simply cannot compare to the capacity potential of fiber-optic networks.
Ironically, we have argued, the downfall of the cable companies will be the fact that their services are delivered on copper-based cables.
The study released by the CFI Group on Tuesday shows that the RBOCs have an additional competitive advantage that we have sometimes mentioned, but only in a subjective manner: better customer service and satisfaction.
Certainly neither the cable companies nor the telephone companies have had stellar reputations for customer service. Both have been satirized in movies (The Cable Guy) and by comedians (Lily Tomlin as 'Operator') for years. Culturally, both industries - probably as a result of their monopoly status - have never made customer service a primary objective.
However, the RBOCs, once "unleashed" by the ability to develop new services and offer long distance service, have become quite aggressive in product rollout and marketing. Both SBC (now AT&T) and Verizon have shown an aggressive focus on taking the lead in the era of converged telecom services.
The CFI study, entitled "How Customer Satisfaction Impacts Telecom and Cable's Battle for the Consumer," surveyed 1,200 households to examine the issue of whether "bundled" telecom service was appealing and whether such a bundled service would be more appealing from a cable company or a telecom company.
The survey results showed an almost universal superior appeal of a product offered by a telecom company over a cable company. The primary distinctive feature was better customer service.
The full survey results are available at no cost at: http://www.cfigroup.com/TelecomStudy.
The basic findings of the survey are summarized below:
Other interesting items related to bundling in this survey include:
Questions on VOIP service provided some interesting data points, however:
Nearly every data point in this survey illustrates a competitive advantage held by the telecom companies.
While we think that the survey's results are extremely interesting and help confirm our premise for Verizon as a long term investment, there are a couple of shortcomings in the survey that weaken the results, we feel. These are:
The biggest shortcoming of the survey, however, is that the definition of "bundled" services included services that are only bundled through marketing.
For example, Verizon "bundles" DirecTV service with their phone service currently. The survey considered this as a meaningful competitive product. In addition, the definition of "bundled" services included cable companies that partner with wireless companies.
We view such a "marketing-only" bundling as both temporary and insignificant in the long run. The only meaningful "converged" product will be those that are delivered on a single platform owned entirely by one company.
When this occurs, the technical integration of multiple products will allow for the creation of new telecom services, some of which are yet to be imagined.
On top of this, the operational efficiency of delivering all telecom services over a single platform will give the owner of such a platform a strong financial operating advantage that will be hard for companies that "bundle" two or more separate networks to match.
Currently, the only company that has built and is successfully deploying a single-platform for converged telecom services is Verizon Communications. All other companies, including AT&T, are far behind.
The CFI study provides a valuable reference point to the state of today's marketplace and the battle for "bundled" services.
Most investors and analysts have viewed the battle between the cable companies and the telecom companies for bundled services as a leading indicator for the future of the telecom industry. Most have viewed the cable companies as having a significant lead in that battle.
We have always felt that this "common wisdom" viewpoint of the cable companies having an advantage was very short-sighted and incorrect for the long term. We have felt this way even if short-term results showed cable companies acquiring bundled customers faster than telecom companies.
Combining cable TV services with internet services makes sense, we felt. But combining phone services with cable services is more of a stretch for consumers, we have felt. In the long run, once telecoms had a significant broadband offering, we argued, the telecoms would be able to successfully convert existing cable TV customers to their platform. When cellular phone service becomes also integrated, the cable companies will be at a distinct disadvantage.
In short, we felt "round 1" of the telecom battle (services bundled by marketing) was insignificant, as is "round 2" (two services bundled). The more meaningful battles will be in "round 3" (triple-play offerings) with the most significant battle being "round 4" (quadruple play services). Round four is still two to three years away.
Today, we are in the transition between "round 2" and "round 3." Both cable companies and telecoms are rushing to be fully capable for true triple-play offerings.
It is surprising to us to see the CFI study indicating that the telecom companies have such a strong competitive advantage, based on customer satisfaction issues, in the current marketplace. We would have guessed that it would have been more of a "tie."
Verizon Communications has been, and still is, our pick for the company most likely to dominate the telecom industry five years from now. The CFI study further reinforces that viewpoint.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
Verizon Communications (VZ): August 4, 2007, mid-day: $43.37 +0.24 (+0.6%)
Note: In accordance with Briefing.com's Trading Policy, the author has a personal position in Verizon Communications.
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The following paragraphs provide a summary of our view of Verizon Communications and our long term investment premise for VZ.
Verizon Communications is one of five stocks on this column's Current Stock list. These are stocks with investment time-frames of three-to-five years.
When a stock is picked as a Current Stock, the investment premise is detailed in advance, with measurable objective predictions. From that point, we measure a company's progress against those predictions. This often makes "beating" estimates each quarter less important than whether the predictions of our premise are met.
It also makes the movement of the stock price somewhat irrelevant, at times. If the company continues to make progress towards fulfillment of our long term vision, we recommend holding the position.
Summarized in a single sentence, our investment premise for Verizon can be summarized as:
How quickly is Verizon approaching true convergence of all digital telecom services onto a single network?
See also the review of Verizon's 07Q2 results: 01-Aug-07 "Verizon 07Q2 Review: Strong Confirmation of Convergence Premise."
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