By Jennifer Yousfi
It's a longtime investing adage that telecom stocks are a good defensive play during a recession. The family telephone is essential, conventional wisdom holds, so consumers will pay their phone bills in good times and bad.
But investors got a bit of nasty surprise last week when telecommunications shares saw a market-wide decline after AT&T Inc. (T) Chief Executive Officer acknowledged weakness in the phone giant's residential sales. According to Stephenson, consumers were hanging up their telephone service as they tightened their belts because of their concerns about the economy.
"We're really experiencing softness on the consumer side of the house from the economy," Stephenson said speaking at Citigroup's Entertainment, Media, and Telecom Conference.
The AT&T chief's comments dialed up worries that the much-feared U.S. recession has already arrived: If consumers are disconnecting their landlines, they must really be feeling the pinch. And that would be terrible news for an economy in which consumer spending accounts for 60% of gross domestic product.
But some other experts now suspect AT&T may be engaged in the equivalent of a stock-market misdirection: While the former Ma Bell is blaming the economy for its problems, it's actually trying to keep investors from spotting its slipping competitiveness and then dialing 911.
Annabel Z. Dodd, professor and author of The Essential Guide to Telecommunications, feels there are three reasons for a decline in traditional landline service.
First, the use of mobile phones is on the rise: "Landlines are more and more irrelevant," Dodd said in a telephone interview with Money Morning. When mobile phones were first introduced, many people maintained a landline as a safety precaution. But as cell phone coverage improves and indoor reception quality increases, consumers are dropping their landlines in favor of their mobile phone.
Second, competition is escalating: "Prices [on landline services] have dropped. It's not as profitable to push or innovate these services," Dodd said. Large phone companies like AT&T make higher profits on business customers. At the same time, cable companies have entered the market, luring customers away with bundled service deals that include what telecom firms are billing as the "triple play – voice, cable and Internet.
Third, as happens with each passing generation, consumers are changing the way they socialize: "Online social networks like Facebook, MySpace, and on the business side, LinkedIn, are changing the way we communicate with others," said Dodd. The days of a teenager spending hours on the phone have passed. Email and instant message chat programs have become the norm. Teens still want cell phones, but increasingly they are using those phones to send text messages, not make phone calls. Younger workers prefer to win new clients through the computer, rather than cold calling.
Dodd only sees the trend of declining landline sales continuing in the future. People's desire for mobility will cross over into other industries. More laptops are already being sold than desktop computers, and she sees that sales trend eventually shifting to highly mobile PCs.
"People don't want to be tethered," she said.
News and Related Story Links:
- Annabel Dodd's Website:
Dodd on the Line
The Essential Guide to Telecommunications
AT&T Drops Most in 5 Years on Consumer 'Softness'