Tuesday, August 4, 2009

My iTouch Told Me Not to Invest in Telecommunications Companies

With AT&T in the States and Telus in Canada offering very high dividend yields, it is difficult for a dividend investor to ignore them. However, a recent experience I had in Berlin, Germany convinced me that now is not the time to be investing in telecommunications companies like these big incumbent behemoths. The reason was on my iTouch.

I am an expat living in Norway and due to vacation allowances and the opportunity for my children to spend time with their grandparents back in Canada, my wife spent much of July in Canada with the kids while I continued to work in Norway. To break up the weekends without the family with me, I decided to take a trip to Berlin. Wanting to speak to my wife and kids everyday was still important. However, if anyone has ever spent any time in a hotel you know that hotels totally rip you off on phone calls. Add on the fact that I would be calling international - you can guess how expensive those calls would be. I thought of calling cards but that is always such a pain. Then it dawned on me that awhile ago I downloaded the Skype app on my iTouch (not iPhone!) and thought I should give it a try.

I went to my nearest Starbucks (near Checkpoint Charlie which was interesting in its own right) ordered a Latte and asked for the free wifi access. I got my iTouch all configured on their network and immediately went to the Skype app. I realised quickly that since I would be calling me wife on a landline phone, I would need to buy some credits that would allot me time on Skype to do that. Skype is totally free for computer to computer calls, but not from computer to landline. However, that process was very easy and I put $15.00 (US) on my account, not knowing how much I would actually need.

The next step was the most exciting part. I used my iTouch - a device that does not have a phone built in - to make a call to my wife 8000 kilometers (4600 miles) away in another country to our phone at the cabin. I was expecting that since this was my iTouch and I was using the Starbucks wifi that the quality would be only ok, but I was really surprised when she picked up the phone and it sounded pretty good. Not perfect, but really good considering what I was doing. We had a 15 minute conversation and it cost me about $1.00. Crazy.

Ok, now back to what this means to dividend investing. It means that there are serious threats against these large incumbent telecommunications companies and they are going to be in the fight for their lives in the coming years in my opinion. Not even looking at financials, the fact that I was able to make an international call using a device other than a phone over a wifi network really encroaches upon their market. Even considering the fact that these companies often own and supply the internet access, the threat is still huge.

When analysing a company you need to look at the macro-factors taking place in an industry to decide if it is worth putting your money into it. This example was evidence to me that telecommunications is in trouble and I will focus my money elsewhere.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.


  1. I had a similar reaction when I read that Garmin is going head-to-head with the iPhone by introducing a cell phone of its own, but I'm sticking with it for now in my Marketocracy mock fund.

    The telecommunication companies will still be able to coin money to the extent that Skype et. al. have to pass signals through telco networks, but they'll be little more than common carriers. Competition never stops...

  2. I am with you on this one 100%. I was recently offered a monthly subscription to Skype for less than $9/month, which allows me to call people in 40 countries and I could call US land line and cell numbers as well.
    I don't view telecom as safe utility like investments any more as deregulation and technology innovations would pressure margins and revenues in the future.
    But then generally tech stocks have not really been good dividend investments with some exceptions of course..

  3. I'm going to respectfully disagree. As a Canadian who invests with Telus, I pay very close attention to what they are doing, and I think it's incredibly telling than only 30% of the revenue these days comes in from traditional landline and long distance.

    How did you log into Skype? Through a wireless or internet connection of some kind. And as landline and long distance decreases, there is an increased takeup in the other areas of Telus business, which you can see from year over year. Increased ADSL use, cell phone use, data use, all more than compensates currently for the lost revenue from landlines and long distance.

    On top of that, if you've been following developments with Telus, you'd know they (and Bell, though I assume based on your reference to only 2 telecoms these are the ones you're most interested in) are rolling out an HSPA network Q4 this year or Q1 next. Currently, ALL roaming revenue in Canada from foreign travelers rolls to Rogers. That's close to $400 million a year. Once HSPA goes live, Telus and Bell will be pulling out of Rogers pockets in a pure revenue generation play from roaming revenue as international travelers will now be roaming on one of three networks. Bell and Telus will have pure revenue gain at Rogers expense.

    Also, Telus purchased Health Data company Emergis, and has signed long term Government contracts in Ontario and Quebec for health data services. As landline and long distance revenues continue to fall, Telus has been leading the pack in finding new revenue generation methods in the communications fields. They are increasingly getting into the spectrum of unified communications (such as integrated health data) and not focusing exclusively on their declines in areas where decline is inevitable.

    Another example is TV. They added 100,000 IPTV subscribers, and just launched Satellite TV in areas where IPTV is unavailable. That's a big revenue generating move that will be competative with local Cable companies.

    And underneath it all, wonderful services like Skype won't be around if they can't make money. And Skype doesn't make money. It was a $1.7 billion WRITEDOWN in Google's books and they plan to spin it off...it simply does not have a long term viable financial model, and exists solely due to an ongoing series of venture capital investments that at SOME point want a payoff. There will be no free ride forever, and once the ACTUAL costs of calls are factored in, Skype will either disappear or find its costs approaching those more of budget phone providers as opposed to the ridiculously low costs associated now.

    NO service exists as a $1.7 billion writedown in a companies portfolio without disappearing completely or finding a method of generating revenue.


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