Thursday, December 6, 2012

On the virtues of Verizon as a financial investment

Fidelity offers some pretty nice stock research tools. One of them is the MSCI Vice Index on any given company.
A MSCI Vice Alert is triggered when a company derives at least 15% of its revenue from adult entertainment, alcohol, gambling, and/or tobacco.
I chuckle inwardly every time I see that. I guess there really are people who decide not to invest in a profitable company because it's involved in those categories.

Verizon is one company to whom MSCI gives it a green light, marking it as "Not Involved" in vices. Yet I believe Verizon is in the category of companies who will throw their customers under the bus to make money. Is that a vice? Shouldn't it be?

Here are some examples:
  1. Verizon has routinely disabled certain built-in features of cell phones to force you to use their expensive (and often inferior) alternative. For example, Verizon has been known to block Bluetooth transfers to keep people from uploading their own ringtones. They've also been known to block setting your own MP3 as a ring tone, to encourage you to buy theirs. Of course, this was not advertised.
  2. You buy data from Verizon in buckets of gigabytes. This might lead you to believe that once you buy these gigabytes, they're yours to do with as you please, including tethering your phone to a laptop/tablet and using data on those more convenient devices. But nope, tethering costs $20 extra, despite there being no technical reason for it. It's not any more expensive to Verizon. So you buy a gigabyte of data, and then you buy separately the privilege of using it in a convenient manner. This changed only once the FCC stepped in.
  3. Like banks, Verizon loves fees. They charge $1.98 per month per line as an "administrative fee", which, as they admit in small print, is not a government fee or fine. It's just a surprise cherry on top of the advertised price. They looove overage fees. In fact, postpaid accounts cannot set a hard limit on their usage to avoid overage fees... unless they pay $5 per month per line for the privilege. And the overage fees are steep, such as $15 per gigabyte. (In increments of gigabyte, rounded up, naturally.)
  4. They don't compete like normal companies. The telco industry has a very complicated relationship with the government, and a lot of Verizon's success is not due to its capitalistic superiority but due to lobbying, monopoly in certain regions, and other similar endeavors.
In short, having followed Verizon's goings-on for a long time, my feeling is that Verizon thrives on consumer's ignorance. They don't have seem to have "good faith" when it comes to customers, so unless you know exactly what you want and what you don't, you'll get screwed one way or another.

Are these not worse, in terms of respect for the customer and society, than running a gambling or tobacco parlor?

Despite my list of complaints, I own Verizon stock. I think they know exactly what they're doing. They've made some really good business decisions. Here are some, in chronological order:
  1. They became known as the network with the largest reach. In a country the size of the US, that's a huge feat.
  2. While in the past they used to be derided for the poor selection of phones, they turned that around, now offering some of the most advanced handsets of all US providers.
  3. They were the winning bid for the 700 MHz block, back when the FCC auctioned it off. It was a significant chunk of change, but 700 MHz is a significantly lower frequency than competing LTE implementations, leading to a higher RF penetration, leading to better signal strength in more places than the competition! This plays right into their "largest reach" status.
  4. Verizon standardized on LTE back when Sprint went with the losing WiMAX. Now Sprint is playing catch-up.
  5. Verizon rolled out its 4G network way more aggressively than any of the competition.
With all that, Verizon has become simply the best network. It has the widest reach, some of the fastest speeds, and the largest 4G footstamp. Like Apple in the computer-land, Verizon sets the bar and the price. And that's why, like Apple, they can screw you in some ways and you'll have no choice but to thank them for it.

I've been with Sprint and its MVNOs for three years now, paying for data. The voice component is fine for me, but the atrocious data speed and high latency means it's over. Unlimited data when it's dripping in at 50 KB/s at most? That's a laugh. So Verizon has earned a new customer. Now I stay with Sprint (Ting, specifically) for just the voice and SMS, and pay Verizon a rather handsome sum monthly for data-only access to their LTE network.

The barrier to entry in this industry in the US is enormous. In fact it's probably insurmountable. Verizon, AT&T, Sprint, and T-Mobile are the four. I don't see anyone else on the horizon. So what about the others?

For the big picture, I believe that 4G is all that matters. Why? Because data usage is exploding. Fast and plentiful data is the foundation of everything else. Voice can go over the data channel (and today often is), but YouTube cannot go over the voice channel. So for a telco to succeed, I believe 4G is key.

So let's look at the other companies.

I am most familiar with Sprint, having had them and rooted for them for three years. Sprint is overburdened with its iDEN and WiMAX networks. They were huge mistakes that will take many years to recover from. (iDEN is an old mistake that's probably run its course by now.)

In terms of LTE, Sprint is juuuuust now rolling it out in a few markets. Meanwhile, Iowa doesn't even have WiMAX. My local Sprint retail stores have been telling me for three years that 4G is right around the corner. The typical customer won't wait. If he values data and wants to stream YouTube cats, he has already switched away from Sprint.

Lastly, Sprint's only positive differentiator is "unlimited data." The problem with this: over the air, it's simply unsustainable. Your DSL and Cable provider can do it because they have a physical wire running to you. Over the air, you're sharing the equivalent of a wire with dozens or thousands of people. The only way for "unlimited data" to hold is with throttled speeds. Is that competitive? (Answer: maybe. People may prefer throttled but "unlimited" to Verizon's awe-inspiring speed that reaches your monthly quota in under an hour.)

With AT&T, I am not sure. I've never had them and don't know anybody personally who has AT&T. But they keep earning Consumer Reports' Worst Customer Service award each year. What's their positive differentiator? Dunno.

T-Mobile is a good value, but their network is not great in terms of speed, and T-Mobile itself is far from nationwide.

So, Verizon has 4G, the foundation of success, in the bag. In summary:
  • If money is not an issue and you just want "the best" , you'll go with Verizon and pay their large monthly charges and fees.
  • If you want fastest speeds, you'll go with Verizon and pay their large monthly charges and fees.
  • If you live out in the boonies and want service, Verizon is probably your best bet. You'll pay their.... yada yada.
  • If you travel often and want reliable service, Verizon is your best bet. Oh, you'll pay.
  • If you're value-conscious and/or indiscriminate when it comes to network service, you'll probably end up with whomever happened to be cheaper at the time of your search, which would be prepaid on a Sprint or AT&T's MVNO. You'll spend as little as you can, yielding very little profit to the telco.

What about growth? A good investment must have growth potential. The growth used to be in getting mobile subscribers. Now that's saturated. The next growth: data guzzlers in the form of smartphones (with more and more apps which draw more and more data), and to a much lesser extent netbooks and USB modems. Right now most non-techies don't have data on their phone. But everyone I've spoken to says that once they got it, they were hooked. And, Verizon is in the best position to profit from this growth market.

And that's why I am long Verizon's stock.

Now Verizon's biggest threat seems to be the proliferation of free wifi. And that's a pretty serious threat. Already many people get by with minimal mobile data usage, relying on wifi at home, at work, at the coffee shop, etc. Verizon has two advantages here: it's always available and reliable, and it's very fast. But it's impossible to beat free.

Verizon and AT&T both have an advantage here over Sprint and T-Mobile: they play the other side of the fence, providing residential and commercial broadband -- powering the very wifi that may undermine LTE profits. Of course, every techie has heard of the legendary speed of FiOS, Verizon's wire-based broadband. Those who have it, love it; those who don't, wish they did. So, Verizon seems to have this threat neutralized.

I want to hear your thoughts.