Playing on the market slide
The industry is in a growth spurt. Just like raising a teenager, the cost of managing growth spurts is awfully high.
I looked at my stock ticker this morning. When the indexes are up, the numbers are a lovely shade of green. And when they’re down, the numbers are bright red. For the last week, [mid-March], the numbers have been flashing more red than a 12-alarm fire. In the first hour of trading, the Dow fell farther than spit over the edge of the Grand Canyon.
Should we be worried? Sure. After all, the business reporters tell us that it’s a “bear market,” as though likening it to a woodland creature makes it better. I’ve got money in mutual funds (or at least I had some before this morning). The way things are going, the Standard & Poor’s Index is going to live up to its name.
As for wireless stocks, they’re leading the charge — to the rear. The question is, how come? Why is it that the most dynamic industry in the country is in the doldrums, dragging down equipment manufacturer performance, tower company stocks and technology houses’ hopes? Well, one theory is that:
The global marketplace dynamic of earnings/price flow margins when compared to the PE of other segments and taking into account the sell-off of lower Kosovo bond issues to leverage the buy-but-not-build of 3G technology, when applied to the influx of profit takers during a time of economic uncertainty, caused a guy named Murray to laugh so hard that soda came out his nose and shorted out the green button on the stock ticker thing for everyone’s computer.
I’ve got a different idea. It’s called “stupidity.” You see, when a bunch of companies do stupid stuff and cover it up using shareholder money, then earnings go down and the stocks go down. If enough companies in a given market segment do enough stupid stuff (and they do imitate one another) so that everyone’s earnings start to suffer, then the entire segment takes a tumble.
So, what stupid things did the publically traded wireless companies do that might have let the bear loose in the market? Here’s my top five, but I’m sure there’s more:
- They weren’t sufficiently forthcoming with analysts regarding the cost and time required for systems build-outs vs. the revenue expectations.
- They didn’t take into consideration how increasing competition would affect revenue-per-customer numbers.
- They let themselves believe that there is a one-to-one ratio between emerging technology and market share (or revenues).
- They booked spectrum as an intangible asset with values that reflect long-term potential rather than short-term cost.
- They forgot about profit.
Between 1995 and 2000 you could have raised a zillion dollars in the public market to build-out any wireless system that had even a remote potential of delivering wireless Internet access (the “killer app”). These broadband ideas (and we’re not talking the Dixie Chicks) fueled FCC auctions. They also ran spectrum prices up until profitability was so far in the future you couldn’t see it with a dozen crystal balls.
The game was changed so severely that companies no longer announced the time period to profitability. Instead, they announced the expected time period until they could pay operations costs and debt service with other-than additionally borrowed money. If you did the math, most of these companies didn’t expect to reach profitability until they had borrowed an amount roughly equivalent to the French treasury.
Underlying these activities was the One Big Stupid Idea: The American economy would see continuing growth (of previous rates) in the percentage of disposal income used to purchase wireless telecom products. Or, more simply, if you build it, people will buy it. Tell that to Teligent, PSINet and Metrocall.
So, what’s the solution? Reality. Let’s be realistic about where the industry is and where it’s going. The industry is in a growth spurt. Just like raising a teenager, the cost of managing growth spurts is awfully high. Try to make a profit on feeding and clothing your high-school kids. Forget it.
During the past few years, the wireless industry has been footing the bill to construct and operate systems that are not presently profitable but have a rosy future (just like that high-school kid). But its capital expenditures are exceeding expectations, and profitability appears to be moving farther away, not closer. Meanwhile, the industry threw itself lavish parties on the deck of the Titanic, and now some people cannot understand why the food is soggy.
The fact of our industry is that it takes a lot of money and time to make a lot more money over time. It requires industry cooperation, standardization and interoperability to reduce the ravages of technological competition that make products and balance sheets obsolete. It also requires honesty.
An honest person would affirm that many more new services will be delivered in a wireless environment. Those services will add mobility and efficiencies to business and personal activities. That same honest person would also have to admit that a fully integrated, reliable delivery system is still in the future. An honest person would also recognize that although there is healthy demand for high-end, broadband services; the wireless market does not begin and end there. Many consumers are looking for lower-cost solutions.
Before the market rights itself (it’s rather depressed now), wireless carriers will be scrambling for creative ways to meet their capital-expenditure needs. Systems build-outs must and will continue — possibly at a more rational pace. If this means that financial analysts must adjust their expectations to fit a more logical scenario of long-term growth, rather than short-term stock price spikes, OK.
In the meantime, look for bargains on Wall Street (they’re there), and be patient. Remember, although publicly traded wireless companies have enjoyed the salad days of mass stupidity, they’re coming around. Oddly enough, they are starting to run their businesses just like yours.
Schwaninger, MRT’s regulatory consultant, is the principal in the law firm of Schwaninger & Associates, Washington, which is counsel to Small Business in Telecommunications. Schwaninger is also a member of the Radio Club of America.