America’s telecom carriers may enjoy a more comfortable market than their European rivals. They do, after all, charge higher prices thanks to a historical quirk. And with limited competition that might seem hardwired in. Their peers across the pond, though, are starting to look like a better investment bet.
On first blush, that might not appear to ring true. Monthly revenue per subscription, for example, is about 80 per cent higher in the United States, according to GSMA Wireless Intelligence. Moreover, American companies are better set up to take advantage of changing trends. Their voice call rates are relatively cheap, while data use is expensive. In Europe, it’s the reverse.
So as voice calls decline and data use increases, revenue at U.S. carriers should grow 3 per cent over the next three months, compared with a similar decline in Europe, according to Thomson Reuters. Throw in slightly higher margins in the United States, and it explains why American carriers trade at nearly a 30 per cent premium on estimated 2014 earnings.
This is probably as good as it gets. After its $22-billion purchase of Sprint, SoftBank is gearing up to battle the functional duopoly of Verizon and AT&T. Meanwhile, one of the incumbents’ key advantages – early access to top handsets – has waned. All the major carriers have the iPhone 5S. That means they’ll need to compete on other services, which could well mean wilting data prices – with Verizon and AT&T stock following.
European data prices are more likely to rise, if only because they are so low already. Consolidation could also reduce competition and bring advantages of scale. If European regulators let KPN’s $11.6-billion sale of its German unit to Telefonica proceed, it could mark a watershed for further consolidation. That augurs premiums for companies likely to sell as well as higher margins – and stock prices – for the survivors.
Some telecom insiders seem to prefer Europe. Vodafone cashed out of its U.S. ownership of Verizon Wireless for $130-billion last month. AT&T has been mulling acquisitions in Europe. And Carlos Slim has offered $10-billion for the rest of KPN. Investors would be wise to go long European telecoms and short their American cousins.