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Why I'm Shorting the Telecom Industry

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Arms dealers profit from warring parties killing each other. Well, telecoms are at war, and I want to be an arms dealer. I'm going to short AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , Sprint Nextel (NYSE: S  ) , and T-Mobile parent Deutsche Telekom (NYSE: DT  ) in Motley Fool CAPS.

Here's why: Last week, Verizon announced a $70-per-month unlimited calling plan. AT&T has since matched that rate. Sprint Nextel, meanwhile, has a plan that allows customers to call any cell phone in the U.S. for free.

What we have yet to see, but which I think is coming, is a rollout of unrestricted, no-contract plans. "Telco is a commodity business. And like all commodity businesses -- think retail and airlines -- when one provider changes the game, the others follow. Expect every carrier to eventually follow suit here, as well," I wrote in October.

Even if it's only T-Mobile that has gone this route -- the nuclear option, you might call it -- every one of these price-matching announcements is further proof that telcos have ceded control to Apple (Nasdaq: AAPL  ) , Research In Motion (Nasdaq: RIMM  ) , Google (Nasdaq: GOOG  ) , and their other smartphone partners; albeit begrudgingly, I'm sure.

But that's my take. Now it's your turn to weigh in. Is it time to short the telecom industry? Am I making too much out of the announcements? After all, some customers may actually be paying more after the changes. Please vote in the poll below. You can also make your voice heard using the comments box below.

Apple is a Motley Fool Stock Advisor selection. Sprint Nextel is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is hard-boiled in the very best sense of the phrase.

Read/Post Comments (10) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2010, at 4:31 PM, Fool wrote:

    Revenue and profit will increase under the new plans as users upgrade to unlimited plans and the 6.5% dividend is very attractive.

  • Report this Comment On January 20, 2010, at 4:58 PM, daveshouston wrote:

    iPhones are very popular but the cheapest plan that AT&T offers runs about $80 per month. The fewest number of voice minutes any of their plans provide is 450 minutes per month.

    Lots of people would like to have an iPhone but can't afford the $80 to $100 per month. Sure, about $20 of that goes to subsidize purchase of the phone.

    If they can get the prices down, way down, they can have a lot more users and Apple can sell a lot more iPhones.

    When one member of a family gets an iPhone, pretty soon every member of that family wants one. But they just can't afford it. Cellular service rates are much too high.

    The dumbest idea I've heard is that AT&T wants to meter data service. Unlimited data is an iPhone bedrock requirement.

    What we really need is price competition, no contracts, minimal subsidies, and smart phones that will work on any network. You should be able to sign up with Verizon on a month to month basis and move to AT&T or Sprint or TMobile whenever you choose or whenever you can get a better deal. That would expand the market for smart phones enormously.

  • Report this Comment On January 20, 2010, at 5:07 PM, Fool wrote:

    Have you had the latest ipod touch, you can make free calls across the US with free Vonage/Skype App. Heard about clear communications, their WiMax offering and all of a sudden the IPOD touch is the ultimate device to own.

  • Report this Comment On January 20, 2010, at 5:17 PM, Fool wrote:

    The lower pricing will only benefit T and VZ as they will increase their higher cost subscribers by upgrading lower cost users. More profits for the telecoms higher stock prices. They have low P/E's and very profitable business plans in a business that is only going to grow. What a dividend!!

  • Report this Comment On January 20, 2010, at 5:21 PM, Fool wrote:

    Short them if you want to lose your shirt. These companies are making great money and they will only be more profitable with the lower cost plans as most people do not have these plans and they will want to upgrade. Subscribers will spend more per month and the data plans are much more profitable to T and VZ

  • Report this Comment On January 20, 2010, at 5:44 PM, kgveit2020 wrote:

    As price lowers this will greatly expand the user community for Smartphones that are always connected via WiFi or cellular. This will feed more and more use and applications. I believe the best days still lie ahead for the Telco's. They need to expand their networks so that they can absord the greater number of users and still provide a snappy response time. That is their biggest issue to manage their net(s) so they can offer good service in terms of network speed and reliability. That will ultimately be their strength is their networks ! It is a very nice cash cow kind of business. Forget the commodity jargon....... it does not apply in this industry of recurring revenues........ You want recurring revenues.... cause that is where the profits are !

  • Report this Comment On January 21, 2010, at 12:10 AM, NguyenViet wrote:

    Even smart phone is hot right now, but it still need

    a better carrier (band width). I think Sprint is the target

    (having 4G)

  • Report this Comment On January 21, 2010, at 10:03 AM, MorganBucks wrote:

    Some points you have are right on. The device makers determine who gets the subscribers, eventually all the WSP will have great devices that will more than fill up their capacity. In th short term a price war makes S the clear winner since it is coming from a smaller base with much more capacity, lower CAPEX, lower DEBT and plenty of free cash flow, the more consumers become cash aware the better for S . Also the trend towards no contract and prepaid all point to S being a winner. S had bad management and handsets that is history.

  • Report this Comment On January 22, 2010, at 3:04 PM, masterN17 wrote:

    This isn't war so much as it is collusion. Sure telcos are lowering unlimited calling plans but they are hiking prices on data plans. It ends up being a no-lose for them. I think you're misreading the tea leaves on this one, Tim.


    - N

  • Report this Comment On April 02, 2010, at 7:36 PM, QuandoInQuando wrote:

    The actual telephone business may eventually go as you predict, but the companies that you mentioned have been in business for a long time and will find a way to contunue to make money.

    Consider the final "T" in AT&T. How much of their income is now derived from the Telegraph business?

    Speaking of the Telegraph, Western Union (WU) is still in business and still maikng money.

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