The following is the first of a three-part series on investment opportunities connected with hands-free communication. Will we soon be walking around with antennae jutting from our heads? Who will provide this head gear? New Research Fool Todd Lebor thinks headsets present an attractive, growing market for investors.
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All of these technologies have a common theme: They offer substitutes for the traditional tools of communication. We can't be expected to drag around tiny keyboards, and we certainly can't type while driving. So, how can we search Amazon.com (Nasdaq: AMZN) for the latest Engelbert Humperdinck single while driving to work? Even if we could type it, spelling would be a challenge. Wouldn't it be better to say instead, "Handset, connect to Amazon.com, search for Engelbert, and buy"?
We are going hands-free. There is no doubt about it. It is simply the next step in wireless. As my colleague, Paul Larson, stated in the July Internet Report on the Wireless Web, "Nokia (NYSE: NOK) and Motorola (NYSE: MOT) anticipate that, by 2003, there will be more Internet-ready handsets than PCs connected to the Web." That is well over a billion Internet-ready handsets designed to receive information via voice commands, not a keyboard.
In this three-part series, I will highlight several of the leading companies working to make hands-free communication possible. The first article focuses on headsets.
Headsets
How much pressure is there to ban cellphone use while driving? According to a July report on cell phones and highway safety by the National Conference of State Legislature (NCSL), only five local jurisdictions "require drivers to use hands-free cellphone devices while operating a motor vehicle," but an additional 300 jurisdictions are considering or have considered similar ordinances, including Chicago, Santa Monica, Philadelphia, and Cleveland.
The NCSL reported the following tidbits of information regarding the use of cell phones while driving:
-- 85% of mobile subscribers use their phones while driving.
-- Since 1995, 37 states have proposed legislation regarding cell phones and automobiles.
-- In 2000 alone, 27 states considered restrictions on cellular use in motor vehicles.
The bills varied, but the only ones that got anywhere concerned hands-free operation. All others died in committee or were voted down. It's surprising that any "hands-free legislation" even got this far. According to that same NSCL report, studies conducted in the U.S., Great Britain, and Japan came to similar conclusions on the cause of cell-phone-related auto accidents. The distraction of the call, not the physical limitations of using the phone, impaired the driver's ability to safely operate the vehicle. In other words, people can't talk and drive at the same time.
Banning cellphone use in cars entirely would be unpopular politically. My bet is the politicians will stick to what they do best and compromise. Keep the wireless players happy by allowing commuters to use phones while driving and, at the same time, pucker up for the safety pundits by requiring hands-free use. It may not be the best call, but it certainly is the most politically feasible.
Headsets are the easy favorite for hands-free operation. They offer an affordable and workable solution. Headsets run from $30 at Radio Shack to $350 for a high-end, wireless set.
Over the next few years, as we spill over 100 million (last count: 103 million) cellular users in the U.S., this issue will heat up and should help drive headset sales. But, wait, there's more. If you buy this argument within the next 10 seconds, I'll throw in two other arguments for free. That's right, absolutely free.
First, the headset market is more than a one-hit wonder. It is not just hands-free legislation that is driving headsets sales. In fact, it's not really hands-free legislation at all. Call centers are the true bread-and-butter for headset makers. According to IDC, the worldwide call center services market had $23 billion in revenues in 1998, and that is projected to double by 2003. Headset revenues are also driven by sales to computer enthusiasts, office workers, and audiophiles. Hands-free legislation is just another day of sunshine for the growing headset garden.
Second, headsets can help put an end to fears of cell-phone-related brain tumors by moving the power source away from your noggin. Every so often, the press rekindles the cellphone brain tumor tragedy, and 100 million Americans are left wondering, "Is this safe?" Whatever the reality, headsets can ease the minds of millions until this issue is resolved.
So, where are the opportunities? The world leader in lightweight communication headsets is Plantronics, Inc. (NYSE: PLT). It designs, manufactures, markets, and distributes headsets and headset accessories around the world. This former Foolish 8 stock (and a holding in this writer's portfolio) caters to the upper echelon of headset buyers. Its products are sleek, clear, and ergonomically designed. Neil Armstrong spoke those famous words, "That's one small step for man; one giant leap for mankind" through a Plantronics headset. The company also has a division (Walker Equipment) that focuses on specialty phones and headsets for the hearing impaired.
Fiscal year 2000 earnings were $64.5 million on $315 million in revenue. That's a 59% gross margin, and it is up from 54% and 56% in 1998 and 1999, respectively. Plantronics has no debt and a 20% projected five-year EPS growth rate. Mobile and PC headsets accounted for 15% of total revenue for Q2 2001, up from 6% a year ago.
In its most recent earnings call, management cited the mobile and PC division as its fastest-growing segment. The company also spoke about Bluetooth initiatives and expects its first Bluetooth-enabled product to debut in the spring of 2001.
Some estimates have put Plantronics' U.S. market share in call centers at 40% to 50%. And, although it does stand atop the headset hill, there are a half dozen other companies, most of them private, that would love to knock it off.
One of the largest is GN Netcom, a division of the Danish telecom and data communications company, GN Great Nordic. GN Netcom recently announced the acquisition of Hello Direct (Nasdaq: HELO), a direct marketer of desktop telephony solutions and reseller of Plantronics headsets. This acquisition could have an adverse effect on Plantronics sales, although its impact should be limited to the small-to-medium-size businesses where Hello Direct is concentrated.
According to GN Netcom's 1999 annual report, non-call-center "markets for office, mobile telephony, and PC users have great potential." It also stated that, while the call-center market was growing at a 10% rate, the non-call-center segment offered 15-25% annual growth rates. This trend coincides with comments from Plantronics management. Imagine what this figure could be if headsets become a standard addition to the PC, just like the mouse or keyboard.
In the next section of this series, I'll look at wireless connectivity made possible by revolutionary technology like Bluetooth and Apple Computer's (Nasdaq: AAPL) AirPort.
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