Arnold Kling

Telecom Outlook

Arnold Kling, Great Questions of Economics
Previous Entry Next Entry

Andrew ("Content is Not King") Odlyzko writes infrequently but insightfully about telecommunications. In this piece, he has may interesting things to say about the business outlook for various telecommunications services. In particular, he says,

for several years now wholesale prices for long distance voice calls in the US have been under a penny a minute (reflecting lower costs). Those costs and a competitive marketplace are not compatible in the long run with consumer prices that are 10 times as high. It was inevitable that for ordinary customers, long distance was eventually going to be provided by their local carriers on a flat rate basis.

The way I would put this is that long distance service is asymptotically free.

Are the stocks of local telecom providers overvalued? Odlyzko writes,

wireless carriers are valued at about $2,000 per subscriber (adding up stock valuations to debt). ILECs are valued at $2,000 to $3,000 per line, while cable TV networks are valued at $4,000 to $5,000 per subscriber. These valuations, much higher than the cost of replacing the assets of these businesses, all may very well be too high...What these valuations do is reflect the inertia in the system...Investors may be overestimating this inertia, and the ability of managers to exploit it profitably, but so far their faith has been justified.

Odlyzko offers the intriguing and optimistic hypothesis that as voice telephone traffic migrates to cell phones, the local phone companies (ILECs) will need to push broadband services in order to maintain revenues.

Discussion Question. People who give out their cell phone number as a contact number will have a hard time changing carriers. Will this lead to increased inertia (and profits for cell phone carriers) going forward, or are there countervailing factors?

(Update. Reader Brad Hutchings writes

With cell phones, I'd imagine that if there were enough consumer pressure and this were a state regulatory issue, cell phone number portability could happen in fairly short order.)

Return to top