Verizon (VZ, Financial) and AT&T (T, Financial) are primarily wireless carriers and earn most of their revenues from this segment, but things are changing at the hearts of these two companies. Apart from the above-4% dividend yield that both these companies have on offer, both are increasingly becoming so divergent that 10 years down the road, a direct comparison between these two will be an apples to oranges effort at best.
Why diversify?
Verizon has been building a content empire by buying AOL and Yahoo, while AT&T has doubled down on their fiber internet business, GigaPower. AT&T is also eyeing the unpredictable European market even though the competitive domestic landscape has forced the company to go slow on that plan.
At the root of that is necessity. Verizon, for example, ended up reporting a 5.3% revenue decline during the second quarter of this year, its first such decline in six years. Verizon earns most of its money from its wireless segment, and the growth in subscriber base is a crucial factor for the company to keep increasing its top line.
The U.S. market is the most developed market for smartphones and mobile devices, so although rapid growth in the past was able to bring Verizon to its heights, the high penetration is now telling on their ability to push even further. Essentially, once penetration reaches a certain point the market yet to be covered becomes a morass for even the most aggressive marketing efforts.
According to Strategy Analytics, nearly 100 million connections will be added through 2020, reaching 128% penetration in the market. If we assume the current relative market positions to continue until then, Verizon can add another 30 to 35 million users to its existing user base in the next four years. Beyond that point growth can only come from poaching subscribers from other carriers.
Can their moats be breached?
This is a huge problem down the road, and both AT&T and Verizon know that this day is fast approaching. But even in the most highly penetrated market in the world, Verizon and AT&T will have the muscle to survive and turn into a stable revenue stream, but further subscriber expansion will become a real challenge.
In preparation, Verizon is building a mammoth digital media network that can keep the advertising revenues flowing, while AT&T is expanding its product lineup and trying to cross the pond into Europe as well.
No matter which way you look at it, these two companies are going to stay at the top of the mobile carrier pecking order. Sprint (S, Financial) and T-Mobile (TMUS, Financial) will keep fighting for third and fourth place, but for a new operator to come in and duplicate the massive infrastructure that these companies have built is nothing short of impossible.
Take Google (GOOG, Financial) as a prime example. Even though they’ve shaken up the wireless world with Google Fiber and are even testing super-fast wireless internet carried on a fiber backbone, they’ve barely been able to make a dent in the industry in the six years since they launched Fiber. If Google can’t crack the moat that America’s top communications companies have, then who can?
But as for new lines of business, the top two players’ divergent strategies will take them far and deep into segments unfamiliar to them until recently. On that count, I will have my money on Verizon to come out on top as the company that shows more growth over the next ten years.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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