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Heading for a Fall?

Raymond McConville
4/29/2008

12:30 PM -- No one really saw the telco bubble coming at the beginning of this decade. Are we ignoring another potential meltdown?

I'm talking about AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) -- two companies that continue to churn out quarter after quarter of double-digit earnings growth. (See Wireless Fuels Verizon's Q1 and Wireless Pumps AT&T's Q1.) Of course, we all know that the growth has been almost single-handedly supported by their booming wireless businesses while wireline continues to shrink. (See Landline Landslide Will Lead to More Layoffs and Verizon to Raise Prices, Cut Jobs.) The question remains: Is this a sustainable business model?

Sooner rather than later, the U.S. mobile phone market is going to become saturated, which means the majority of future revenue growth is going to come from wireless data. But in preparation for increasing the bandwidth for this data, AT&T and Verizon both shelled out billions of dollars to acquire new wireless spectrum for future 4G and LTE-based services. (See AT&T & Verizon Make 700 MHz Plans.) Could this dilute profit margins in the same way that it has diluted Verizon's earnings for FiOS up to this point?

These telcos have been able to weather the recent economic uncertainty thanks to their healthy wireless businesses and the ability to reduce costs in wireline, partially through job cuts. But as the wireless market becomes more and more saturated, you have to consider the possibility that things could get ugly for them sooner than people think.

— Raymond McConville, Reporter, Light Reading

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