Oligopolies in the Mobile Phone Market Offer Stability for the Major Players
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As discussed before monopolies and oligopolies make for great investments. The mobile phone market in America is oligopolized and offers a relatively stable environment in which a business can grow. At the same time the constant improvement in technology and need to upgrade networks to be in line with consumer demand places a temporary drag on earnings. As investors it is easy to get caught up in the quarterly earnings and forget the long term characteristics of the market.
The four firm concentration ratio in this market is far above the 50% mark. At 80% this is a clear sign that the market is oligopolized. Customer service is important in any market. In a market with fewer choices consumers can be forced to bear lower quality service. In MSN's 2012 Customer Service Hall of Shame only a select number of industries are presented. It is telling that the companies come from the banking, cable, and telecom industries along with AOL.
The presence of Sprint Nextel Corp (NYSE: S) on this list has a number of insights for investors. Their poor customer service and absence of other companies like Verizon Communications, Inc. (NYSE: VZ) is definitely negative for sprint relative to its peers. Given a choice between the same phone and poor customer service or effective customer service any consumer will choose not to go with poor customer service. Investors can also learn that the mobile phone industry is so oligopolized and companies have such power over consumers that an inferior service will be tolerated to a degree. Investing in a market with such characteristics definitely provides a degree of protection for investors.
Verizon and AT&T, Inc. (NYSE: T) have posted 5 year revenue growth and negative 5 year EPS growth. Verizon is at 4.23% and AT&T is at 3.48% over this time frame. These growth rates are not amazing. Although these numbers are nowhere near the growth posted by companies like Google they still show that the both companies are able to keep up with inflation. The decline in EPS show how the continual need for network upgrades and the huge increase in data requirements place a serious dent in profits. A 5 year EPS decline of 15.47% for AT&T and -17.79% for Verizon shows significant negative forces for the industry.
Verizon's and AT&T's depressing numbers are nowhere near the numbers which Sprint Nextel has posted. They have negative 5 year revenue growth -3.63% and have posted negative EPS over the past couple years. Their market share is one third to one half the market share of AT&T and Verizon which limits their ability to put capital into network development. Also, the larger companies will have more cash available to buy spectrum blocks when they come available. There is not an infinite amount of spectrum available and this is another instance Sprint's smaller size can limits its' ability to compete over the long term.
The mobile phone market is highly concentrated and the lack of options mean that customers can be forced to endure second rate customer service. If smart phones were not greatly expanding the amount of bandwidth required then the market would be a very different placed. The R&D and roll out of the latest networks do put a serious dent in the company's profits but they also allow more established companies like Verizon and AT&T to maintain their supremacy. Profits are not guaranteed but the top players remain oligopolists and their unique ability to expand their networks will allow them to maintain their power.
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