There was a time, not too many years ago, when the telecommunications sector was the place everyone wanted to invest. Names like TPG Telecom, Vocus and M2 were top of the pops, as companies participated in an infrastructure arms race to capitalise on growing demand.
Miles and miles of new fibre were being laid. Companies and consumers were signing up at a rate of knots. And share prices were being boosted as investors painted a rosy future.
That was then. Now, the most innovative and disruptive of the lot, TPG, is struggling to grow. In fact, according to numbers only recently announced to the ASX, the company's top line actually shrank, while its profit growth is probably best described as 'tepid'.
Telecommunications, once the bastion of high-growth, tech-focussed investors, has now essentially become a utility — more akin to water companies than silicon valley.
It shouldn't be a surprise, of course. It's the price you pay for market saturation. For a while, telecommunications was the Wild West — a land of hope and promise, but with an uncertain future. Such situations create winners and losers as the players jostle for position, hoping to be the last companies standing when the dust settles.
But settle it has. A wave of mergers and acquisitions will be essentially complete once Vodafone and TPG, currently betrothed, tie the knot. The market is now mature, and saturated. The vast bulk of us have our own mobile phones.
Most households have an internet connection. The NBN has made home broadband both ubiquitous and commoditised.
Unsurprisingly, a saturated market leads to margin compression, both because the NBN is a common supplier of an undifferentiated product, and because the incumbents need to fight harder — lowering prices — to earn more market share.
Market-wide growth becomes hard to come by, as you rely on the laggards and population growth to eke out modest gains in the number of new connections.
In that sense, then, we've almost gone back to the future. There was a time when telecommunications (albeit copper phone lines, with the internet barely a dream) was indeed a utility. The company, of course, was Telecom Australia.
If there's a bright spot — either real, or a false dawn — it's the pending introduction of the next generation of mobile telephony (if we can really call it "telephony" any more) represented by the 5G spectrum.
According to my colleague, The Motley Fool's Director of Research, Anirban Mahanti:
"5G promises high-speeds but we already have plenty of speed from our 4G plans. I 'm not sure if 5G will change anything in the near term. Over the medium to long term, 5G, with the combination of low latency & high speeds might enable new types of applications. It remains to be seen how much of that valuation creation, if any, is captured by telcos."
Anirban's last sentence, of course, is the key point. 5G will become the standard for new mobile devices. It will be a boon for consumers and businesses alike.
The telcos might be able to charge premium prices — and earn premium profits — for a while, but, like 3G and 4G before it, competition might erode those margins almost as quickly as they increase.
Foolish takeaway
Aiding the 'more profit' story is the possibility that a merged TPG/Vodafone is a less aggressive competitor, happy to cede the chase for market share in exchange for higher prices and higher margins. If so, that's good news for the telcos, even if we end up paying more for our connections.
Or, it might continue to push prices down, mirroring the price war only just now abating in the Supermarket sector.
Telstra continues to dominate the mobile market, and stands to gain the most should peace break out in the price wars. Optus, for its part, remains captive to its much larger big brother and the smaller, nimbler, TPG.
The latter has the whip hand, and all eyes will be on what it plans to do once the marriage with Vodafone is consummated.
In a slow- or no-growth world, it's not overstating the case to suggest that the financial fortunes of all telco investors hinge on that decision.
