The latest news from the Motley Fool: Who's in the telecom loop?
Sunday 22 August 1999
With talk of high-speed internet access on so many people's lips, it'd be a very isolated investor indeed who hasn't thought of investing in the telecommunications business at sometime. New and improving technologies have always been a good target for investors (but more risky than some plays, perhaps, as technologies can fail). Internet firms have been a big favourite in recent years but have faltered more than a little these past few months. They are very hard to value at present, as most aren't making any profits yet.
However, telecoms is a whole different game. It's an industry that has been with us for more than a century, and many big players are very well established. But it is still growing fast.
One problem is that it is hard for Foolish investors to work out who's going to be providing the lion's share of all this new telecoms technology. We hear talk of wondrous devices called "ADSL" and "cable modems" and all manner of magic, but how many of us can really find out what this all means without having to delve into masses of impenetrable technical jargon?
In fact what really counts is a basic understanding of what each technology can do, and what are its commercial advantages. The present problem is that ordinary phone lines are very slow at transferring data, when the demand for high-speed data links is increasing rapidly. These are often known as the "local loop" as they connect customers to the local exchange and, having two copper wires, they are, well, loops. There are really only two main ways of improving them. One is to up the speed of the services on copper wires, the other is to replace the copper with something better, such as fibre optics.
The copper local loops are owned by British Telecom (BT) so it is no surprise it favours improving them, not replacing them - certainly possible, as there is a suitable new technology that only needs an upgrade to the equipment at each end of the line, but which will work well on copper. The most popular way to do this is an "asynchronous digital subscriber loop" (ASDL), and it is very fast. "Asynchronous" means it's slower sending out from our homes (but still more than 10 times the speed of current modems), and faster for data coming back (about 100 times faster), which is ideal for the internet. BT plans to start rolling out ADSL within the next few months.
But the cable companies favour the cable modem, potentially more than 150 times the speed of ordinary modems, it's claimed. Cable modems are being trialled, with the intention of rolling them out by year end.
We will have both technologies in parallel for quite some time, but which will win out in the long term? The commercial advantages of the competing companies are very important for Foolish investors, possibly more so than the technological differences themselves.
Despite more cable TV, cable networks are still only accessible to 50 per cent of UK homes, and only 16 per cent actually use them. But BT's local loops are available to every home in Britain, and BT provides 85 per cent of local phone access.
BT's near monopoly might sound like a huge advantage over cable, but that is where the Office of Telecommunications comes in: Oftel requires that BT provide competitors access to their local loops, so consumers who choose to go for ADSL will have a choice of supplier.
So which companies will be leading the industry in the next century, and which should we invest in? Well, that is for individuals to decide, but the Motley Fool hopes this discussion will help you to understand the issues a little more clearly.
n Motley Fool: www.fool.co.uk
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