Sheltered From the Storm

The first quarter of this year shows why incumbency has an intrinsic value all its own.

While the overall TNE 100 Index of convergence industry stocks registered a dip of 21.3% for the 90-day period ending March 22, the convergent incumbents in the index fell only 7.9%. That performance compares favorably with the Standard & Poor's 500 Index, which dropped 14.4% over the same period.

The relative buoyancy of the convergent incumbents in a generally fading market is no big surprise. The 10 companies that make up the TNE 100's convergent incumbent component represent much of the industry's old guard, including three of the four Bell companies and a handful of cable operators, which are de facto monopolists in their markets. The investment truism that such companies are less prone to fluctuations in the market is holding true so far.

That basic market dynamic aside, incumbents also are getting traction from the idea that they have successfully withstood the worst of the CLEC onslaught.

"The incumbents have warded off the competition and now will roll out broadband services on their own timetable, one that is economical and doesn't cannibalize existing services, such as T1 lines," says Tom Wolzien, an analyst with Sanford Bernstein.

Wolzien adds that while a lot has been made of importance and growth of data, "it's still voice services that pay the bills."

Cable Stays Strong

Among the cable operators in the convergent incumbents group, Cox Communications and Comcast have both outperformed all indexes, with Cox actually realizing a slight gain in stock value over the 90-day period. Market watchers attribute cable's relatively solid standing to the fact that cable TV revenues have proven to be largely recession-proof in past economic downturns.

But the leading performer by far in the convergent incumbent category is one company that is in direct competition will all of the cable incumbents: direct broadcast satellite service provider EchoStar Communications.

Even though EchoStar is far from profitable — its loss per share is expected to widen from $1.26 in 2000 to $1.32 this year — interest in the stock remains high, in part because of rumors of takeovers and mergers involving EchoStar and DirecTV, which is owned by convergent incumbent component GM Hughes.

Performance was much less rosy north of the border, where both Bell Canada International and Rogers Communications posted numbers that lagged even the overall TNE 100 index.

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in The Net Economy.