Invest in What You Know

A lot of people working in telcos fancy themselves to be great stock-market pickers. Some of them are right, some horribly wrong. Bari, who I know through T-Mobile and who lives across the street from me, seems to know what he is doing and can hold long intelligent conversations about various investment theories. On the other hand, I mostly beat him at poker.

It is easy to see why people got caught up in the stock market when the dotcom boom happened. Back in the days when I worked at Deloittes I used to sit near a young lady who would excitedly tell me about how her shares were rising on a daily basis. That used to irritate me because I could never work out how she could afford to invest given the meagre salaries Deloittes used to pay us. I calculated that the annual cost to Deloittes of employing me – including taxes, overheads and all – was less than one-sixth of the annual fees charged to clients for my work. You can probably deduce why I wanted to leave. Nowadays the ratio is much better :) But I digress. Of course, what happened to that young lady is that one day she went quiet, and from then on she remained quiet – because her shares were going south and she did not want to talk about that.

At the time, I would read the FT and ponder how to invest my spare money, if I only I had some. They say you should invest in what you know. So my conclusion was that I would not touch dotcom businesses, telcos, TMT and the rest with a bargepole. They were all a lot of nonsense about a “new paradigm” and no business fundamentals, as I could tell from working with them. To my eyes most of the businesses were blighted were poor cost controls, hardly any revenue, lots of cash outflows and no inflows, were full of people with no experience unaware they were talking nonsense, and were one of far too many suppliers competing for hardly any customers. No, I used to watch the share prices of companies that make alcoholic beverages, or booze as I prefer to call it. Diageo was my favourite boozeco. At that time they seemed very unfashionable to the stock market picker, but their brands (Guinness for the boys, Baileys for the girls) were the fashionable tipples for people out drinking. And selling alcohol for people to drink seems like a long-term winner as a business model (sorry to any Muslim readers out there – first I mention profiting from gambling and now from booze). So as dotcom when down boozecos went up and up. Not that I invested in the boozecos either.

Now, perhaps, things should be turning the corner for telcos. Maybe by now I should know what telecoms and technology businesses to back? Nope. I still have no clue. Okay, so Vodafone and the like are starting to get real and pay out decent dividends instead of relying on rising share prices to attract investors. That is a good sign of a reality check. But even Vodafone’s business – arguably the most successful worldwide mobile brand – is a lot of smoke and mirrors that is hard to penetrate. Sometimes Vodafone will seek to acquire operators, othertimes to divest. In some countries they 100% own the mobile operator branded as Vodafone, in some they own most of the operator, in some they own less than half and in others they licence the brand but have no real stake in the business operation. Now Vodafone wants to expand their business model into a wide variety of new areas that are either unproven and possibly unpopular with customers (advertising over mobiles) or where they had no previous in-house management experience (reselling DSL). Listen to Arun Sarin and you will be hearing about data and content as the drivers for growth. Pick through the financials with a fine toothcomb and you see that of the 200m “proportionate” mobile customers Vodafone has world-wide, currently only one in six has a device that can be used for Vodafone Live! and that their 30% growth in “data” revenues means data still contributes less than half of the revenue that “messaging” does, even after Vodafone reclassified revenues from content services provided by text as “data” instead of “messaging”. Voice minutes are climbing nicely, but given a business strategy of fixed-to-mobile substitution, you would hardly expect less, especially if this is acheived through aggressive pricing that Sarin predicts will end with eat-all-you-want tariffs becoming the norm. Finally, there are all the factors that are impossible to predict. Nobody can be sure where the EU will end up with its plans to curb roaming costs and unless you have a loose-lipped friend in the CIA you are unlikely to anticipate scandals like the bugging of mobile phones used by Greek government ministers. It seems to me you would need to work full-time for a month just to decide if Vodafone is a good investment or not, without even considering how well their competitors were doing. So do not ask me for advice about investment in telcos and technology. Perhaps Bari across the street knows where to put your money, but he does not like to share his tips.

It gets no better when I look just at revenue assurance, not that I recommend that any investor worried about his pension should back such a risky venture. Two key fundamentals for revenue assurance will be the success (or otherwise) of the telecoms industry as a whole, and where a vendor’s various revenue assurance products are in terms of the product life cycle.

Looking at the industry as a whole, RA vendors give contradictory messages about how their business reacts to trends in the wider telco arena. Some suggest that communications providers spend most on RA when confronted with a saturated market, when they are under competitive pressure, and when they are turning their attention to eeking out increased efficiencies. So per this argument RA should go up when the telco market goes down, and vice versa. However, spend on revenue assurance is in fact largely discretionary in any telco budget, and the relative strong growth enjoyed by revenue assurance firms over the last couple of years appears to mirror the strong run for telcos as a whole. Given that telcos growth is appearing to be stable, but that slow and eventual consolidation will slowly reduce the number of customers for RA products, the only obvious conclusion is to take a longer-term view and to try and side with the vendors that already have the largest share of the market, so long as they have not become crippled by debt in order to get that share.

In terms of the product life cycle, the picture is arguably gloomy. Most of the true revenue assurance products being sold today were around, in one form or other, a decade ago. The tools are more efficient, more powerful, have better interfaces, create fewer false alarms, are easier to integrate etc, but essentially they do the same things. The advisory/consulting RA product is also unchanged. If advice is bought from the right people it is more refined and informed, being based on broader and deeper experience, but the underlying product has not really altered much. Looking at the classic product life cycle, the products are entering the maturity stage where the highest volume of sales will take place. But after maturity comes decline. Two outcomes that would be predicted by a product life cycle view of RA would be that (1) as the product reaches maturity it will become increasingly important that the vendor increases efficiency and cuts operating costs and (2) that the product, increasingly faced by a saturated market in the richer early adopter countries, needs to get pushed more and more to customers in developing countries. Both are happening, and the two factors complement each other. After all, why should an operator in a developing country have to pay rates associated with a developed country when the RA product they buy could just as easily, and far more cheaply, sourced from a developing country?

For evidence of the shift of sales to developing countries, take a look at recent announcements from Dublin-based RA vendor Cape, for example. Okay, they sometimes announce sales in Europe, but recently the enterprising Irish business announces contracts elsewhere in the world; look at the press release Cape issued yesterday. Or take Israeli vendor ECtel as an example. Recent wins include O2 UK and Portugal Telecom, but towards the end of last year they announced sales to China, Namibia and Latin America.

Of course, what you learn from the product life cycle is that as one product reaches maturity, it becomes time to use the proceeds to invest in the development of the next product. So yesterday I blogged about cVidya launching a new product for mobile content that also takes QoS into consideration. There are two big problems here, though, for RA vendors. The first problem is that the next big thing in telcos, data and content, is not big business compared to traditional telco products yet. It may take a long time to become big business. It may never become big business, especially if commodity-based flat-rate prices become the norm in the way Arun Sarin predicts. The second problem is that the new thing in telco products does not equate neatly into a new product for RA. The RA advice and the RA tools can cover the new products without much need to change. Whether reconciling charges to usage, network to bill or whatever, the same principles can be applied whatever the product. People exaggerate the differences to gain a marketing edge, but savvy customers can see through the hype. The principles remain constanct across voice, data, fixed-line, mobile, whatever. RA vendors may try to fill up the virtual supermarket shelves with lots of different brands for different telco sectors, but as with the making of washing powder you find essentially the same ingredients in every box. A wise (or cash-strapped) telco will lean on its existing suppliers to provide relatively simple and cheap upgrades of existing RA and fraud systems to cover their new products, and will not want to pay heavily for relatively superficial changes. Consultants will be increasingly pushed to justify how they can re-sell the same advice by changing the name of the product and a few details. On top of that, if prices go down, and become flat-rate, the technical challenge and possible benefits for RA diminishes significantly, undercutting the business case for investment in sophisticated RA software or advice. No wonder then that SubexAzure wants to diversify away from its RA/fraud base. So RA right now is reaching a product crossroads. It cannot keep selling the same thing as being “new” but once sales start to saturate worldwide there is currently no obvious new product or upgrade that will keep the same level of revenues coming in.

The shift of RA vendors to developing countries also poses a straightforward risk to investors as well. Some of the risks are mitigated when opting for a vendor in a developed country, but only at the price of buying into a business with a higher cost base than some of its competitors. There is no substitute for understanding the detail including the local business environment. Recently I was unable to blog about SubexAzure’s continued acquisition spree because the news was embargoed in the UK and various other developed countries. I will not state an opinion on how seriously you can take an embargo over news that got issued via SubexAzure’s website which presumably anybody might see from any country in the world ;) For a more serious example, in the results announced by ECtel for the end of 2006 investors saw a potential US$2.5m annual profit from US$29m annual revenues completely wiped out by a US$2.8m refund of R&D grants issued by the Israeli Office of the Chief Scientist. I know nothing about Israeli government R&D grants, but clearly you need to know in order to understand how well a business like ECtel is really performing.

So the summary is that I do follow the rule “invest in what you know”, but I will not be investing in revenue assurance, or even in telcos, for that matter. I think I know something about them, but nowhere near enough. Sadly, having spent too much time working, and not enough down the pub, I no longer know which alcoholic beverages to invest in either. Perhaps Bari from across the street knows enough about one or other, but if so he is not telling…