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Telecommunication Investment

Telecommunications investment has been identified as one with a strong potential to spur economic growth and create employment. Investments in telecommunications infrastructure could not only provide a short-term boost to the economy, but also lay the groundwork for long-term improved growth and employment perspectives. Many fiscal stimulus programs adopted by national governments to lessen the impact of the recession and boost economic recovery include substantial stimulus investments related to digital infrastructure. Indeed research findings indicate that telecom investment has an impact far beyond the scope of the industry itself, promoting growth in adjacent industries and creating new industries. Telecommuni-cations investment explains up to one third of economic growth. With regard to employment, telecommunications investments have contrary effects: On the one hand, it is widely acknowledged telecom investments lead to significant productivity improvements. Increased efficiency is certainly beneficial for the economy; however, process optimization may lead to job losses. On the other hand, various direct and indirect employment effects can be identified that contribute to create new jobs. Therefore, the question arises whether negative or positive effects prevail. Our article gives an overview of the most important studies and their key findings, addressing methodology and assessing total contributions of telecom infrastructure investment to GDP growth and employment in important economies in Europe, North America and other parts of the world. We review ICT productivity studies, econometric studies analyzing the relationship between broadband infrastructure and economic development, and "forward looking" studies estimating the multiplier effects of telecom investments. Most evidence indicates a strong and robust positive relationship between telecom investment and both economic growth and employment. These results confirm that investments in digital infrastructure may significantly contribute to overcome the adverse effects of the economic crisis and improve long-term growth prospects.

Investing in Telecommunications

Telecommunications companies are a rarity among equities: Their shares have, at times, exhibited characteristics of both income and growth stocks. For growth investors, the small companies offering wireless services provide the best opportunities for share price appreciation. In contrast, larger companies dealing with equipment and services tend to be havens for conservative, income-focused investors.

Value investors also can find good pickings in the telecommunications sector. The need for telecommunications services, an integral part of the global economy, persists regardless of changes in the business cycle.

However, while the demand is constant, individual suppliers can rise and fall. For several years, a company may enjoy its regulatory privileges (like other utilities, telecom firms often are protected from competition by government mandate), and produce reliable, generous dividend yields (generated by high monthly revenue from its stable customer base). Then, suddenly, technological advances or mergers and acquisitions create uncertainty and leave room for loss—and recovery, with fresh growth.


Evaluating Telecommunications Companies

It is hard to avoid the conclusion that size matters in telecom. It is an expensive business; contenders need to be large enough and produce sufficient cash flow to absorb the costs of expanding networks and services that become obsolete seemingly overnight. Transmission systems need to be replaced as frequently as every two years.

Big companies that own extensive networks—especially local networks that stretch directly into customers' homes and businesses—are less reliant on interconnecting with other companies to get calls and data to their final destinations. By contrast, smaller players must pay for interconnection more often in order to finish the job. For little operators hoping to grow big one day, the financial challenges of keeping up with rapid technological change and depreciation of equipment can be monumental.

Earnings can be a tricky issue when analyzing telecom companies. Many companies have little or no earnings to speak of. To gauge a company's value, telecom industry analysts might turn to the price-to-sales ratio (stock price divided by sales). They also look at average revenue per user (ARPU), which offers a useful measure of growth performance, and the churn rate, the rate at which customers leave (presumably for a competitor).