Value Migration

Just for fun, the other day I was looking at the evolution of market caps for a number of well known Western companies over the past five years. It is interesting to note that when Apple cut its deal with ATT (lets say 2006, one year prior to launch), ATT was worth roughly 2.5x Apple, and could have easily bought 25% of Apple as part of the deal. Today, Apple is worth about 20% more than ATT, mostly because Apple has grown and ATT has remained flat. The broader point is that, during the period 1995 to 2005 there was substantial value creation in telco, for example the emergence of Vodafone, Nokia's surge in value, and so on. However, since around 2006/2007, many traditional telco operators and OEMs have seen almost no valuation increase or even substantial declines. On the other hand, a few players such as RIM, Apple and Amazon have seen notable increases in valuation over the past 4-5 years. I believe that this signifies the beginning of two fundamental trends:

1. Valuation may have peaked for Western telco operators and OEMs, as they have run out of EBITDA growth in their core markets, and have shown little aptitude for entering new markets. Those smart or lucky to have made bets in emerging markets (e.g. Telefonica, Nokia), may get somewhat of a reprieve, but for the most part this trend will be inexorable. Instead, wireless valuation growth will primarily come from non-traditional players, who understand how to create profitable marketplaces at the intersection of wireless and adjacent ecosystems. Although players like Apple, Amazon, Google will be prime beneficiaries, an ecosystem of followers will be ushered in by fundamental re-alignments in the wireless value chain.
2. In particular, we will see a shift in valuation from Europe to the US. Wireless was one of the areas in tech where until even 2008 Europe was viewed as substantially ahead of the US. The competition has shifted rapidly and dramatically to the US, and today what matters most are the advances in Apple's, RIMs, Palm or Google's OS. The wave of innovation hitting the US market in response to the new OS war is only beginning, and we can expect to see second and third order effects. For example, smartphone mania in the US, may have helped accelerate the decisions by both Verizon and ATT to accelerate LTE deployment, and the US companies will be ahead of Europe in deploying this new 4G standard. The availabilty of 4G together with the faster adoption of smartphones in the US, means that by 2011, Europe is likely to be 1-2 years behind the US. This is important because they will be "Internet-years" and thus in effect the Europeans will be a decade behind! As I am British, I am not saying this to gloat, but just in wonderment. How could the American's have stolen the lead in wireless!! What happened?