A long-term investor in telecom could bet on all the companies. Winning stocks could generate enough capital gains to cover losses of laggards.
Much of investment and management theory is tainted by survivor bias. Analysts study the management styles of successful businesses and try to isolate the factors that make them successful. They also study investment methods to try and find the ones that generate high returns.
So far, logical enough. Common factors can be isolated from success stories. It may be assumed that somebody who internalises those common factors will also be successful at business, or investment, as the case may be.
However in any industry, which has been through even one full business cycle, the sample of companies consists of survivors. The losers have already been at the receiving end of the forces of “creative destruction” and disappeared off the radar. Therefore, the experiences of the losers is ignored and that removes a vital element of the picture.
Luck plays a large role in determining success. But luck apart, survivor-biased analysis often glosses over mistakes. It pinpoints what a company needs to do but it doesn't point out what it should not do.
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Another problem that is especially acute in technology-driven industries is that history provides little indication as to the future direction. IT is the most egregious example of an industry where pole position has changed with every shift in technology.
One has to look at the ongoing telecom 3G auctions in this context. The Indian government has lost out on several grounds by delaying 3G by over 2 years. It could have got far higher license fees before the global financial crisis. It could have already had 18-odd months worth of revenue share in its pocket. It could have also picked up tax revenues from the new business opportunities that 3G would have generated.
However the government's loss may be the industry's gain. Ironically, the delays make it likely that assorted Indian telecom companies will not suffer Winner's Curse.
The European experience showed initial 3G auctions triggered massive overbids. Prohibitive license fees left most telecom companies suffering losses for years after network rollout. That sort of over-optimism is unlikely in the Indian market.
Another favourable factor is that Indian telecom penetration has more than doubled in the past two years. Most subscribers are extremely value-conscious. But many already possess cheap 3G-capable handsets because that has become the default option.
Local handset manufacturers have gotten into the game by flogging cheap, 3G capable handsets, which are focussed on data-heavy apps like social networking. According to a recent IDC study, local manufacturers now have around 17-18 per cent marketshare.
That makes the potential market much larger. The global 3G experience has also created a rough road-map for popular services and applications that could be adopted to generate Indian 3G revenue. Telecom service providers have a better idea what they can sell and where the ideal price-points are likely to be for value-added 3G services.
So there is much more clarity regarding projections and the potential to hit the ground running and generate more revenue from day one. But it will still take a year or more before 3G is made available to consumers, along with a wide array of services and choices in service providers.
Beyond this timeframe, what happens will be in the lap of the gods. Historical experience, both in India and abroad, suggests that there will eventually be consolidation across the entire telecom space. The current market leaders hold incumbent advantage but the travails of BSNL and MTNL show how easily that can be frittered away.
How long it will take for 3G leadership to emerge is an unknown. Who eventually survives post-consolidation is also unknown. That will not, however, stop people from betting on it. That betting has already commenced if the current volatility among listed telecom shares is any indication. It is likely to peak with the last stages of the auction process, two weeks down the line.
A short-term trader will have to operate on technical grounds. He will have to gauge price-volume patterns and if possible, relate changes in price-volume to news-based triggers. There should be ample opportunities to ride that volatility but the risks are obvious.
A long-term investor could try buying the entire telecom service provider pack. A few will be winners, others losers. If history holds, the winners will generate enough capital gains to more than cover losses on the also-rans and losers. Trying to be selective about it could leave you open to the weakness of a survivor-biased strategy.