Phone Companies Are Ringing Up Big Profits

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A few years ago traditional phone companies seemed on the verge of extinction. Instead of using landlines, more callers were turning to cell phones. Cable companies were beginning to offer cheap phone service along with television. Free calls via the Internet were on the horizon.

 

But some traditional companies have fought back, cutting costs on landlines and expanding their own cell phone operations.

 

Foremost among the rejuvenated companies is the new AT&T, which is the product of the merger of SBC, Pacific Telesis, Bellsouth, and the old AT&T long-distance business. The new AT&T has regained its title as America's largest phone company.

 

While AT&T has lost residential customers, it is succeeding in business markets by offering high-speed services. “I don't think the free Internet services can provide anything like the quality that AT&T offers for businesses,” says Judy Saryan, portfolio manager of Eaton Vance Utilities.

 

About one third of AT&T's revenues now come from its Cingular wireless service. This fast-growing operation is proving highly profitable. AT&T expects to report double-digit earnings growth in 2007 and 2008.

 

Nipping at the heels of AT&T is the number two phone company, Verizon, which was created in 2000 with the merger of GTE and Bell Atlantic. Verizon is spending heavily to connect 18 million homes with high-speed fiber-optic lines by 2010. The goal is to offer one connection that will provide phone, Internet, TV, and wireless service.

 

Verizon reported 7 million broadband connections at the end of 2006, up 35% from the year before. Most of the expansion is occurring in major metropolitan areas, which have the biggest concentrations of upscale consumers.

 

The heavy spending has yet to produce much profit, but the company seems poised to grow quickly in the future. Besides building up the broadband, Verizon is expanding its wireless service, which already signs on 59 million customers. That wireless business should continue expanding steadily as the company moves into emerging countries, markets that still do not have adequate phone service.

 

To invest in the wireless revolution, consider Sprint Nextel, which has 53 million customers and added 600,000 in the first quarter of 2007. Despite the ferocious competition it faces, Sprint should hold its position and emerge as one of the surviving phone companies, says Judy Saryan of Eaton Vance.

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