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AT&T Inc. (T) Stock’s Relationship with Facebook and Alphabet: Friends, Enemies or Both?

How the two tech companies may hurt, and help, the venerable telecom

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Major telecom companies, like AT&T Inc. (NYSE:T), have a complicated relationship with tech companies like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).

Telecoms envy Facebook and Alphabet’s profits and stock performance. Since January 2009, Alphabet stock is up 460%, while AT&T stock rose only 49%. And telecoms like AT&T particularly resent the fact that internet companies like Alphabet and Facebook gained these profits while piggybacking on the equipment the telecoms spent tens of billions of dollars installing. You wouldn’t be able to access websites such as this one or Facebook without the help of a telecom, such as AT&T.

On the other hand, when people access Facebook or search Google, they are using data, which means more business for telecoms.

But tech companies hurt telecoms when they cannibalize their revenue with apps like Viber and Messenger and WhatsApp. Using WhatsApp is cheaper than sending a text message, and has caused text message volume to decline.

Storm Clouds on AT&T’s Horizon

But that’s not all. Alphabet and Facebook now are looking to compete with the core business of telecom providers such as AT&T. Alphabet’s Project Fi, in collaboration with Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS), will free users from signing a contract with a single network. This allows users to switch between networks depending on which one has the best signal quality.

And that’s not all. Alphabet has more projects, including Project Loon and Google Fiber, in the works. These also threaten telecoms like AT&T. And Facebook is doing likewise, with Free Basics, Express Wi-Fi and the Aquila drone project.

Why are tech companies like Alphabet and Facebook doing this? Why don’t they just stick to their core businesses, search and social networks?

Well, Alphabet and Facebook derive most of their revenue from advertising. More people receiving access to the internet means more people viewing ads, and more revenue for Alphabet and Facebook’s core businesses. If people can’t access the internet, they can’t bring the two companies revenue.

Alphabet and Facebook want to see more people using the internet, and if this means using drones or balloons to bring access to remote regions, so be it. With greater availability of bandwidth, traffic on their websites will go up.

So are Facebook and Alphabet threats to T stock? Well, yes, in some ways. But in other ways they may help telecoms like AT&T by pioneering open-source hardware and software-defined networking. They have their own reasons for doing so, and this could help AT&T by lowering the cost of equipment which AT&T uses.

Facebook/Alphabet vs. T Stock: Friends

In an article I wrote in November, I discussed Facebook and Alphabet’s efforts to develop open-source networking equipment. Currently, companies like Cisco Systems, Inc. (NASDAQ:CSCO) make money by selling proprietary hardware and software to telecoms and internet providers like AT&T.

Networking equipment has been described as a “black box,” where hardware and software are bundled together by the same vendor. Software from other companies might not run smoothly on one company’s hardware. Companies like Cisco can earn high margins on these proprietary products. Routing equipment has not yet been commoditized like other hardware, such as servers.

But the development of software-defined networking and network functions virtualization could change this. These trends involve using open-source software and hardware instead of more expensive proprietary versions. Telecoms like AT&T can then save money by switching to cheaper, interchangeable “white box” switches and routers.

Alphabet and Facebook are taking advantage of this, and making their own networking equipment.

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Article printed from InvestorPlace Media, http://investorplace.com/2017/03/att-inc-t-stock-friends-enemies/.

©2017 InvestorPlace Media, LLC