RedState Wonkery on Open Networks

by publius

I wasn't expecting the good folks at RedState to endorse open networks.  But RedState's Neil Stevens threw me for a loop with this one: 

[Open network regulations are bad because] [w]ealth will be redistributed, as cash-rich, massive market valued Internet firms will bully and get a free ride on capital-intensive, smaller market valued telecommunications firms.

Ah yes, let's hope gritty upstart AT&T can survive this.  Anyway, I was brave enough to click the link, which led me to his previous post explaining why AT&T is actually David fighting Goliath:

“Amazon.com, EBay, Google, Intel, Microsoft, Facebook, Skype, and Yahoo” are all on their side. Some of those are small companies, but . . . Microsoft’s market capitalization stands at over 220 billion dollars today, and Intel’s at half that, $106 billion. The big, bad AT&T itself is only worth $1.2 billion, or about half of one percent of Microsoft.

Um, ok. 

I'm not exactly an expert, but I do have Google.  And Google tells me you measure market capitalization (i.e., value of equity) by multiplying the number of outstanding shares by share price.  For AT&T, that gets you $153 billion (or $146 billion after you subtract their cash). 

As you probably recognize, $146 billion is bigger than $1.2 billion.  He was close though -- just off by a factor of 121.

And if you really want to determine the value of AT&T, you should also factor in its $76 billion of debt.  That brings you to around $222 billion.

The point is that AT&T is an enormously large and powerful company under any metric you choose (revenues, market cap, etc.).  Stevens, however, is treating it like a new startup company.

More broadly, his argument that a bunch of rich Internet companies are fighting for open networks isn't really true.  Internet companies aren't exactly doing the heavy lifting anyway.  Public interest organizations like Free Press are.

And with the exception of Google, most of the companies actually doing some real work aren't that big.  Microsoft, by contrast, has been virtually useless in this fight.  You'll notice that it's not on the CEO letter that went out earlier this week supporting open networks.

In any event, essentially nothing is correct in either of Stevens' posts.  They are entertaining though.  "Single Payer Internet" is a keeper.

Comments

[Guest]

What the heck is that guy even talking about? It doesn't even make sense.

[publius]

There are so many things wrong with both posts that it's impossible to summarize in a single post.

I do think it's worth noting the huge gap between critics like this and good faith ones like Julian sanchez who actually bring legitimate thoughtful critiques.

This, by contrast, is basically Glenn Beck stuff

[Justin_Anderson]

I can't believe I actually went and read that thread. The level of stupidity simply boggles the mind. These people really do believe Obama and the gummint are going to take over their computers and keep them from visiting Freeperville.

[Christophe]

I am certain that Google, Microsoft, Amazon.com, eBay et al. will be fascinated by the notion that somehow they are not paying anything for bandwidth. If this is true, their network operations people have some serious explaining to do about those giant invoices they pay each month.

Next, we will examine how those airlines are going to gang up on the poor, abused oil companies in order to get their av gas for free.

[idlemind]

Curious that, along with Microsoft's Steve Balmer, Yahoo's CEO Carol Bartz did not sign that letter. I'm pretty sure that their previous CEO, Jerry Yang, would have, given that he was pretty outspoken on net neutrality.

The telcos want to collect a tax, pure and simple. They not only want internet companies to pay for bandwidth, they want them to pay a percentage of the money they make using that bandwidth.

[yoyo]

the blithe disregard of reality in favor of the made-up play-time world of pseudo concepts is sure something to behold. I suggest a nobel lit prize for the lot of them.

I mean, read this sentence:

"And while I don’t think its government-backed (by FCC or by franchise monopoly) providers should be able to set network policies to harm competitors such as Skype or YouTube, I think competition in that field is vital to our well being. The last thing we need is competition-killing regulation of every router and wire in America, increasing the costs of business high enough that only the richest companies can compete, and paving the way to the Socialist dream of Single Payer Internet in America."

such alien thought-forms. its the best 'first contact' novel ever written.

[Kenneth Almquist]

Curiously, for all the fire Neil Stevens aims at net neutrality, he just barely opposes the concept:

"If Genachowski stopped here, I would not oppose him. I don’t agree that the FCC must act in this space; rather I believe the answer to this problem lies at the state level. Ending or reworking franchise monopolies and duopolies on phone and cable television would go further in fixing the problem government created, than creating more new government."

I think that Stevens is wrong because we are talking about natural monopolies here, not state-created ones.

[byrningman]

It's pretty hilarious watching these morons take instructions from their telecoms paymasters, and try to turn an esoteric and technocratic issue into a Mel Gibson movie. Alternative policy proposal on arbitrary issue = Stalinist Nazi homosexual Redcoats want to explode your baby.

Republican standard operating procedure really does get surreal in these kinds of situations.

[cleek]

competition-killing regulation of every router and wire in America, increasing the costs of business high enough that only the richest companies can compete, and paving the way to the Socialist dream of Single Payer Internet in America.

he doesn't seem to even know the meaning of the word "socialist".

[von]

Publius, small point on valuation -- because you're wrong regarding this:

And if you really want to determine the value of AT&T, you should also factor in its $76 billion of debt. That brings you to around $222 billion.

Well, no. You don't add debt to market cap and get a value. Market isn't a traditional measure of value and, in any event, already factors in debt (more on this below). Rather:

- You can subtract debt from asset value in order to determine the "book value".

- You can subtract debt from revenue prior to applying a suitable multiplier and discounting as part of an attempt to establish enterprise value.

- You can compare debt to relative debt levels held by other telecom companies as part of a comparable analysis.

Book value, enterprise (going-concern) value, and comparables are the three traditional ways of measuring the value of a firm. They are useful in different ways.

Now, as for market capitalization: This is a method of measuring the market's collective judgment regarding company value for a publicly-traded company, but it is not a valuation the way the term is commonly used. You certainly can't add market cap to debt and get the real value (the market has already, in theory, takin into account the debt.) What market cap really tells you is the shareholder's expectations regarding the company's future value (which is loosely related to -- but not the same as -- enterprise value).

Given that you've criticized Neil for making a mistake regarding value, you may want to do a little research re above. If you think you yourself have made a mistake (and you have -- but don't rely on me saying so), you may want add an update.

[von]

One clarification:

I wrote "You can subtract debt from revenue prior to applying a suitable multiplier and discounting as part of an attempt to establish enterprise value." That's not how it's generally done; you typically use EBIT or EBITDA (rough proxies of profit, not revenue). You can use revenue, and I was trying to avoid too many unfamiliar acronyms; still, it struck me that if I'm nit-picking I had better pick my own as well.

[Bunk Moreland]

Publius,

I believe Neil Stevens simply looked up the wrong ticker symbol for AT&T. If you use the ticker "T" you get the ~$150 billion market cap you report

http://caps.fool.com/Ticker/T.aspx

However, there is also a ticker "ATT" that is listed as AT&T, and that stock has a market cap of ~$1.2 billion:

http://caps.fool.com/Ticker/ATT.aspx

I'm not sure what ticker "ATT" actually is (it may be a different class of AT&T stock, in which case the market cap of AT&T as a company would be the sum of ~$150 billion + ~$1.2 billion). In any event ~$150 billion is a good estimate of AT&T's market cap.

Claiming AT&T is a small company is silly, but I do believe Neil Stevens made an honest mistake with his market cap figure.

[Bunk Moreland]

Von,

Your definition of "enterprise value" is not the same as "enterprise value" that is commonly used in the financial world. Typically enterprise value is defined as "market cap + net debt":

http://www.investopedia.com/term/e/enterprisevalue.asp

I'd argue that this traditional definition of enterprise value is a good estimate of the "true value" of a company. Intuitively this makes sense I think- a company needs to repay its debt holders before paying its stock holders. So really the market cap of a stock is the market's judgment of a company's worth after it repays all of its bondholders/debtholders.

[publius]

Right - my understanding is that you add debt to get enterprise value.

Regardless, i was just using what he did. I was originally going to use revenues (AT&T has $111 billion this past year), but used what he did.

Bunk -- I think you probably identified what happened. The problem is that anyone with even passing familiarity with this subject should know that Microsoft isn't 200 times bigger than AT&T, or that AT&T is only worth a billion dollars.

But essentially the whole thing is wrong.

[JustMe]

"T" has always been the market ticker for AT&T. Anyone who doesn't know that has never looked at the stock market.

In any case, let me write the definition right-wing policy argument which should fit most anywhere:

"I do not support having this policy supported by [Federal Regulatory Agency and/or Congress]. It simply represents a socialist redistribution from [those people/corporations on my side] to [those people/corporations on the opposing side]. Instead, I believe that any regulations, if necessary, should be passed on the state and local level. In addition, the best way to address this issue should be to pass tax cuts and tort reform to insulate [those people/corporations on my side] from frivolous lawsuits, which is what has been causing these problems in the first place."

[von]

Bunk Moreland (and Publius) -

You're right -- I used the term enterprise value when I meant discounted cash flow. My bad. Too much to do this morning and not enough coffee. That doesn't make Publius any more correct, however. Enterprise value (in the real sense, not the vonian brain-freeze sense) is the cost of an outright takeover: it requires you to account for cash on hand (and equivalents ... potentially including some receivables), minority interests, premiums, preferred stock, etc. It's not what I think of when I typically think of the value of a company.

But, Publius, if you're trying to compare the cost to purchase these companies outright, you should say that (and do it right, because it's more than just equity+debt).

I'd argue that this traditional definition of enterprise value is a good estimate of the "true value" of a company. Intuitively this makes sense I think- a company needs to repay its debt holders before paying its stock holders. So really the market cap of a stock is the market's judgment of a company's worth after it repays all of its bondholders/debtholders.

I agree that market cap (plus any premium) and debt is a good way to evaluate the takeover value of a company. But it's not an appropriate measure of value for the vast majority of investors. I also don't know of any person seeking to purchase an entire company who starts his valuation with enterprise value .... that generally the end point.

[John Thullen]

I hope this is obvious to everyone, but "market value" tells you nothing about how large a company is nor the breadth of its business.

It's merely the market's snapshot guess at any given time of a company's future growth prospects, expressed by pieces of paper called shares.

It's fizz and foam, constantly changing.

AT&T's revenues were roughly 30 billion in its last reported quarter; Microsoft's were roughly 12 billion in its last reported quarter, Google's were @ 5.5 billion.

In the insubstantial world of Wall Street as reported to us now by the insubstantial world of business reporting, they will tell you the market cap.

But who cares? That could change by as much as 50% either way at the top of the hour.

They might tell you how much revenue and profit grew.

They rarely tell you the actual revenue and profit numbers, or it's at the bottom of the story.

Too boring.

[Bunk Moreland]

Von-

You're discussion of the "value" of a company is more from the viewpoint of a potential investor looking for a market inefficiency. However, if one believes in the efficient market hypothesis (I don't-at least in the short term- but any other of valuing a company is subjective in at least some way), the enterprise value is what the company is worth (in the total judgment of all investors). According to efficient market theory, discounted cash flows, etc., are accounted for in this value.

Effectively investors that are trying to beat the market are looking for companies who they judge to be more valuable than the market enterprise value.

[Mike Schiling]

he doesn't seem to even know the meaning of the word "socialist".

It's what Neville Chamberlain was! (Or is that "appeaser"?)

[The Gay Species]

Publius,

I would not change your day job for accounting. Your smoke and mirrors is novel, but I think the reason they call it "net worth," is because it is the net worth.

[Bernard Yomtov]

Now, as for market capitalization: This is a method of measuring the market's collective judgment regarding company value for a publicly-traded company, but it is not a valuation the way the term is commonly used. You certainly can't add market cap to debt and get the real value (the market has already, in theory, takin into account the debt.)

Of course you can. That's the basic finance textbook approach. Of course you should value the debt at its market price, not face value. The market prices of debt and equity tell you what investors (bondholders are investors too) think the cash flow is worth.

A firm generates cash flow from its operations. There are various claims on that cash - debtholders, taxes, equityholders. The market value of the company is the value of those claims other than taxes. A different capital structure - the mix of equity and debt - does nothing to change the underlying cash flow. You don't sell any more widgets. It may affect value by changing the tax burden, but that's it.

If you buy a company you don't ignore the debt. It's there. If you don't pay it off then it's still there after you buy the equity, and is still a claim on cash flow. You may have bought the equity, but you haven't bought all rights in the cash from operations.

This basically the Modigliani-Miller theorem, considered a hugely important argument. There are some simplifying assumptions involved, but it's a very useful foundation for thinking about these things.

[ajay]

You have to compare apples to apples, von. You can argue about whether EV or MCAP are good measures of value, but MCAP is the one that this idiot used and got wrong when he was trying to compare the "worth" of Microsoft, Intel and AT&T.
They're also very commonly used in the presswhen writing about companies: if you say "Yoyodyne is a $10 billion company" it's normally accepted that it means MCAP.

[Bernard Yomtov]

I would not change your day job for accounting. Your smoke and mirrors is novel, but I think the reason they call it "net worth," is because it is the net worth.

But that has little to do with market value. Not nothing, but little. "Net worth" is a balance sheet item. It does not reflect the company's earning power, which market prices are based on, but rather the excess of assets over liabilities.

It's an accounting term, and there is no reason to expect that two companies with the same net worth have anything resembling the same market value.

[microgaming]

I am not an expert about the topic but I liked this article and will come to this board more often. I like when there are controversial topics for people to discuss and good lectures. Definitely this blog will be bookmarked for a future.

[Sebastian]

""Net worth" is a balance sheet item. It does not reflect the company's earning power, which market prices are based on, but rather the excess of assets over liabilities.

It's an accounting term, and there is no reason to expect that two companies with the same net worth have anything resembling the same market value."

To emphasize this, a moderately successful one-shop grocer who owns the land under his store outright might have exactly the same currnet net worth (assets minus liabilities)as a moderately struggling nationwide grocery chain with 1000 locations that are leased or mortgaged. Yet the nationwide grocer is clearly larger.

[tgirsch]

von:

If you keep admitting when you're wrong like that you're going to lose whatever little conservative street cred you have left. I'm just sayin'. :)

[hairshirthedonist]

"T" has always been the market ticker for AT&T. Anyone who doesn't know that has never looked at the stock market.

I didn't know that (or at least remember that if I ever did know). But I'm not sure what it means to have "looked at the stock market." I own stocks and mutual funds and check their prices. I also check the Dow, NASDAQ and S&P 500 numbers fairly regularly. Maybe I'm being too literal.

[Robert K.]

Why am I not surprised that Sen. McCain is introducing the anti-net-neutratility “Internet Freedom Act of 2009 ?”

http://www.macworld.com/article/143445/2009/10/mccain_netneutrality.html

[byrningman]

All this quibbling over how one defines the "value" or "size" of a company is silly, obviously there's various ways of doing that, and they are all arbitrary.

Publius' original point is completely correct: whether you use "market value" or annual revenue or probably just about any other measure, AT&T is one of the very largest (top 10 or even top 5) companies in the USA, and substantial larger than, for example, Google barring wild swings in the stock price of either firms.

Thus the original post at Redstate was moronic in trying to portray AT&T as some sort of plucky little David against Google's goliath. Neil Stevens either conveniently forgets or is blissfully unaware that another telecoms goliath, Verizon, happens to have come out in favour of net neutrality. But he's probably blissfully unaware, because whatever error he made to get a valuation of $1 billion for AT&T, he clearly didn't realise that was wrong by an order of magnitude, and thus patently has no clue whatsoever of what he's taken.

[byrningman]

I meant to say "no clue whatsoever of what he's talking about", but "of what he's taken" probably works just as well, since the guy must be drunk or high to write that nonsense.

[von]

I agree with Byrningman - I meant to raise a quibble, then made a mess of it by making an error in my own comment. I stand by my quibble (correctly phrased), but it ain't nothing compared to the errors in Neil's post.