Beneath the sector surface: communication services, investing in the attention economy

Investing in an evolving sector

In 2018, the S&P 500 reclassified some of its largest and fastest-growing sectors to better reflect the realities of the modern economy. One of the most controversial reclassifications was when eBay left the information technology sector to become part of the consumer discretionary sector.

The main purpose of this move to reclassify broad swathes of the index was to acknowledge the convergence of certain industries, specifically technology, consumer discretionary, media and the Internet.

This resulted in the birth of the communications services sector, uniting firms like AT&T, Verizon, Facebook, CBS, Disney, Netflix and Comcast under a single umbrella.

The communications services sector now broadly splits into two main sectors: media and telecoms. It splits again into five subsectors: Internet services, advertising, publishing, gaming and entertainment.

Technological innovation has radically reorganised the industry from an infrastructure-based economy to a content-based economy. There’s significant overlap with the tech sector, but communication services offer some unique opportunities not found among the chip makers and data centres of Silicon Valley.

Read on to discover:

• Which firms are offering eye-watering salaries in a bid to win the AI talent war
• How one government’s attempt to make adult content less accessible could have unintended consequences for content producers
• How AI is changing the game in multiple exciting ways
• Where to find defensive picks in a sector characterised by rapid innovation

A diverse and rapidly growing sector with mixed fortunes

To give a sense of the sector’s diversity, it's home to gaming giant Roblox, concert ticket seller Live Nation, video streaming platform Netflix and news publisher News Corps. This diversity necessarily points to a sector with mixed fortunes.

Over the past decade or so, the sector has experienced significant growth^[1] and analysts are broadly optimistic about this trend continuing. The current compounded annual growth rate (CAGR) of 6.23%^[1] may seem low when compared to rapidly growing industries like AI and healthtech, but taken in the context of the sector’s diversity, which includes legacy telecoms and advertising, it’s solid if unremarkable.

Giants like Charter Communications^[2] and Interpublic Group^[3] have underperformed in the past year, so there’s certainly room for growth. By 2033, analysts expect the sector to be worth around $3.99 trillion, putting it on an even footing with the consumer and industrials sectors^[2].

The communications services sector was one of the first to benefit from AI innovation, with communications platforms and telecommunications providers being early adopters of what was an emerging and unproven technology.

Ripe opportunities for defensive and value investing

Although firms like Disney and Comcast were removed from the consumer discretionary sector category in 2018, their new home in the S&P 500 communications services sector still relies heavily on consumer confidence. That means a large part of the sector depends on strong economic fundamentals like jobs, GDP and inflation.

Alphabet and Meta might be the two firms most exposed to any potential economic headwinds as advertising revenue remains a fundamental part of their business model. Yes, they’re somewhere near the forefront of the AI revolution and are well placed to benefit from AI, but smart investors in the communications services sector won’t lose sight of their undergirding business model: attention, clicks and revenue.

For more cautious investors and traders, there’s plenty of opportunity for defensive moves within the communications services sector. Telecoms firms like AT&T and T-Mobile remain relatively stable in the face of macroeconomic volatility.

Another reason to get excited about this less glamorous sector niche is its influence on socioeconomic development. Communication technology is a key driver of economic growth, catapulting nations and industries ahead and facilitating connections. Whether it's mobile connectivity, mobile banking or superfast broadband, there’s a strong correlation between growth and communications.

Value investors should keep an eye on the advertising sector. Two of its biggest firms, Omnicom and Interpublic, look set to merge in a $13.25 billion all-stock deal, having just cleared a big regulatory hurdle in the UK^[4].

How will AI influence the attention economy?

The communications services sector is effectively a formal way of describing what pundits have dubbed the ‘attention economy’. TV shows, social media, messaging services and advertising are all predicated on capturing and retaining human attention.

You can figure out if you should be bullish or bearish on the communications sector by asking yourself this question:

Will the human appetite for consuming content continue to increase?

If you said yes, you can further refine your position by asking yourself this follow-up question.

Will AI make it easier and cheaper for corporations to produce and distribute content in a more targeted manner?

If you answered yes again, it’s a heavy tick in the bullish box.

But there’s more to it than that. AI isn’t simply a lever for improving existing products.

Meta and Alphabet, the homes of Facebook and Google, respectively, are the sector’s two largest firms, representing around 50% of the sector’s total weighting^[5] . Both are deeply committed to AI as a force multiplier for growth.

As well as using AI for ad and content targeting refinement, Meta and Alphabet are each exploring how AI can fit more snugly into our everyday lives, not just our devices. Meta has partnered with Ray-Ban® to develop smart glasses that can translate text in real time and even tell you where you parked your car.

Although a novel concept still in its infancy, it demonstrates the two-pronged trajectory that could characterise the sector over the next few years.

This invites another important question.

Will the firms that develop AI or the firms that best integrate it into their products be the biggest beneficiaries of this technology?

Should you be investing like Mark Zuckerberg?

There’s evidence to suggest the communications services sector is betting big on AI, supercharging what has already been impressive growth. An emerging talent war in Silicon Valley has resulted in the likes of Meta offering AI researchers and engineers eye-watering salaries to jump ship to Zuckerberg’s firm. One report claimed that an unnamed researcher declined a $1 billion offer from Zuckerberg himself^[6].

If you still lean bearish or suspect regulatory scrutiny and legislation, like the UK’s Online Safety Bill, will artificially constrain consumer access to content, then it could be worth exploring how your scepticism translates into a trading or investing strategy.

If you’re curious about how you might profit from falling values without owning stocks, it could be time to discover spread betting.

The bottom line

A sector generously stocked with powerhouse brands like Disney and Meta, plus smaller players poised to potentially enjoy rapid growth in the next decade, communications services remains an opportunity rich landscape. Investors and traders will be paying close attention to the economic outlooks of major economies to spot ripples that may depress consumer confidence. They’ll also be paying close attention to trends in AI, advertising and social media, as well as the regulatory posture of the economies that produce and consume the most content.