Wireless Carriers: Threats, Everywhere
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Smart stock analysts know where the value is. Geniuses know where the value will be.
After AT&T (NYSE: T) announced new rules for its unlimited data plan, its shareholders as well as those at Verizon (NYSE: VZ) better demand the genius type. That change signals the first sign of trouble ahead for the two dominant wireless (broadband) carriers. Actually, investors should have been expecting that. After all, wireless carriers exist in a mature industry, especially considering technology advancements.
Specifically, the initial red flag is that data traffic is exploding, mostly because of streaming video. Netflix now has lots of company playing in that sandbox, including the latest arrival Comcast. By 2014, predicts MeFeedia, about 66% of the world’s mobile data traffic will be video. That is and will continue to put the screws to the capacity of the network and expanding it could erode profits. Deloitte & Touche states that revenue growth from data grew 132% during the past 4 years.
Now comes the time to pay the piper. This developing situation was described last month in The Cambridge Strategic Management Group’s report “Signal Strength: Assessing Value Shifts in the Mobile Telecommunications Industry.” The study also highlights several other longer-term threats for wireless. Meanwhile, in the present, the headline in Reuters, following AT&T's announcement, read “Some heavy video users may leave AT&T for Sprint.”
A lot is at stake. According to the International Telecommunication Union, there are 1.2 billion mobile broadband (wireless) subscriptions around the world, representing 45% growth over four years. In the past 15 years, reports Zacks Equity Research, the U.S. wireless industry invested $300 billion for the global communications network.
There is the possibility that subscribers with AT&T and Verizon will bail when their 2-year contract is over. By then there could be more affordable high quality options. Eventually, for example, Sprint (NYSE: S) could be the company providing the most viable one. And that likely would not be through its own current relatively low-cost wireless but rather its partnership with Republic Wireless, owned by Bandwidth.com.
Republic Wireless provides smartphone service whose device (yes, you have to use its own not-so-cool-looking LG Optimus) operates primarily on WiFi. That delivers unlimited voice, text, and data for $19 a month. No contract is required. When WiFi isn’t available, users are switched into Sprint’s 3G wireless network.
Some experts view what Republic has to offer as promising. The headline in ANDROID AND ME reads, “Republic Wireless has the potential to become huge, needs better devices.” As most of those who follow telecommunications know, Sprint is faced with debt problems. Its Chief Executive Officer Dan Hesse and the board also seem to be having tense relations, reports Motley Fool analyst Dan Radowsky. Will Sprint be around to keep supporting the partnership? That’s not the point. The point is that the technology and the business model are now there. WiFi can be fused with some broadband – and be commercially operable. This is exactly the kind of new entrant threat which The Cambridge Strategic Group has in mind. Pages and pages of comments to the ANDROID AND ME article indicate enthusiasm about the approach and willingness to switch from the majors when it is refined. Will a cooler phone be available? That’s likely, if the model gains enough traction in the marketplace to attract a sophisticated designer and manufacturer. Developers of the standard smartphones out there, including Apple, agreed to configure them only for wireless.
Can an upstart really disrupt an industry which has been assumed to have so many barriers to entry, ranging from capital to regulatory? It’s possible. In France that’s exactly what newbie Free Mobile is doing by offering for $26.50 monthly unlimited voice including to 40 countries, texting, and data. That’s less than half what the established player Orange France bills.
Another threat is from the surging popularity of the tablet computer, which usually operates on WiFi. Hubspot estimates that 11% of U.S. adults already have them, 13% of them use them for watching movies and videos daily, and 21% get their news through apps. When users combine these with a “dumb” phone, this is a lower cost way to be mobile. Also, the screen is larger. Every time I go into the Staples (NASDAQ: SPLS), North Haven, Connecticut, which has repositioned itself as high-tech, the tablet aisle is crowded with shoppers.
Wireless providers have already felt the presence of Skype, whose parent is Microsoft (NASDAQ: MSFT). Skype facilitates free voice, videoconferences, and messaging over the Internet. Clearly, wireless has to make a response to this in its billing for phone and other kinds of messaging. Eventually, though, Skype could wind up their partners. Microsoft could develop software for new kinds of smartphone services leveraging Skype technology. After all, it didn't pay $8.5 billion for Skype just to provide those freebies.
The business of being a wireless carrier can become a challenging one in the next few years. Struggling players like Sprint, upstarts like Republic, and established companies like Microsoft, which is determined to enter new categories, could transform it into a very different industry. Meanwhile, The Cambridge Strategic Management Group warns, “Established players can no longer rely on the rising tide of demand to guarantee growth.”
Motley Fool newsletter services recommend Apple, Microsoft and Staples. The Motley Fool owns shares of Apple, Microsoft and Staples. janegenova has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.