Is Apple About to Ignite a Profit Center For Wireless Carriers?
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Famously resistant to introducing any new technology until it is ready for prime time, Apple (NASDAQ: AAPL) has made 4G LTE network access a key selling point for its new iPad. And 4G capability in the iPhone 5 can't be far behind. So, with the 400 pound gorilla of the tech world starting to bring 4G to the masses, the technology is about to hit center stage. And wireless carriers stand ready to reap significant benefits.
Can you read me now?
For years now, people have been talking on their phones less and less, while texting and surfing more and more. The Apple-dominated tablet category - built for data consumption - has only accelerated this trend. And it appears that we've finally reached that tipping point for data vs. voice. By next year, it is expected that data revenues for the wireless carriers will exceed voice revenues for the first time.
By 2013, your voice won't be a substantial part of your wireless usage, except maybe when it's delivered along with your talking head in a video chat.
But the first two iPad iterations, shackled to 3G technology, didn't dramatically increase wireless data consumption. Most tablet users were content to buy the WiFi version, finding little reason to shell out the extra money for 3G. According to industry analyst Chetan Sharma, close to 90% of tablets in 2011 were WiFi only. For 2011, at least, wireless was still a voice-driven industry.
Place your bets
Against this backdrop of declining voice profits and stubbornly slow non-WiFi data consumption, industry players have been placing their bets on the next white horse of increased margins: 4G.
In 2010, Verizon (NYSE: VZ) went so far as to institute a gutsy price cut on its data driven devices like USB modems, mobile hotspots, and tablets, which had the unfortunate effect of dropping revenue-per-user by double digits last quarter. CFO, Francis J. Shammo explained that the price cut was aimed at "expanding the market."
The payoff wasn't just in added volume, though, which the company achieved with almost 4 million in unit sales on the top line. According to Shammo, the real story was that "the greater efficiency of our 4G LTE network means that this data revenue is also generating higher margins and driving improved profitability."
USB-modem access to a 4G network is a service that will satisfy a niche, but it is most likely limited to business travelers and other customers who were already high-margin clients to begin with. What Verizon, and main competitor AT&T (NYSE: T), have really lacked in the quest to drive massive data consumption through their networks is a compelling "killer-app" that could convert low-margin web surfers into conspicuous consumption data hogs.
An article this week in the Wall Street Journal demonstrates how the new iPad - only a few days into its product cycle - could already be achieving that all important customer conversion.
Profiled in the piece was a man named Steve Wells, whose father had hit his data limit just a few days after purchasing his iPad. How did the man burn through so much data, so fast?
While he was at the basketball game with his son, his wife was using his iPad as a video baby monitor for his granddaughter while she napped in another room. By the time the two were back from the game, the app had burned through his two gigabyte plan.
If grandparents could be seduced by real time, full screen, high-def baby monitoring then just think of all the other data uses that 3.1 million pixels can sell to the legions of consumers expected to purchase an iPad this year. With over 3 million iPads sold just in the first weekend of availability, Verizon and AT&T are about to get the "expanded market" they've been hoping for.
Now I'm listening
Strong growth in data consumption has the potential to contribute substantially to wireless carriers' bottom lines. Verizon in particular stands to benefit from this trend as the company is the only one - so far - which can deliver mobile hotspot usage for the new iPad. And, at about 7 million 4G capable units, this segment still represents less than 10 percent of the company's retail postpaid base, leaving plenty of room for growth as new iPads join the network by the thousands.
AT&T won what you might call the Apple Carrier War I, with its exclusive hold on the iPhone for the first few years. And while AT&T will benefit from increasing data consumption driving user-revenues, it is Verizon that looks ready to pad its bottom line most with Apple's latest technology intro.
Demitri writes about stocks and investing at his blog, Sigma Swan.
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