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Google and Facebook: 2 Major Threats to AT&T and Verizon

AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) are the most dominant wireless providers in the U.S. Combined, the two telecom juggernauts have nearly 169 million wireless customers and almost $250 billion in annual revenue. With such a massive market, it's no surprise that Google (NASDAQ: GOOG  ) and Facebook (NASDAQ: FB  ) are lurking around the corner to, perhaps, become the next great telecom giants.

New tech stepping up to the plate
Verizon and AT&T have had great runs, and for the most part, no one has been able to test either in dominating the telecom market. However, this is because the playing field has been fair for its competitors, and with more resources, no one has been able to match AT&T or Verizon in size, spending ability, or capacity.

However, Google and possibly Facebook represent the first time that new tech has made an effort to disrupt the telecom space. Essentially, mobile has become the new PC, which is interconnected with voice, text, and data, which are all important components for Google and Facebook.

How is Google a threat?
In Google's case, it has already launched Fiber, which is high-speed broadband with Internet speeds of one gigabit per second, 100 times faster than the average broadband. Google began this project with low expectations from Wall Street, as many believed it could cost up to $28 billion to build out a large network.

However, Google has been able to cut these costs thanks to the use of competitors' utility poles -- Google just attaches its fiber cables to existing poles -- and by requiring that customers sign-up in advance before the network is even built. Google has already rolled its service into Kansas City and Austin, Texas, and recently announced an expansion plan for 34 new cities.

Google Fiber began as a dream, but is becoming a legitimate threat to AT&T and Verizon, with new headlines arriving by the week. Two weeks ago, reports surfaced that Google's success with Fiber has prompted it to become an all-around wireless provider. Furthermore, the demand for Google Fiber has been unprecedented relative to any other broadband provider; who else could require customers to subscribe in advance?

For example, in Nashville, a massive video campaign is begging for Fiber. Of course, this includes citizens, but also large corporations such as the Nashville Zoo and Regions Bank. While such a move is eventually likely, Google clearly has its eyes set on being most disruptive, and entering large markets; Google is now seeking a regional sales manager in New York, showing that beyond 34 new cities, Google is prepared to grow Fiber rapidly.

Is Facebook a new threat?
While Google's plan for Fiber is rather transparent, Facebook's recent acquisitions imply that it's lurking around the corner.

For example, the WhatsApp acquisition was not considered cheap by any means. However, what if Facebook acquired a key element in offering mobile service? Then, $18 billion doesn't seem so harsh, and considering it already has 465 million users, WhatsApp has a larger user base than Verizon and AT&T combined.

With that said, WhatsApp was acquired as a messaging service, but has already begun a transformation. Shortly after Facebook's announced acquisition, WhatsApp announced that it would incorporate voice calls. Then, last week, Facebook announced the launch of a $14 WhatsApp SIM card that will provide access to its services without data charges. Essentially, this becomes a way to monetize WhatsApp's 465 million users, offering messaging and voice.

The final part of the equation is Facebook's acquisition of drone maker Ascenta. As strange as it may sound, these drones actually beam Internet from the sky. Investors already know of and Facebook's plan to offer affordable Internet services across the world. With these drones, Facebook's plans look attainable, but combined with revelations regarding WhatsApp, it also appears the social media giant has a non-traditional, low-cost, telecom company in the making.

Final thoughts
Obviously, Facebook's services through WhatsApp, and Internet connection through drones, won't be as reliable or fast as networks built by telecom giants. However, for consumers wanting a significantly lower-priced option, Facebook can provide these services at a cost that is unbeatable, as WhatsApp's service is currently $1 per year, not counting the $14 annual price of the SIM card.

Google, on the other hand, is high-tech, offering the best of the best, and is prepared for toe-to-toe action against the likes of AT&T and Verizon. In both cases, this could be disastrous for the traditional telecom companies. Looking at the sheer size of both AT&T and Verizon combined, with operating margins over 20%, it should come as no surprise that both Facebook and Google want a piece of the action. Apparently, both are going to get it, which could mean large gains for investors.

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  • Report this Comment On April 19, 2014, at 11:13 AM, Collett224 wrote:

    First, Verizon dominates in fiber to the home in the Northeast with millions of houses served. It is highly unlikely that Google, who has a long way to catch up to where Verizon is right now, will try to compete where Verizon is already providing fiber based services.

    Both AT&T and VZ have spent many billions of dollars building massive reliable wireless networks.

    A cheap substandard service could carve a place out, but drones? seriously? There are a huge pile of issues to work before that happens.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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