For Telecoms, the End Is Near

Which will be the last telecom standing? We may know sooner than you think.

Yesterday, at the CTIA trade show, Sprint Nextel's (NYSE: S  ) chief executive Dan Hesse said his company would stop charging wireless subscribers by the minute and start charging by the gigabyte. The change won't happen immediately, but in two years, The Wall Street Journal reports Hesse as saying.

As if the timing matters. With this change, Sprint is pretty much admitting that traditional telephony is dead.

Credit Hesse for recognizing the obvious, even if he's doing so long after at least one of his peers. Last year, AT&T (NYSE: T  ) called the old Public Switched Telephone Network a relic in a filing with the Federal Communications Commission. In February, a spokesperson explained the company's support of Skype on Apple's (Nasdaq: AAPL  ) iPhone by calling it a consequence of courting data users. Telephony has become secondary to AT&T; Hesse is singing a similar tune.

But there are implications to taking dynamite to the pay-for-minutes model that has sustained wireless providers such as Sprint, AT&T, Verizon (NYSE: VZ  ) , and Deutsche Telekom's (NYSE: DT  ) T-Mobile for years. Eliminating the buffer created by overcharging for unused minutes would surely lead to lower margins.

Hesse, for his part, seems to be characterizing this as an evolutionary move that aligns his company more closely with partner Clearwire (Nasdaq: CLWR  ) . Together, they'll design plans for high-speed access to a national 4G WiMAX network capable of carrying voice, video, and data with equal velocity. Smartphones such as Palm's (Nasdaq: PALM  ) Pre ensure that data will account for a large portion of the traffic, which in turn makes per-gigabyte-consumed pricing seem more appropriate.

And it may be. Trouble is, once today's opaque wireless pricing schemes go away, replaced by one-size fits all data plans, differentiators disappear. Cost becomes king, and a race to the bottom is all that's left. That's why I'm staying short in all the telcos in my Motley Fool CAPS portfolio.

Is Sprint right to switch to per-gigabyte pricing? Discuss in the comments box below.

Apple is a Motley Fool Stock Advisor selection. Sprint Nextel is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He had stock and options positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is wired. Double-shot espresso will do that to you.


Read/Post Comments (11) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2010, at 1:45 PM, nerdcommando wrote:

    I suspect the wireless carriers will make up the lost voice revenue with data charges--after all, spectrum remains a scarce resource and the traffic on that limited spectrum keeps growing

    One exquisite irony of the maturatrion of the mobile phone busuiness is that Qwest, long ridiculed for its lack of a wireless play, could end up in a strong position. They have a good nationwide fiber network and will benefit from the increase in wireless traffic by backhauling a lot of that traffic to switches and data centers. So they will benfit from the wireless revolution without having to slug it out in the increasingly competitive wireless services market.

  • Report this Comment On March 25, 2010, at 2:41 PM, Mystone wrote:

    I diagree with shorting the telecom stocks. They still offer 6% dividends and already near 5-year lows. Their consistent earnings should keep the stock relatively stable at this point. All I can say is not a good short. However, the dividend and earnings give them some attractiveness.

    What do you think about the FCC's Spectrum plan. Will this hurt or help the telecom Mogul's?

    http://www.reuters.com/article/idCNN2523057820100325?rpc=44

  • Report this Comment On March 25, 2010, at 2:43 PM, Mystone wrote:

    I diagree with shorting the telecom stocks. They still offer 6% dividends and already near 5-year lows. Their consistent earnings should keep the stock relatively stable at this point. All I can say is not a good short. However, the dividend and earnings give them some attractiveness.

    What do you think about the FCC's Spectrum plan. Will this hurt or help the telecom Mogul's?

    http://www.reuters.com/article/idCNN2523057820100325?rpc=44

  • Report this Comment On March 25, 2010, at 4:19 PM, DJDynamicNC wrote:

    I could agree, if wireless were the only business the telecoms were engaged in. But it's not. I see Verizon building for long term with their FiOS system, and I am upbeat about their prospects for the long term. And their dividend is very solid.

  • Report this Comment On March 25, 2010, at 4:24 PM, TheRusty wrote:

    If soon is 5-10 years from now, Tim is right on on the money. Otherwise, he's going to lose his shorts.

  • Report this Comment On March 25, 2010, at 7:06 PM, stan8331 wrote:

    In the long run, pretty much everything will run over the Internet and all these cable and wireless companies will have to find creative ways to change their business models in order to survive. But I also agree with TheRusty that it's not going to happen overnight - shorting these companies right now has the potential to get one deep in the red for quite some time...

  • Report this Comment On March 26, 2010, at 9:34 AM, ATTMcCall wrote:

    As a spokesperson for AT&T, I'd like to add my two cents...

    First, I'd note that key differentiators for wireless providers are the network, devices and the overall customer experience. As data usage has increased exponentially, AT&T has continued to invest and innovate to deliver the nation's best, most advanced mobile broadband experience for our customers.

    That includes the nation's fastest 3G network (validated by independent testing), the ability to talk and surf the Web at the same time, nationwide call retainability that's within two-tenths of a percentage point of the only higher score in the industry and the most popular smartphones (one reason why AT&T has more than 2X the number of smartphones on its network than any of our competitors) and a wide range of emerging devices (I'm sure you saw Ralph's statements yesterday about the revenue potential of emerging devices). What's more, we augment our wireless network with the nation's largest Wi-Fi hot spot network, with more than 20,000 hot spots across all 50 states.

    We've been very upfront about the fact that we view ourselves as a wireless, data-centric company. Pricing models change over time - that's to be expected. As just one example, we were the first to introduce the roll-over minute concept, and we're still the only wireless carrier to offer that benefit to our subscribers.

    Thanks for the forum.

  • Report this Comment On March 28, 2010, at 2:52 AM, wisertwin wrote:

    The point of the author is questionable. Harbinger, the PE firm, will join the 4G mobile broadband war by deploying its own LTE network. Just don't think Harbinger would cough up billions of dollars and venture into a business new to them if there is not lucrative profit to be made in this business.

  • Report this Comment On March 29, 2010, at 1:00 PM, wisertwin wrote:

    Just tried my friend's WiMax USB dongle. Works great. Love it!

  • Report this Comment On April 03, 2010, at 12:21 AM, stockmover wrote:

    I fully agree with the previous posters. I fully expect Tim to be hurting if he is shorting T and VZ. .His down side risk is virtually unlimited.

  • Report this Comment On April 05, 2010, at 7:17 PM, Dshupe13 wrote:

    These companies will make it, BECAUSE they are providing wireless data (though LTE, 4G and more advanced services will be required)! They do unlimited data for $40 or $50 a month now because it's cost effective and they are creating users/addicts. They charge per minute now. You think they won't charge per gigabyte in the future? Of course they will. The company that does that can attract the people who take up very little spectrum and reward them appropriately while keeping themselves competitive on the mega user front, all while selling new devices, accessories, insurance, etc. and hitting every user (thus the reason to attract more users) with hidden fees they don't mention in the advertising!

    There will be losers, so shorting some of the companies will be appropriate...shorting them all will be costly.

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