Will AT&T Wireless Profit From i-mode?

While AT&T Wireless' announcement of an i-mode service later this year may be big news, investors will need to watch how the company executes its wireless data services. Overall, for investors interested in the wireless industry, the issue is billing and usage, not new, whiz-bang technologies.

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By Chris Rugaber (TMF Chris)
March 15, 2001

Wireless carriers continue to press forward with high-speed data services, but it's not any clearer that they will be able to make much money from them.

Yesterday, Japanese wireless giant NTT DoCoMo announced that it would roll out its popular i-mode service in the United Stated by early next year through its partnership with AT&T Wireless (NYSE: AWE). It also hopes to implement a 3G (third-generation) version by the end of 2002 or early 2003. Not to be outdone, Sprint PCS (NYSE: PCS) reiterated this morning that it plans to launch what it calls "3G services" later this year. While the company has announced its plans previously, today Sprint noted that it will discuss their 3G launch in greater detail next week at a wireless conference.

These developments come only a couple of weeks after further delays were announced in planned U.S. auctions of the spectrum needed for 3G services. Clearly, the hype and confusion surrounding high-speed wireless data access isn't going away, despite slowdowns in mobile phone sales and new subscribers, as announced by Nextel (Nasdaq: NXTL) yesterday and Verizon (NYSE: VZ) earlier this week.

What's important
For individual investors, sorting through all the technical complexity of different wireless transmission standards and the need for additional spectrum can be daunting, to say the least. Instead, it's more important to consider how -- or whether -- U.S. wireless carriers will make money from data services. After all, this isn't particularly dependent on 3G or a specific transmission speed.

While the technology is important, it's how that technology affects billing and usage that investors should pay attention to. For example, in the U.S., all the talk of the "wireless Web" and the misleading impression that you can surf the Web from your phone as easily as you can from a PC has locked many carriers into the flat-rate monthly billing plans that have made consumer ISPs such an unattractive business.

Meanwhile, the two dominant wireless carriers around the world, NTT DoCoMo and Britain's Vodafone (NYSE: VOD), bill their customers based on the amount of data they download or transmit. As a result, they are seeing significant revenues from data services, unlike their North American counterparts, and not because users are surfing the "wireless Web" -- Wireless Application Protocol (WAP) has been a big failure in Europe -- but because their customers are using their mobile phones for specific purposes that make more sense for smaller, mobile devices: short-messaging services, games, and basic information requests.

SMS: The killer ap
Short-messaging services, or SMS, are particularly popular in Europe, with 200 billion text messages expected to be sent in Europe this year, double last year's amount. While most are between individual users, the U.K. technology news site The Register reports that in Great Britain, a nationwide blood donor service sends out text messages to remind people of their appointments. In other European countries, some mosques use SMS to call Muslims to daily prayer.

Short-messaging services, which charge users per message, are quite lucrative for carriers. According to a Reuters report late last month, some operators are getting up to 20% of their revenues from SMS. Meanwhile, a year after offering their "wireless Web," Sprint PCS still does not break out wireless revenue in its earnings press releases, because there isn't much. In last year's third quarter, Sprint estimated that data revenues were running at perhaps a $50 million annual rate.

Flat-fees vs. packet fees
The point here is that for investors, what's important is how carriers are charging for wireless data usage, not what whiz-bang wireless technology or service they're rolling out. To charge per data packet, for example, carriers only need what some refer to as 2.5G technology, which uses packet-based, always-on technology. This spares users from having to dial up a connection every time they want to send a text message or download a stock quote.

That's why investors in AT&T Wireless should zero in on one sentence in the news articles surrounding the AT&T/DoCoMo announcement, in which a DoCoMo manager noted that flat rates, which are not available in Japan, may be considered for i-mode service in the U.S. This may be necessary for the American market, given what we're used to, but it's not how DoCoMo and Vodafone are making money abroad. Enjoying the same kind of revenue growth from i-mode that DoCoMo has may not be so easy for AT&T Wireless after all. 

Chris Rugaber does not own shares in any of the companies mentioned in this article. Nor does he have it in for AT&T or AT&T Wireless, even if he was the bear in a recent Duel over the company. The Motley Fool is investors writing for investors.

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