Are any of you like me -- fascinated by the potential of wireless to reward investors, but still free of a mobile phone? Of course, this is an option for those few with access to dependable, low-cost landline service and jobs and love lives not dependent on mobile access -- even if they require online availability. Ahem.
But I am soon to be a dinosaur, if I'm not one already. When The Economist surveyed telecom after the bubble, it looked at three main trends. The first governs all else: Mobile phones overtook fixed-line phones in 2002 for the first time. Makers of wireless handsets sell 450 million phones a year. Total users are projected to grow from 1.3 billion to an estimated 2 billion in 2007. Wireless will be All.
Consumers benefit. Killer competition in manufacturing and service lowers prices weekly. But what may be good for us ain't necessarily good for our providers. In this cutthroat environment, where is the future for investors in Nokia (NYSE:NOK), the world's largest handset maker at 40% market share, and competitors Motorola (NYSE:MOT), Ericsson (NASDAQ:ERICY), and Samsung?
The Economist answers "services." Here's why, with some investing options and then a surprise conclusion about Dell (NASDAQ:DELL).
Subscriber growth fuels profits, but not indefinitely
Parts of western Europe and the more developed areas in Asia already boast 80% wireless penetration, leaving little room for growth in new subscribers. There's still room in the U.S. with 50% penetration, because dependable fixed lines serve people like me, and in such places as eastern Europe and developing Asia.
The real growth will come where the people are. An estimated 60% of new mobile-phone subs in the next seven years will be in China and India. China today has 200 million subscribers, adds 5 million a month, and still has only 18% penetration. Service is exploding in India and stands at but 1% penetration.
You might think that in these countries low incomes preclude wireless service, but the record proves otherwise. And necessity is the mother of invention. Among even the most destitute, such as in the sub-Saharan nations, users pool resources to share a phone and prepaid cards supplant the need for a credit infrastructure.
A wild-eyed guess is that handset makers can continue creating models for all price ranges and keep investors happy for another few years -- five to 10? -- but will need more than that for a sustainable future. No surprise to anyone that we're talking about data services.
3G was a disaster and failed
Remember the promise of the "Coming of 3G" -- third-generation mobile telephony bringing high-speed wireless data capability? The medium would be enough, and nothing rang louder than Qualcomm (NASDAQ:QCOM) and Nokia investors arguing the superiority of various network technologies -- CDMA, WCDMA, GPRS, EDGE, and the entire alphabet soup (here's how it looked to us in 2000).
Telecoms bid billions for 3G licenses to build and operate those networks, but today they have written down their value and even returned them to the vendor governments. The only commercial European 3G service is Hutchinson's. According to The Economist, it was a classic "build it and they will come" mentality. 3G would do everything but make your lunch. Instead, it ate its own providers' lunch.
Today, operators offer 2.5G networks allegedly from 40 kbps to 100 kbps and will quietly migrate to 3G and its greater speed and capacity. Users won't know or care. What network providers devoutly wish is that subscribers will care and pay for services on the faster networks.
It's the services, stupid
What's saving providers today is the success of text messaging. Who knew? U.S. residents send the fewest per month -- seven -- so we may be forgiven for missing this phenomenon. But everybody else is texting 'til they drop. Singaporeans send 250 a month, and the average worldwide is 30 per subscriber. According to The Economist, users send 1 billion text messages a day at 10 cents, for about $40 billion a year. Holy moly! Texting revenues account for 20% of some operators' revenues at a time when fierce competition is lowering charges.
Texting is a start, but mo' money is about bundling services. Mobile phone operators offer a souped-up handset with a color screen, usually a camera, and bookmarks and menus directed to downloading games and accessing information, for a monthly fee. Do NTT DoCoMo's (NYSE:DCM) i-mode service and Vodafone's (NYSE:VOD) live! bring higher revenues? Vodafone says live! monthly bills are 7%-10% higher than others, but it's just the start. Time will tell.
The regular A.T. Kearney and Cambridge University survey of 5,600 mobile phone users in 15 countries shows 43% own an Internet or WAP-enabled phone (WAP is the failed wireless access protocol), and that 34% have surfed the Web from their phones, up over 25% from last year. And all this alleged game playing on phones? Worldwide, 6% of users have downloaded and played games -- double last year -- with 10% in the U.S. and 15% in Brazil.
How to play it
The wireless world is about convergence -- of devices, of telephony and Internet Protocol, of voice and data and entertainment and business. Today -- and certainly someday when the hardware's as cheap as plain old telephones are right now -- the high margins reside in entertainment software and gaming subscriptions. This is why Nokia reorganized to emphasize this, introducing the N-Gage portable gaming device. Nokia leads for now in wireless but is joining the video game console world of Microsoft and Sony (NYSE:SNE) -- and their online gaming ambitions, too.
Investors have three broad choices. They can bet on wireless software or hardware infrastructure (not the handsets, but their network guts) and hold a Nokia, Microsoft, Palm's (NASDAQ:PALM) soon-to-be spun PalmSource, or Qualcomm.
Or they can own a Nokia or Microsoft expanding into the gaming and entertainment universe, or perhaps one of the network providers like NTT DoCoMo or Vodafone betting on success in bundling. Each of these companies has other businesses to cushion their new forays.
Third, investors may eschew companies with legacy wireless businesses and take on more risk for more potential reward. This means buying shares of the now-profitable video game software makers Electronic Arts (NASDAQ:ERTS) (richly valued) or Activision (NASDAQ:ATVI) (more of a bargain). (Electronic Arts investors sure benefited from David Gardner's recommendation in Motley Fool Stock Advisor.)
Dudes and Dells
But there is another choice. For those fixated on the gadgets, the mobile phones, I predict that within five years, Dell will be one of the top two, if not the leader in wireless handsets -- whatever they will be called or look like then. It's well on its way, destroying prices with its PDAs and going full tilt on consumer electronics. Doubters have dogged Dell at every doorway, as it took over PCs, then servers, printers, and now consumer electronics, but Dell will be the phone leader. Count on it.
Given that I believe investing is all about calculating risk vs. reward in a world where nothing is certain, I hate predictions, but I'll stick by this one. Agree or disagree on our Dell board, and check up on the company in Dave Marino-Nachison's latest take.
Riga, Paris of the Baltics
I'm writing this from the capital of Latvia, Riga, often called the Paris of the Baltics for its parks, canals, Daugava River, and art nouveau architecture that rivals Vienna's. Winter may have arrived Sunday with six inches of snow, but the place bustles. Following its independence in 1991, the country's GDP really took off starting in 1995, and today much activity anticipates the country's European Union entry next May. Twenty-year-old real estate agent Edmonds Lacis tells me that commercial rents today in Riga's Old City are the same as Stockholm's.
I read that 50% of the university students study information technology. Their world takes for granted what still amazes me: You would have no idea where this is written or sent from, nor does it matter. Logistically, I need only ensure that I'm available to our most excellent Foolish editors during their rush hours, and IM and email make that a breeze. Ain't technology grand?
Have a most Foolish week, and thanks for reading! To receive an alert when my weekly column is published, please email me with "mailing list" in the subject line.
Tom Jacobs (TMF Tom9) owned a wireless phone once, but refuses to do so again until service improves and costs decrease even more. He is not a Luddite. At press time, he owned shares of Microsoft and Nokia. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
