For one, there is a cost regarding consumer backlash aimed at one company, or industry. Smart investors should note the importance of observing these trends. Consumer dissatisfaction with their mobile phones led to the smartphone revolution and most notably the iPhone. Another example could be cord cutting consumers, roughly 2.65 million in the US, who have completely foregone cable subscriptions, watching content exclusively online.
Combined AT&T (NYSE:T) and Verizon (NYSE:VZ) own up to 70 percent of the U.S. smartphone market. Considering the growth of these markets, who owns the pipes is pretty important, those pipes of course being the carrier signals. The issue is that for the first time ever carriers have consumers subscribing to every service offered. Gone are the days of people foregoing texting and data plans, now everyone and their elderly parents has a Cadillac plan. They weren’t forced into this either; the truth is no one wants the older services like voice and text — everyone wants the newer data technology.
With a smartphone, users can make calls for free using wifi or send text messages. If they need to do it universally their phones data plan will prove far less expensive than a traditional carrier plan. For international calls rates can be around $2 an hour; with Skype calls require very little bandwidth and the minutes are in pennies. Consumers are learning fast and craving larger data plans.
Which is why Verizon and AT&T have announced new plans requiring consumers to purchase unlimited voice and text plans and capping data. They are sold as family plans that allow users to share data among the family, which makes sense because tethering and tablet access are important for modern consumers. The push though is for consumers to stop wanting unlimited data and to start paying for those free text messages, Skype calls and Netflix movies.
The first backlash came when Apple announced that Facetime, the company’s video conferencing service, would be coming to 3G connections. The reason it was important was because unlike apps which require users to create a new sign-on using their emails, this would be built into the phone’s contacts and call numbers directly. The move excited many consumers regarding the possibilities for futuristic conferencing being available to casual users. Then AT&T announced the service would only work with one of their new capped data plans.
Consumers were frustrated as AT&T had already outlined plans to cap home-based Internet subscriptions of its U-Verse service. These caps essentially require consumers to pay for extra services like Hulu and Netflix because of the extra data they consume and the potential threat they pose to ad-based TV models.
The problem is users aren’t switching, despite better budget plans from smaller carriers, AT&T and Verizon maintain a stranglehold on the market. With that type of market share why fight for the 30 percent? Funny enough AT&T tried when it attempted to merge with T-Mobile Deutsch Telekom(DT), and the US Justice Department basically said no. But other than that carriers are comfortable asking existing customers to pay a little extra, rather than look for new buyers.
The transition from legacy plans, i.e. text and voice, to digital plans is met with friction from consumers who find the rates for data unfair.
Subsidies can be a major pain for carriers as they can add substantially to up front costs obtaining consumer contracts. The industry paid out roughly $10 billion last year in subsidies, which accounted for $7.50 of Apple’s earnings per share. There has been speculation that carriers might retaliate against Apple by lowering subsidies, which would improve carrier bottom lines, but with the popularity of Apple’s iPhone, carriers currently have no competitor to switch consumers to. So with that in mind maybe carriers have to rely on raising rates after all?
Consumers could potentially retaliate by sharing their data connections and transmitting their own signals within certain cities. The idea could even be carried out by a risky and ambitious ISP, that allows consumers to share their broadband, and in return use other subscribers' wifi networks when out of the house. It’s completely crazy and would never happen, except that it did in France. The ISP simply known as Free offers consumers just that option and has plans that start around $20 a month.
It seems like a great idea except it simply can’t happen in the U.S. For one, the country is one of the slowest places to browse the web at home at 16th place. Even Portugal holds the 15th spot. The average U.S. connection ranges around 3.6 mbps, simply not fast enough for an ISP to share with other paying customers. So unfortunately for Americans looking for cheaper Internet, retaliation or faster Internet speeds, they may have to go elsewhere to get them.
Recently, AT&T reported its highest-ever operating profit for its wireless division. At $31.6 billion, data plan revenue was up 19 percent. Verizon saw similar increases in its data business with 18.5 percent growth. The company finished their quarter at $28.5 billion.
The good news for investors in Telco is that carriers are ditching discounted phones and heavy subsidies in favor of strict revenue-focused business plans. Perhaps my best advice would be to purchase Telco stock and use it to pay your phone bill.