Telecoms Reveal Competing iPhone Profit Theories

NEW YORK (TheStreet) -- Investors entered 2012 mapping out probabilities on how the telecom sector would consolidate, as also-ran carriers like Sprint (S), T-Mobile USA, MetroPCS (PCS) and Leap Wireless (LEAP) struggled to build networks to handle Apple (AAPL) and Google (GOOG)-powered smartphones and compete against industry titans AT&T (T) and Verizon (VZ).

In the wake of a frenzy of 2012 mergers, investors now need to understand how carriers are addressing key issues such as spending, profitability and long-term strategy when it comes to servicing high data load smartphones and tablet devices.

A flurry of recent announcements from the nation's largest carriers indicates that competing theories are emerging in the telecom sector on how to handle and profit from booming demand for smart devices.

Consider that earlier in the week, AT&T unveiled an ambitious "Velocity IP" plan to bolster its nationwide 4G LTE network. Along with the the plan the carrier announced an annual capital spending budget of $22 billion through 2015, with 60% allocated to the company's wireless network. The bet, in AT&T's case, appears to be that spending on network and service improvements is the way toward subscriber growth and long-term earnings.

Competitors like Sprint and recently merged MetroPCS and T-Mobile appear to see a slightly different way forward to iPhone and Android-powered profits.

Sprint continues to see unlimited iPhone data plans as its value proposition to consumers over competitiveness on wireless coverage and service, in the interim. From a pocketbook perspective, Sprint's unlimited data plans compare favorably to the tiered data plans of AT&T and Verizon; however, consumers need to take a leap of faith on coverage, data speeds and the company's improving financial picture.

Sprint also is in the process of completing Network Vision, a rollout of a nationwide 4G network, but that spending plan pales in comparison to AT&T even after the company was effectively recapitalized in a merger with Softbank of Japan.

Meanwhile, the biggest announcement from a recently merged MetroPCS and T-Mobile [the deal's yet to close and faces regulatory reviews] is that T-Mobile will finally start to carry the Apple iPhone, after years of rejecting the highly subsidized smartphone.

It's no surprise; however, that the subsidy averse U.S. arm of Deutsche Telekom will carry the phone in an unsubsidized manner that may break new ground in passing handset costs onto consumers.

The three aforementioned plans to handle smartphones illustrate the biggest issues facing the telecom sector - capital spending, data pricing and handset subsidies - and indicate that after this year's reshuffle, telecoms are approaching 2013 and beyond with increasingly divergent strategies.

While AT&T's plan may seem expensive to investors, the real question is whether competitors like Sprint are realistic in theirs?

Bernstein Research analyst Craig Moffett highlights the tension in a Thursday review of AT&T's higher-than-expected spending plan and the import for the industry. Notably, Moffett argues that when faced with a choice of spending, subsidies or service pricing wars, AT&T appears to see its comparative advantage in using a fortified balance sheet to invest tens of billions in its wireless network and outrun competitors.

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