Guest commentary by Anton Wahlman, a Silicon Valley-based independent investor and consultant to hedge funds and tech/telecom companies and former sell-side equity research analyst covering communications technology companies at UBS (1996-2002), Needham & Company (2002-06) and ThinkEquity (2006-08).Back in 2003, I argued in a research report that the only way communications carriers could make money in the future was to be the best at delivering data. My prediction was clearly a bit premature. Now, however, all the stars are aligning to make this an important segment of the consumer market. In the next year or two, I predict, some of the wireless carriers arelikely to offer data-only plans on smartphones for $30 to $60 per month. These plans would include unlimited SMS (text messages) and not block usage of Internet voice/video applications such as Skype. Here are the reasons why I believe it will happen. First, four or more of the major carriers offering 3G networks (HSPA and EVDO) now cover essentially 100% of the urban areas in the U.S. With 100% 3G coverage, Internet voice applications such as Skype can function as perfect substitutes for traditional circuit-switched GSM/CDMA plans. Second, price competition between the wireless carriers has dramatically increased in recent months. For example, T-Mobile USA offersunlimited domestic calling for $50 a month for loyal customers, who have stuck with them for more than 22 months. MetroPCS ( PCS) offers unlimited-everything, including some internationalcalling, for $55 a month. Sprint Nextel ( S - Get Report) offers itsunlimited-domestic-everything plan for $100 a month. These prices arewell below the $150-per-month "unlimited everything" prices AT&T ( T - Get Report) and Verizon ( VZ - Get Report)charge for Blackberry and iPhone service. How many people who buy the iPhone or some other smartphone, would be happy just using Skype or other equivalent Internet telephony applications? It may not be the solution for everybody, but it may appeal to a significant percentage of the population.
Imputed in the $150 a month"unlimited everything" iPhone service price today is a $100 voice plan(the other $50 consists of $30 data and $20 SMS). What if AT&T were tooffer the iPhone for a $60-a-month plan, consisting of an imputed $20 SMSand $40 data? I say $40 data instead of today's $30 to compensate AT&Tfor the higher data consumption of such a customer. One could argue that WiFi-only devices, such asthe Apple iPod Touch, already fill this market opportunity. That argumentis weak, because WiFi coverage is unacceptably spotty at best. This new paradigm requires dual-mode 3G/WiFi handsets. With the U.S. cellular market rapidly reaching saturation, it willultimately not be enough to bring the newest handsets to market fasterthan the carrier competition. The carriers will also have todifferentiate on services, targeting widely different demographicgroups. One such rapidly growing group consists primarily of youngerpeople who embrace Skype and similar services. The use of Skype on cellular handsets in the U.S. today is wellbelow 1%. The primary reason for the insignificant use of Skype and similar services on cell phones is that you are mostly forced to pay at least $30 a month for a bucket of approximately 500 minutes per month, all the way up tounlimited calling for $100 a month. At that point, why bother using Skypewhen you can use what you have already paid for? Verizon and AT&T have price umbrellas for $150 a month for unlimited-everything service. Sprint and T-Mobile arelower, and regional players such as MetroPCS are lower still withunlimited-everything service at $50.
I predict that we will see serviceofferings for this unlimited data/SMS service paradigm start as low as$30 for the regional players, and range up to $60 if the 800-pound gorillaiPhone were to enter this competition. Some of the smaller wireless players have been at a disadvantagebecause of poor handset selection, but this is changing. MetroPCSstarted offering a Blackberry in March, and the new platforms such asGoogle/Android and Palm/WebOS are empowering T-Mobile and Sprint.Blackberries are available on all major carriers, and don't dismiss Microsoft ( MSFT - Get Report), which has offerings on almost every carrier, as well asNokia/Symbian, which is in a similar position. Internet phoneapplications such as Skype already run on most of these platforms, andwill fill in the remaining gaps within the next few short months. While the price of cellular phone service has fallendramatically in the last couple of years already, they are about to fall through the floor because of arguably the most brutal competition of any sector in our economy. The four major competitors (Verizon, AT&T, Sprint and T-Mobile) wouldhave driven this by themselves, but we now have several ankle-biting newnetworks such as MetroPCS that offer a Blackberry, accelerating a leapinto this eventual paradigm shift. This will drive these companies tooffer what perhaps 25% of the wireless market wants: the ability to skipthe mandatory voice plan in favor of paying a lot less, and the abilityto use services such as Skype. Can you say $60 a month for iPhoneunlimited data/SMS service? And other devices ranging from $30 to $50for similar packages, on AT&T and other networks? Not everyone willadopt these new plans right away, but some will - after they launch in2010 and 2011.
There will be a wide variety of responses to these new cheaperand more flexible software-driven calling plans. For example, operatorsthemselves could offer VoIP plans of their own, banking on superiorintegration and ease of use. Still, other operators will be forced tosimply cut prices on their regular circuit-switched voice plans, whichis possible given that this equipment is already installed and thevariable absolute cost is falling. What is not falling is theopportunity cost of use for the spectrum, where the demand for data isrising dramatically. Clearwire ( CLWR) has started to roll out data service in its fourinitialWiMax markets (Portland, Baltimore, Atlanta and Las Vegas) over the lastnine months, and will be launched in numerous of the country's largestcities by the end of 2010. Clearwire has no legacy mobile voiceoffering and has no publicly announced intention to offer any such.Rather, it's an all-IP low-latency network that's tailor-made forsupporting 3rd party voice software, such as Skype, on the handsets. With no legacy business to protect, it would be very surprising not tosee Google/Android-based WiMax smartphones offered on Clearwire, andrunning VoIP services such as Skype, no later than 2011. Remember,Google is a major investor in Clearwire, and Intel ( INTC - Get Report) and Cisco ( CSCO - Get Report) are bothvery supportive of this paradigm. I was very early in asserting this thesis in 2003, but we are now only ayear or two away from this paradigm emerging in full bloom.