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 are likely 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 offers unlimited 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 international calling, for $55 a month. Sprint Nextel ( S) offers its unlimited-domestic-everything plan for $100 a month. These prices are well below the $150-per-month "unlimited everything" prices AT&T ( T) and Verizon ( VZ) 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 to offer the iPhone for a $60-a-month plan, consisting of an imputed $20 SMS and $40 data? I say $40 data instead of today's $30 to compensate AT&T for the higher data consumption of such a customer. One could argue that WiFi-only devices, such as the Apple iPod Touch, already fill this market opportunity. That argument is 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 will ultimately not be enough to bring the newest handsets to market faster than the carrier competition. The carriers will also have to differentiate on services, targeting widely different demographic groups. One such rapidly growing group consists primarily of younger people who embrace Skype and similar services. The use of Skype on cellular handsets in the U.S. today is well below 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 to unlimited calling for $100 a month. At that point, why bother using Skype when 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 are lower, and regional players such as MetroPCS are lower still with unlimited-everything service at $50.
I predict that we will see service offerings 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 gorilla iPhone were to enter this competition. Some of the smaller wireless players have been at a disadvantage because of poor handset selection, but this is changing. MetroPCS started offering a Blackberry in March, and the new platforms such as Google/Android and Palm/WebOS are empowering T-Mobile and Sprint. Blackberries are available on all major carriers, and don't dismiss Microsoft ( MSFT), which has offerings on almost every carrier, as well as Nokia/Symbian, which is in a similar position. Internet phone applications such as Skype already run on most of these platforms, and will fill in the remaining gaps within the next few short months. While the price of cellular phone service has fallen dramatically 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) would have driven this by themselves, but we now have several ankle-biting new networks such as MetroPCS that offer a Blackberry, accelerating a leap into this eventual paradigm shift. This will drive these companies to offer what perhaps 25% of the wireless market wants: the ability to skip the mandatory voice plan in favor of paying a lot less, and the ability to use services such as Skype. Can you say $60 a month for iPhone unlimited data/SMS service? And other devices ranging from $30 to $50 for similar packages, on AT&T and other networks? Not everyone will adopt these new plans right away, but some will - after they launch in 2010 and 2011.
There will be a wide variety of responses to these new cheaper and more flexible software-driven calling plans. For example, operators themselves could offer VoIP plans of their own, banking on superior integration and ease of use. Still, other operators will be forced to simply cut prices on their regular circuit-switched voice plans, which is possible given that this equipment is already installed and the variable absolute cost is falling. What is not falling is the opportunity cost of use for the spectrum, where the demand for data is rising dramatically. Clearwire ( CLWR) has started to roll out data service in its four initial WiMax markets (Portland, Baltimore, Atlanta and Las Vegas) over the last nine months, and will be launched in numerous of the country's largest cities by the end of 2010. Clearwire has no legacy mobile voice offering and has no publicly announced intention to offer any such. Rather, it's an all-IP low-latency network that's tailor-made for supporting 3rd party voice software, such as Skype, on the handsets. With no legacy business to protect, it would be very surprising not to see Google/Android-based WiMax smartphones offered on Clearwire, and running VoIP services such as Skype, no later than 2011. Remember, Google is a major investor in Clearwire, and Intel ( INTC) and Cisco ( CSCO) are both very supportive of this paradigm. I was very early in asserting this thesis in 2003, but we are now only a year or two away from this paradigm emerging in full bloom.