Telecom Shake-Up

Posted on April 82015, by Ben Connard

Verizon and AT&T dominate the US wireless phone market while T-Mobile and Sprint try desperately to catch up. The only way they can really compete is through aggressive price promotion. Consumers are starting to see some benefit. After T-Mobile announced its “unlimited” data plan, Verizon responded by cutting all of its data plans by $10. For example, a 3GB per month plan used to cost $60 and is now $50.

We believe the battle has just begun over wireless subscribers. Generally speaking, there are two sets of companies that provide voice services and video services. AT&T, Verizon, T-Mobile and Sprint are wireless telecom providers selling voice services. Comcast and Time Warner, the largest cable providers, and DirecTV and DISH, the two largest satellite companies, provide video services. On one level, this division makes sense as using a cell phone is different than watching TV.

But, on a more granular level, both sets of companies do the same thing – they provide data over a network. Cable companies work through lines with a direct hook-up to our homes—what the industry calls the last mile. Wireless companies use towers to send signals through the air and do not need a last mile connection. And, of course, satellite companies broadcast signals using a network of satellites.

AT&T and Verizon already encroach on the cable world with U-verse and FiOS respectively. Their combined subscribers are a little more than half of Comcast’s total. So while smaller, they provide a nice alternative to cable’s local monopolies. AT&T and Verizon still offer landline phone service, but this business is shrinking.

Now, cable companies are encroaching on cell phone companies. In February, Cablevision (which serves New York City and parts of the surrounding metropolitan area) launched Freewheel. It’s a Wi-Fi only network largely using Cablevision’s 1.1 million hotspots and costs $10 a month for Cablevision subscribers ($30 for non-subscribers) after the purchase of a $100 Moto G (a budget smartphone). Wi-Fi signals are not always available when you’re outside and aren’t always secure, but for someone living in Manhattan, this kind of network might work.

Comcast may not be far behind with its own cell service. The company already claims 8.3 million hotspots. As it tries to get FCC approval for a merger with Time Warner Cable, the company has indicated a Wi-Fi phone service would be possible. This offering may appeal to regulators as it would provide a direct benefit to consumers as a result of the merger.

A third player is emerging in this space. Google already offers a cable alternative, Google Fiber, in multiple cities. Google may also launch a wireless cell phone service combining Wi-Fi hotspots and rented cellular networks. Google can combine its database of Wi-Fi hotspots and rent space from T-Mobile and Sprint in order to provide sufficient coverage and become a mobile virtual network operator.

Smaller companies are using similar strategies to break into the wireless market. Republic Wireless offers a $19/month plan which uses Wi-Fi when available and leases bandwidth from Sprint when it needs a cellular signal. TracFone is a no contract wireless service provider which uses a mobile virtual network.

In the long-term, we think the service offerings from the various companies will merge. All competitors will be considered data providers and offer any service which involves the transfer of data—voice, video or Internet. It could be direct to your home, a nearby WiFi connection or a cellular signal from a tower. We see the beginning of this trend in how cell phone plans are structured. Terms used to be based on minutes and companies made a big deal about the ability to roll over your minutes. Now plans are sold according to data limits while AT&T and T-Mobile are marketing data rollover plans. Minutes and messaging are now often limitless. It some respects it’s an odd situation. Your monthly phone payment is not related to the amount you use your phone to actually make calls.

In the short-term, we are not bullish on the telecom providers, cable companies or satellite companies. All are facing increasing competition from each other and outside companies like Google. This makes us wary as investors, but happy as consumers.