Key Telecom Trends: VoIP and Shift to Prepaid Wireless Plans

This is part 2 of my Key Telecom Trends article. Part 1 can be read by clicking here. Two other trends in Telecommunications over the past few years that should have a significant impact in the future are:

Voice Over Internet Protocol (VoIP)

Voice Over Internet Protocol (VoIP) emerged on the commercial scene in 2004 harnessing the power of broadband internet connections to deliver unlimited voice plans, both local and long distance, over an internet connection. VoIP has enabled co-workers within a firm or from different companies to communicate through video conferencing. Cisco’s (CSCO) Telepresence has been a successful enterprise VoIP system for businesses to communicate in a real-lifelike conference room. It has also seen substantial growth over the past year as companies seek to cut travel expenses in a recession, replacing it with videoconferencing like Telepresence. From a consumer perspective, VoIP has became increasingly attractive in order to cut costs as consumers trade down in a recession without sacrificing quality.

Vonage (VG) is a pure-play on VOIP with 2.6 million users as of the end of 2008, however, the stock has been on a steady decline since its IPO reflecting its trouble penetrating the home wireline market.

Skype has been the dominant player in the VoIP consumer market as of late with 405 million users at the end of 2008. Skype not only allows people to videochat over internet connections from across the world, but international calling is relatively cheap. For instance, I spent four months in Ireland and I used Skype to call cell phones of friends and family members in the U.S. for just 2.1 cents per minute. However, as a registered U.S. user, it was over 50 cents to call an Irish phone and 25 cents to call Germany; these rates are still relatively cheap and could come down in the near future as Skype expands more into our globalized world. Skype was acquired by eBay (EBAY) three years ago for $2.6 billion, but they have recently announced that it will be spun off in an IPO in the first half of 2010. Skype has recently released an iPhone (AAPL) app allowing users to make free calls over a Wi-Fi connection to other Skype users; downloads of the app exceeded 2 million in the first week alone. Users can also make reduced price calls to wireline and wireless phones using money from their Skype account. Skype is also releasing a similar app for Blackberries to make a push into the enterprise VoIP market.

Recent articles from the likes of Business Week, USA Today, and The New York Times have stated that Verizon (VZ) and Apple (AAPL) are in talks to release two new iPhone-like devices dubbed as the “iPhone lite” and “Mac Tablet.” The tablet features picture viewing, music and hi-def videos. Articles have also stated that it could make calls over a Wi-Fi network; this ushers in my speculation on the matter. Skype will be the predominant application to place these VoIP calls over Wi-Fi. Several other companies offering VoIP are AT&T (T), Verizon, and Vonage.

The Postpaid to Prepaid Shift

With unemployment at 8.9% and consumer spending and discretionary income at rock bottom, prepaid wireless plans are a cheap alternative for U.S. consumers feeling the pinch. In this economic environment, we see consumers trading down in two areas: disconnecting home wireline phones to solely rely on wireless phones and wireless subscribers switching from postpaid contracts to prepaid plans. The postpaid wireless market has continued to decelerate, which has been offset by higher average revenue per user (ARPU) from the growth in data and smartphones.

On the flip side, the prepaid market continues to expand and for the first time ever, prepaid net adds are expected to exceed postpaid net adds in 2009. What attracts consumers to prepaid plans? First off, postpaid plans often have hidden fees on the backend such as overage charges for minutes, texts and internet usage. Recently, prepaid wireless companies have rolled out unlimited plans at low prices ($40-50) which draw lower-income individuals with bad credit scores who are ineligible for postpaid contracts. The plan includes unlimited minutes, texting and web browsing for one low cost paid in full upfront. Consumers do not have to sacrifice popular more sophisticated handsets to trade down to the prepaid plans. MetroPCS Communications (PCS) offers the Blackberry Curve, while both PCS and Leap Wireless (LEAP) offer various Nokia (NOK) , Samsung and Motorola (MOT) phones, most notably the new Motorola Hint.

LEAP and MetroPCS are pure-plays on the prepaid wireless market. Both have seen substantial subscriber growth through 2009, and each are up YTD 23% and 11% respectively, while the Technology SPDR (XLK) is up 5% YTD and the S&P 500 is down 5%. Although trading down to these plans are easy cost cutting initiatives for consumers, they have a serious disadvantage for frequent travelers. Both LEAP and PCS have limited network coverage areas and are only available in main metro areas. Thus, when traveling outside of these areas, users will be required to pay roaming charges, which will deter many people from making the switch. However, LEAP has reported that its users only roam less than 10% of their total minutes used. These two companies also experience compressed margins due to the rock bottom pricing strategies in place.

An alternative to the two pure-plays, Sprint-Nextel (S) has rolled out Boost Mobile’s Unlimited plan. For just $50 per month prepaid, users receive unlimited nationwide talk, texting, web and walkie-talkie. Sprint-Nextel added 674,000 prepaid customers in 1Q09 thanks in large part to the Boost Unlimited plan and its aggressive marketing strategy.

Below is a chart of net adds from the last two quarters to compare prepaid companies to Verizon and AT&T, predominantly postpaid companies:

Net Adds	4Q08	1Q09
LEAP	385,000	493,000	Prepaid
PCS	342,000	603,000	Prepaid
Boost		674,000	Prepaid
Verizon	1,400,000	1,300,000	Postpaid
AT&T	2,100,000	1,200,000	Postpaid

Telecom is a rapidly changing industry, serving as the conduit for information flow worldwide. I have mentioned some trends to take note of when analyzing and evaluating your investments and their role in furthering communication infrastructure. Like always, remember to stay ahead of the curve as technology evolves rapidly and investors often flock to the big names when it is too late to reap large gains.

- Jake Kimble

Disclosure: The author’s family is long VZ. The fund the author is associated with is long VZ and CSCO.

Comments

[User 152855:]

You should take a look at VoiP's premier vehicle for international call interconnection (IBAS).

spondoolix

Jun 04 08:35 AM

[PeterB:]

Why do articles on VOIP never mention companies offering VOIP service via a local number. We use Tel3 for such a service, call a local number from our landline for anything outside our free local zone, and get Skype-equivalent rates (or better: US 1.9c/min Ireland 1.5c/min, UK 2.5c/min, France 2c, Germany 1.5 to 3c, Italy 2 to 3c, Spain 3.3c/min etc. (Mobiles usual are significantly more). We no longer have any long-distance service on our landline, so that is cheap. From our mobile phones, we use the account for international calls at the same rates. I even used it from a pay phone at a State park (though the pay phone fee was heavy, the call itself was cheap). No monthly fee (unlike Vonage), no broadband connection needed (unlike Skype), no computer needed (except maybe to set up and check the account). Our total phone bill has dropped to about 1/4 what it was before (we were already using long-distance and international carriers cheaper than POTS), and we have many relatives and friends in Europe. Only problem is it does not do us much good from abroad, though I have used it by calling a US access number from one country to call another, saving one of the two roaming charges on the cell phone. Normally it is better to buy a local SIM card (what, you don't have a GSM phone, or it's an iPhone?) for such calls, though it took my ex-daughter-in-law, who now works for a Czech mobile company, to start me on that.

Jun 05 01:51 AM

[cameroni:]

All good and nice,

But Joe Bloke cares not about phone plans. Not any plans.
Not anymore.

He will choose the best deal available (or nothing) when he is unemployed and the bills rolling in cannot be paid. There is no loyalty to a company or an idea or a fancy program at that point (which is now by the way). He will not care if it is prepaid or postpaid or unpaid as long as the call goes through.

Most Telecoms are completely overvalued at this juncture. They have not learned about their customers, only learned their weaknesses and how to manipulate them. Even the best "restrictive" plans offered just manage to p*ss people off without sending them into a complete rage. But too many people are short income now and as the jobless picture grows telco revenues will decline. Precipitously too in the next few quarters. And it serves them right.

Your commentary on various plans simply misses the point that customers without cash have no loyalty to any of the ideas you are discussing. Phone cards are as valid an alternative as using "Aunt Betsy's" land-line while she is distracted and busy gardening.

In other words, fancy plans and programs and incentives will not draw new customers now. The fact that some companies are "allowing" restrictive prepaid services just makes most people more resentful than ever. Especially as their incomes have dropped or been eliminated. They have still not forgiven the 24 and 36 month locked in plans.

And that is why so many phone companies have found their delinquent files bulging lately, and their canceled contracts folders overflowing. It is why they are in the full-time business of debt collection instead of expanding services. And why most of their energy is diverted more to resolving regulatory filings than it is to actually giving customers what they ask for and want. It will get a lot worse before it gets better.

And that my friends is a leading economic indicator of the backlash against the debt servitude brought on by communications contracts masquerading as real socialization opportunities. It's all BS and we know it. Prepaid plans are just one more kick in the teeth. I will not put a dime into any of the domestic players now. They are all too risky for my liking now that things have turned against them and public resentment is on the rise.

Cam

Jun 07 05:04 AM

[Enigma:]

Cam, you are right, public resentment is on the rise simply because the government is involved in this telecomm corruption. remember global crossing ,the promise land of broadband wireless ,it is a disgrace that americans have to pay stiff prices and lousy service compared to other countries. this government officials are not looking at consumers best interests. and please don't be naive to think its a republican or democrat issue they are both corrupt parties that have betrayed the american people and our Constitution. Why you may ask? because both parties sidded with the big corporations and betrayed us. The crooks from global crossing, and the telecomm meltdown still out there,so as the crooks in the financial meltdown. who is partly responsible for the fall of Sirius-XM if not the government ,the FCC sidded with the fat cat lobbiest to protect their terrestial radio mafia ,just like they protect their VERIZONS AND AT&Ts. and PLEASE do not think this present administration is any better, they're ripping this country apart and sidding again with the big banks and corporations .

Enigma

Jun 18 12:48 AM

[directcommu...:]

eght has actually stayed away from the residential and focused more on business and international

Nov 08 03:41 PM