The two behemoths of the US telecommunications industry, AT&T (T) and Verizon (VZ), have lived and will die by their duopolistic strategy. Both carriers have a combined market capitalization of about 350 billion dollars and they dominate the US wireless industry. In tandem, they have milked the US consumer for service that is mediocre compared to their competitors abroad. Their gravest error, however, is not squeezing the pocketbooks of the US consumer, but squeezing the books and potential of the largest global software companies.
Apple (AAPL), Google (GOOG), and Microsoft (MSFT), with a combined market cap just shy of one trillion dollars, are the innovators behind the smartphone and tablet revolution. Smartphones and tablets are so wildly popular because they are mobile. They offer the power of desktop computers in the palm of our hands. Without nationwide internet coverage, these mobile devices would be useless. Thus, for the past several years these software behemoths had to rely on the wireless carriers to make their products successful. The carriers know this, however, and they have been using their power to restrict the potential of these major software companies. I will break down how each of these three has the potential to end the AT&T/Verizon duopoly.
There may be no company in history with a better track record of upending entire industries. Computers, music, phones, tablets -- Apple redefined each of these product categories. Apple knows that the future is mobile and they are only getting started. Before launching the iPhone, Apple actually considered going it alone and building their own wireless network. Steve Jobs envisioned using Wi-Fi to end the era of wireless carriers standing between the phone maker and the customer. At the time, however, this was not possible and Apple ended up building partnerships with the carriers. Yet with each passing day, Steve Jobs's vision comes closer to reality. The launch of Apple's iMessage may be the clearest sign yet that Apple intends to disband from the carriers. iMessage allows an Apple user to send a message to another Apple user while at the same time completely bypassing the carriers' text messaging service. In the words of AT&T chief Randall Stephenson, "You lie awake at night worrying about what is that which will disrupt your business model, Apple iMessage is a classic example." It is only a matter of time before iMessage follows in the footsteps of BlackBerry's (BBRY) BBM and allows for calls as well. With calls and messages taken care of using the internet, Apple will only need to build out wireless internet, something that their tens of billions of dollars in cash could fund.
Google has shown some of the strongest signs in its willingness to ditch the carriers. Not only is Google building an experimental network on its campus, but the WSJ reports Google and Dish (DISH) have held talks to launch a wireless network together. Should SoftBank secure its acquisition of Sprint (S), then you can be sure Dish will look for a new partner to launch a network. What's more interesting -- Google's experimental campus network runs on the 2.5GHz spectrum which is the expertise of Clearwire (CLWR), a company Dish tried to purchase. As a company known for "moon shots" like self-driving cars and Google Glass, you can be sure a nationwide wireless network is not out of the realm of possibility for Google. Many of the pieces are already in place should they decide to launch a network. Google Voice is a service that allows for texting, calling, and voicemail over the internet, and Google Babble is a rumored messaging service similar to iMessage. As a company that operates almost entirely in the cloud (I'm writing this in Google Docs), Google has clear benefits to offering internet service across the country. They are already focused on changing ISPs with the launch of Google Fiber; it steps directly on the turf of AT&T's U-verse and Verizon's FiOS with faster internet at better prices. Google has all the services, a network on its campus, and a potential partner in a possible bid to launch a nationwide carrier.
Microsoft is a company that, at least in recent history, has been more of a follower than a leader. They have notoriously been known to appease the carriers in an attempt to have more favorable placement and marketing of their products. Most people would not think of Microsoft as the company to revolutionize the mobile industry with their own carrier. But, the question must be asked: "Why did Microsoft spend $8.5 billion to purchase Skype?" Skype is a massive VoIP service that has hundreds of millions of users across various platforms and continents. So far, the only use Microsoft has made from its largest acquisition ever, is merging it with its Windows Live Messenger service. Microsoft must have bigger plans for Skype, and the potential for integrating Skype with Windows Phone is massive. Microsoft could use the power of this international VoIP service to bypass nearly every service offered by carriers today. The biggest problem? Microsoft's Windows Phone has yet to make a large impact, especially in the United States, and a disruption like this would carry enormous risks for Microsoft's mobile hopes. The more likely scenario is that Microsoft waits for another company to disrupt the carriers, then they use their acquisition of Skype to follow suit once the path is more clearly defined.
Apple, Google and Microsoft, with their respective platforms, iMessage, Google Voice, and Skype, show these three software giants are already inching away from their reliance on wireless carriers. All it takes is one of these companies to launch a network for the other two companies to follow suit. The duopoly of AT&T and Verizon has worked tremendously well for these two carriers in the past, but their mistake lies not with overcharging the customer, but with crippling the potential of software companies that are truly innovative. In the near term, investments in AT&T and Verizon are safe and that yield is great in this low-rate environment. But these stocks are no longer the sleep at night situations they once were. Investors must keep their eyes peeled for any hints that another company is ready to take them on. When one of these innovative software companies takes the initiative, the movement is going to snowball incredibly quickly. Of course the largest obstacle to this occurring is how the situation will play out internationally. But if the United States can be figured out, the model can likely be duplicated in other countries. If one of these companies makes the move, our monthly bills are going to don the logo of a software company rather than the blue globe or red check mark.
Additional disclosure: I am long NOK July 13 calls.