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Summary

  • Facebook, Google and other OTT ("Over the Top") providers have previously disrupted mobile operator revenues.
  • Facebook and Google are making aggressive moves to bring low-cost wireless connectivity to users.
  • AT&T shareholders should monitor the success of these efforts in reducing AT&T subscriber data consumption.

Wireless carriers have seen steady erosion of their core revenue base in recent years as new entrants sought to encroach on attractive segments with high margins.

Mobile voice was the first revenue stream of consequence to be disrupted. The introduction of over the top services such as Skype, WhatsApp and Viber promised low-cost calls using VoIP technology while leveraging carrier data networks. The effective per minute plan pricing of voice calls has steadily fallen through the last decade. US Voice ARPU for the major telecommunications carriers has fallen from over $45 in 2007 to just under $30 in 2013. Messaging was the next large carrier business stream to be impacted. A number of alternative messaging services from the likes of Apple and Facebook steadily cut into operator messaging revenues.

The impact of the destabilization in both the voice and messaging businesses were enough to cause telco's such as AT&T (NYSE:T) to bundle voice and messaging with data. While that may suggest that voice and messaging are still contributing to revenue, the reality is that it is really data connectivity that provides the core value in these bundles (as is apparent by the pricing of data by the size of the bucker), with unlimited voice and messaging being thrown in for good measure. While it may seem as though AT&T has stemmed the bleeding from the loss of both of these revenue streams, a look at the forces that created the disruption in these businesses provides interesting insight, and helps answer what could happen to data connectivity in the future.

The carriers were providing a premium, high-quality voice and messaging services with excellent reliability. However the quality of the services was so good in fact, that it significantly exceeded what consumers required as far as managing their core communications. As the quality of the over the top solutions improved, with a price point that was a fraction of the carriers offered, consumers realized that their messaging and voice communication needs could be met with a service that was good enough without necessarily being the best. Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Skype as well as a host of other smaller players succeeded in progressively delivering improving communications services at a fraction of the price, eventually diminishing the utility of premium carrier services.

Wireless Connectivity

The obvious question to be asked is whether any of the internet players such as Facebook or Google (NASDAQ:GOOG) could have success in disrupting the provision of wireless connectivity.

Both Google and Facebook have been active in experimenting with solutions to deliver low-cost connectivity in both the US and around the world. For both Google and Facebook the availability of low-cost connectivity for users likely means more eyeballs on Facebook and Google content, and hence more opportunities to advertise.

Facebook has been experimenting with free wifi for sometime now in local cafe's in San Francisco. It has decided to extend this more broadly to other local businesses, with the condition that these businesses enable Facebook users to check in via a business Facebook page. Such a move obviously allows Facebook to get better targeting insight, and eventually lure these businesses to advertise on Facebook.

Facebook has also been active in exploring the use of high-altitude satellites to deliver cheap internet connectivity to developing economies, and it's recent purchase of Ascenta is a step in that direction.

Google has also been active in exploring the use of cheap forms of connectivity to reach users. Google has blanketed Mountainview with free wifi. In addition, it has been active in exploring wifi balloons to deliver low-cost internet access to remote areas. Finally, like Facebook, Google has also been active in considering promising satellite technology to deliver on the potential of cheap, universal internet access. Google recently purchased Titan Aerospace to further its ambitions in satellite technology.

The efforts from Facebook and Google are the first forays in an effort to bring low-cost connectivity solutions to the masses. There's every likelihood that neither of these efforts will come to fruition. However both Google and Facebook have substantial cash reserves to make these efforts a reality. Additionally, the drones and satellite technology are currently focused on the delivery of cheap connectivity for the developing world, rather than in North America.

I don't realistically believe that either Google or Facebook will be able to effectively replace AT&T as a primary provider of mobile connectivity and data access. For one, the reliability of a "mesh network" comprised of different types of coverage such as wifi or satellites and wifi balloons is fairly questionable. While users may be able to get sporadic connectivity from these services while mobile, it's unlikely to be significant enough to be a complete replacement for mobile connectivity provided by AT&T or other carriers.

Getting into the data connectivity business in the US in any material way may also pose interesting regulatory implications for both Google and Facebook and would have them regulated by the FCC. That's not an outcome that I am sure either company would be keen to have happen.

So while I don't believe either Google or Facebook will get into the business of providing wireless connectivity access in direct competition with AT&T, it's clear that both will continue with efforts to make low cost connectivity available. As wireless carriers in North America such as AT&T make efforts to move away from offering unlimited data and offer data priced by tier, subscribers of these carriers will be looking to see how they can get better access to the data they want at a more affordable price. Some users may even curtail non-essential activities that consume data. For Google and Facebook, that's potentially less usage of their core services and represents a big problem. Less data usage while mobile is thus an outcome that both companies would be keen to avoid.

What both Facebook and Google are effectively suggesting with these recent initiatives is to subsidize wireless connectivity to push advertising-based business models. "Good enough" coverage in many public areas could encourage users to step down the amount of data plan access that they require with mobile operators. Wireless carriers such as AT&T are banking on users stepping up their data usage over time and move to larger data plans, as an explosion in data consumption and connected devices cause people to upgrade data plans.

If however many users are blanketed by a large swath of wireless coverage that is "good enough" then this could relegate AT&T to being a premium provider of back up connectivity, where no other cheaper, alternative form of wireless connectivity exists.

Long-term investors in AT&T should watch developments in this space carefully.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Do Facebook And Google Pose A Long-Term Threat To AT&T?