Sprint's (NYSE:S) brand Virgin Mobile is offering customers new products that may further expand the cell phone market. While cell phones appear to be everywhere, there are still children without phones. Many of the teenagers that do have phones use the phone for most of their internet access, according to the Pew Research Center. Any wireless provider would be happy to start those kids on the path to being a teenager attached to a cell phone, and Virgin Mobile Custom may be plan that does it. It appears Sprint may have found a profitable way to handle customers that have very limited means. While high cell phone bills have become common for many families, Virgin Mobile has been offering service at substantial discounts. Their latest offering has ruffled quite a few feathers though, as the company has indirectly challenged the principles of net neutrality.
What is the plan?
The new plan offered by Virgin Mobile allows users to have a mobile phone plan with only 20 minutes of "talk time" and 20 text messages for only 7 dollars per month. While that may be unappealing to many readers, it is the options that define the deal. The plans can be upgraded, to include access to specific applications. Bandwidth, not included in the 7 dollars per month, is available for free so long as it is used through the application. They are initially supporting applications for four major sites: Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Instagram, and Pinterest. Each application can be added to the plan for five dollars per application per month.
The plan will only cover 3 phones and they must be purchased through Wal-Mart (NYSE:WMT). All three phones are lower-end models, which aligns with the concept of providing phones to customers who otherwise would be unable to afford the service. This is brilliant. Sprint doesn't want existing customers to downgrade to this service, so they've created a barrier to downgrading.
What is the problem?
Net Neutrality has four basic premises. This section, from Wikipedia, identifies them clearly:
- Consumers deserve access to the lawful internet content of their choice.
- Consumers should be allowed to run applications and use services of their choice, subject to the needs of law enforcement.
- Consumers should be able to connect their choice of legal devices that do not harm the network.
- Consumers deserve to choose their network providers, application and service providers, and content providers of choice.
For more reading on the FCC and Net Neutrality, see this article from the New York Times.
Using Virgin Mobile's new plan, consumers will have access to the internet, but only to the sites they are specifically paying for. If Virgin Mobile is able to offer this option, it may have some significant impacts. By offering this plan as a wireless provider, Virgin Mobile has better positioning to challenge Net Neutrality. They aren't attacking it head on, they are attempting to skirt around it. As you might imagine, they have denied that they are going around Net Neutrality.
What does it mean for Sprint?
Sprint may get a few more customers onto their network. Virgin Mobile was already the most affordable option for many adults. That is, of course, assuming that having no phone is not considered an option. The plan actually has some major advantages outside of which applications are available. The adult on the plan, even if they are not a Sprint customer for their own service, can easily manage the plan. The system is simple, which is a relief for parents that have too much to do already. Not only can parents determine which applications their children can use, they can also determine when they can be used. They can upgrade or downgrade the plan in the middle of the billing cycle without a problem. They can make their child's phone incapable of purchasing things. These are all very appealing aspects to a plan that the parent can manage from their home computer.
What does it mean for Wal-Mart?
The phones sold under the plan should not have any meaningful impact on Wal-Mart. Yes, they are the only place to buy them, but it shouldn't be much more than a rounding error on their financial statements.
What does it mean for providers like Comcast?
So far it has no impact. However, if Virgin Mobile gets challenged and wins, or doesn't get challenged at all, another precedent will be set. In January, 2014, a federal appeals court ruled in favor of internet service providers and against the FCC. The ruling relied on the classification of internet service providers as "information service companies".
Is Sprint a telecommunications company or an information service provider?
This is where things get very complex. During my research I came across professional articles with contradictory opinions about the FCC's authority in regards to Virgin Mobile. Given that none had sourced definitive material, nor had the reputation to establish themselves as experts, I continued searching. It appears that telecommunications companies are by default considered common carriers. As common carriers, the FCC has a great deal of authority over them. However, Cable Internet is classified as an "Information Service Provider". An "Information Service Provider" by definition is not a common carrier. The service Sprint provides is primarily phones, but their service includes internet access. Going back to June 27, 2005 the Supreme Court handed down an important ruling. Internet Service Providers were Information Service companies, even if they did everything that a common carrier did. Justice Scalia, in a three-member dissent, compared the ruling to allowing a pet shop to deny being in the pet business. Under the precedent set by the ruling, if a pet shop gives away a leash with every puppy, it can claim to be in the leash business instead of the pet business. In Scalia's opinion, a leashed puppy is still a puppy. The majority disagreed.
Going further back to March 14, 2002, we find the FCC declared:
"The FCC determined that cable modem service is not a "cable service" as defined by the Communications Act. The FCC also said that cable modem service does not contain a separate 'telecommunications service' offering and therefore is not subject to common carrier regulation." This "Declaratory Ruling" by the FCC provided the ammunition that was used to defeat them in the case in 2005.
So which is Sprint? I called the FCC with the following questions:
- Are Internet Service Providers by definition "Information Service" companies?
- As Information Service providers, will they be exempt from being classified as Common Carriers regardless of their other activities?
- Please state clearly the classifications of the following companies:
Unfortunately, they were unable (or unwilling) to answer any of the questions. Officially, a supervisor was assigned to research the matter and return my call. If they do call, I will issue an update with the answer and an interpretation of the answer.
Will the FCC sue, if it is able to?
The FCC previously was considered a strong supporter of Net Neutrality. That is no longer the case. The FCC Chairman, Tom Wheeler, has been in favor of reducing Net Neutrality. By not challenging Sprint, the FCC can set precedent through inaction.
The new plan by Virgin Mobile has caused a bit of a stir, but it seems unlikely that it will provide significant risk adjusted returns. If there is a lawsuit, the cost of defending may overshadow the profits from the deal even if they win. I would not expect the FCC to comment on pending litigation. Therefore, the questions are not asking the FCC if they will get involved. It is an entirely different matter to ask about the classification of a company and the scope of the authority of the FCC. If they state that Sprint is an Information Service Provider and that the classification will be mutually exclusive with the definition of a common carrier, then the FCC will have no teeth unless it redefines "Information Service".
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