New Tech Trend Poses Questions for Apple, Netflix, Nokia and RIM

|
Includes: AAPL, BBRY, NFLX, NOK, S, T, VZ
by: NakedValue

Verizon (NYSE:VZ) spokeswoman Brenda Raney told FierceWireless that Verizon Wireless will switch from unlimited data packages to a new usage based pricing scheme for smart phones starting July 7. Under the new system, customers can choose from three options: $30/month for 2GB, $50/month for 5GB and $80/month for 10GB. For low bandwidth users, they may not even notice the change since current users pay $30 for unlimited data.

While Verizon's data usage costs are less than the plans offered by AT&T (NYSE:T), this move will still have long-term ramifications for many of the technology world's largest companies. As bandwidth needs increase along with mobile device ownership and global internet usage, wireless companies like Verizon, AT&T and Sprint (NYSE:S) will likely stand to benefit through increasing pricing power and improved profit margins. This new-found pricing power could actually accelerate in the medium- to long-term if cloud-based computing gains a foothold in personal computing. Under this scenario, the bandwidth usage could increase dramatically because applications and processing take place remotely rather than on the local computer.

Most to Gain

Verizon Communications has a reputation for offering the nation's most dependable wireless network. As of December 31, 2010, the company had around 94.1 million customers, of which 87.5 million were retail. Its network covers a population of around 292 million. In 2010, the company generated $106.56 billion of revenues, of which $63.4 billion were attributed to the wireless business and $41.2 billion were attributed to the wireline operations.

AT&T, Inc.: In 2010, the company reported revenues of $124.3 billion. Its wireless segment had 95.54 million customers at the end of the year, of which 68.04 million were prepaid, 11.65 million were resellers, 6.5 million were prepaid customers and 9.3 million were connected device customers. Overall average service revenue per user (ARPU) declined 1.8% in 2010, but data services ARPU increased 19.3% in 2010 and 23.7% in 2009. The data plans are already a secular source of growth in revenues per customer; any trend towards stricter cost per usage plans will likely improve this growth.

Sprint Nextel Corp. has struggled over the years to compete with AT&T and Verizon, but in 2010, it still reported 34.25 million postpaid subscribers and 11.27 million prepaid subscribers. Average revenues per retail subscriber dropped in 2010 because of the company's aggressive growth of its prepaid operations, but the revenues per postpaid retail customer have been stable over the last few years.

Most to Lose

Apple Inc. (NASDAQ:AAPL): The world's largest technology company is built on the success of the iPhone and the strong, growing demand for the iPad. With strong pricing power and wide profit margins, the company sports a price/sales ratio of 3.70 compared to competitors like Research in Motion (RIMM), which has a price/sales of 0.73, and Nokia Corp (NYSE:NOK), which has a price/sales of 0.37. While these two competitors suffer from negative revenue growth prospects, the price/sales ratios are also positively correlated to profit margins. I'm not saying that Apple's status as the dominant player in personal electronics is in jeopardy in the near term, but it is important for investors to realize that the company is priced for success. Any deviation in profit margins, either because of competitive pressures or increased wireless costs, could have a disproportionately large effect on the company's market capitalization.

Netflix Inc (NASDAQ:NFLX): The popular internet-based video rental company explicitly lists usage based pricing as a Risk Factor in its most recent SEC Form 10-K. Here is an excerpt:

To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our subscriber acquisition and retention could be negatively impacted.

This is not just speculation. Many link Netflix's lackluster performance in the Canadian market to usage limits at service providers like Rogers Communications (NYSE:RCI). If similar limitations become the norm in the US, Netflix could be adversely affected.

Nokia Corp. and Research in Motion: Like Apple, they stand to suffer if service providers increase the cost of bandwidth usage. Both companies are already in tenuous positions and any deterioration of pricing power could have negative consequences for shareholders. Nokia is still in the process of building mobile devices for Windows' O/S while RIMM continues to struggle to stay relevant outside of enterprise.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VZ, T, S, AAPL, RIMM over the next 72 hours.