There's a growing glut of bandwidth.
Analysts who talk to these companies insist the opposite is the case. They want the government to free up, and sell, more frequency spectrum. The key word there is sell, because only if spectrum is property, and that property is controlled by a duopoly, is there hope of these companies' survival.
The ability to cellularize and sectorize frequencies, combined with the ability to use them more efficiently using digital frequency-hopping techniques, is a trend that has been going on for 30 years. The Internet's ability to deliver any video to anyone who wants it has been around for a decade.
Consumer electronics companies like NetGear (NASDAQ:NTGR) have been taking advantage of the former trend to turn the freely-available WiFi spectrum in your home into an application platform, which lets you move even HDTV signals from bedroom to living room to the kids' room efficiently. The payoff on this, as I've noted before, is what can be done with lower-speed frequencies, automating everything in your home through what's called the Internet of Things.
Companies like Google (NASDAQ:GOOG) , Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), meanwhile, have been taking advantage of better Internet video quality and speedy delivery to transform entertainment. Netflix even cannibalized its own business model, the mailing of DVDs to households, in order to pursue a technology everyone sees as inevitable.
What happens to cable companies like Comcast (NASDAQ:CMCSA), Time Warner (NYSE:TWX) and Cablevision (NYSE:CVC) if people stop watching “channels” and instead demand videos from these companies? They can resist the inevitable by raising the price of broadband, bundling video with it at a “bargain” price, or even capping bandwidth so consumers can't use it for their TV watching. But these are short-term fixes.
You're looking at slackening demand for 99% of cable bandwidth, which is devoted to TV, and growing demand for the 1% sold as Internet service. Someone, someday, is going to get the bright idea of devoting more bandwidth to the Internet. But the idea that people want, or have a ready use for, 100 times more bandwidth than they're getting is pretty far-fetched (although it will be fun to watch technologists find a way).
When cable becomes Internet, Internet supplies in the last mile increase dramatically, and WiFi can connect to the Internet core as fast as WiFi signals can travel. That's 100 Mbps for current 802.11n routers.
Been to a hospital lately? That's the future. Every department can now move the most complex files to any bedside using WiFi, and the hospital can buy digital backhaul wholesale to move this out to the world.
This doesn't impact cellular companies, I hear you say. Well if it doesn't, why can't T-Mobile find a “white knight” to save it from AT&T (NYSE:T), even with the government pounding the table for it? Why did the cable companies just get out of Clearwire?
Carriers, including both AT&T and Verizon, are now taking advantage of these larger trends. They're offloading traffic onto optical fibers closer to the incoming call in order to handle the huge increases in traffic they're getting from iPhones and Androids. But they still have no real pricing power, even with their contracts based on subsidizing phones. (And check out the real interest rate you're getting on the loan of that phone.) Notice what happened to that big SMS business they used to have? If customers have iPhones, it's gone. That's why AT&T pushed an “unlimited messaging” plan on captive customers.
The only way to gain pricing power is through monopoly. Well, duopoly power. That's what is behind the AT&T purchase of T-Mobile, and it's what is behind the Verizon Wireless purchase of these cable assets. If you only have two choices for nationwide wireless service (and Sprint (NYSE:S) – let's face it – is circling the drain) then maybe, they think, they can name their own price. Because you will “have” to go to them.
Maybe. In the short run. But technology marches on. And WiFi is becoming increasingly useful, even to wireless customers, so even the monopolies will have limited pricing power.
In the end, as I've said, bits are bits. The telecom model for bits won't work. But there is a model that will. The Internet model. Run the frequencies as a utility, allow unlimited resale, let equipment define the standards, and plan for abundance. The only question is not whether this will happen, but when.
Before or after bankruptcy?
Disclosure: I am long GOOG.