What Business Are AT&T and Verizon in Anyway?
In the late 1940s, Bell Labs set Claude Shannon on the task of figuring out how much information could be passed down a twisted pair (a telephone line). This was the beginning of information theory.
And it was also the first seed of a transformation that the big telephone companies seem destined to make. Randall Stephenson of AT&T (T) (the combined remnant of the AT&T that used to own Bell Labs back in the 1940s) recently said he expected to see data-only plans within 24 months.
It doesn't seem like it's going to take all that long. Verizon (VZ) recently announced that it is overhauling its pricing policy in "the most profound chance to pricing the telecom industry in 20 years," according to Craig Moffett, Sanford C. Bernstein & Co analyst.
Verizon is phasing out the old billing structure, and it is going to new billing structure called "Share Everything" which will include unlimited phone calls and texts, and will cost $90 per month for one smartphone, and which includes one gigabyte of data. Last summer Verizon dropped unlimited data plans, so for now, the price of data is going up, though some of us wondered why texting, which only uses a tiny amount of data, could ever cost so much?
My prediction is that even this announcement will seem really dated very soon, as the telecoms will soon become known as data transmission utilities. I suspect this is a reality that will be forced on these companies because utilities are not typically viewed as growth companies. Experts in the field have been calling data transmission by the cacophemism "dumb pipes" for some time now. And while the move of the telephone companies into mobility seemed to mask the true nature of their business, it will more and more become to be seen as a commodity type business - transmission of data bits.
The data utilities, AT&T and Verizon and Comcast (CMCSA) will control the land-lines and fiber-optic cable laid out over the past hundred twenty years, and it will become apparent why the bidding wars for spectrum were so intense, to paraphrase Mark Twain's advice about buying land - they ain't makin' it anymore. They have a moat. And they will be allowed to make a living, even if, under some future administration rates are regulated to prevent the effects of ruinous competition.
So What Is Up With Data?
What AT&T and Verizon are saying and doing is that they will own the land (landlines, fiber-optic and copper cables and the radio spectrum), and leave the cultivation (the step-by-step programming and algorithms) to the farmers. What we don't know now is what the deal will be between the farmers and the landowners, and how that will all play out.
And the real question now is what happens with the over-the-top telephone services, which would be the remainder of the telephone company business. In the general sense, any data manipulation (software, programming, algorithms) is considered an over-the-top service. All the apps on the iPhone are over-the-top (OTT) services; in fact, any program that uses information transmitted over the internet is considered OTT. But here I am referring to the narrow part of that service which the telephone companies still do, or that you would expect them to be doing. That is, texting, voice calls, video calls.
These could all be considered over-the-top apps, a texting app, a voice app, a video app. And the answer appears to be that the data transmission utilities appear to be leaving the field. There is nary a video app in sight among them, nor the other kinds of new internet services like dialing cell and home phones (or computers) at the same time, or allowing users to see if the party they want to call is on the phone (what is called presence).
Will they continue to vacate a possible lucrative field? That remains to be seen. The more investors view them as dumb pipes or data transmission utilities, the more the managements of these data transmission utilities may find themselves attracted to a growth area they have ignored.
Microsoft's Purchase of Skype for $8.5 Billion May Not Look Stupid After All
So, okay, the telephone companies have focused almost entirely on putting up mobile towers, and laying down fiber optic cable, and their efforts on the new telephone services is practically non-existent. AT&T had a video initiative in 2006 which came under the name CallVantage. By 2008, this service was gone. Was this service improved, reintroduced, enhanced? Not really. So this left an opening. An opening that was filled by Skype. Think about it: Which of the major telephone companies offers a video service comparable to Skype? None, really. The telephone operators have given up 20% of what used to be the lucrative international long distance market to Skype. And pretty much without a fight.
The way this is shaping up, it looks like Microsoft's (MSFT) purchase of Skype for $8.5 billion may not have been as high-priced as it seemed at the time. If it becomes a part of Windows, that would permit anyone to connect with anyone else with Windows. Perhaps they will include it as an update of older versions of Windows, thus expanding the phone-connecting universe. This may remind users of years ago when they added Internet Explorer to Windows, and vanquished Netscape.
But also, there is Skype for iPhone, and Skype for Android. It operates on platforms outside of Windows. So the universe of connections is expanding quite a lot. And it adds some vitality to an operating system that was getting a little creaky under the threat from the tablets, where Microsoft does not yet operate as a factor.
The telephone companies can still collect charges for the interconnect to old legacy telephones, but this will become less and less of a factor. The interesting thing is that this begins to leave Microsoft's competitors looking like they have their hands in their pockets. Where was Apple (AAPL) while this was going on? Sure, they have Facetime, but doesn't that only connect with Apple users? There you have the Apple of yore going down the same old dead end of their exclusivity. Didn't work for the Mac; in fact, didn't work for any of Apple's computers. To reiterate, Skype works on Windows, iPhone, and Android.
Where was Oracle (ORCL)? Will industrial data manipulation be enough for Larry Ellison? Or how about IBM? Or how about Cisco (CSCO), which just bought a data hog user, NDS, which is in the business of digital TV software? And what is video phone service, except a huge video hog user?
And then again I ask: Will the telephone companies really just cede all of this business without a fight? They could see their telephone business leave with a speed they apparently lack the imagination to envision, but I suspect it could be quite quick indeed.
Think about first class mail at the post office. When email (an OTT service) began it seemed like there was a bit less rain, but by now we are talking about a desert as far as first class mail goes. This same thing could happen to the telephone companies in short order.
But it's not all over. Microsoft bought a proprietary system, Skype. And IT people are concerned about what's going on inside Skype, so it may never be big in the enterprise market. Sure, Microsoft has Lync, they could do a re-write; probably they're doing one, but that will take some time.
And while most of the telephone companies appear to be like a deer in the headlights, a few are forward-looking. The cellular and cable company, Rogers (RCI), in Canada has adopted many of the internet features I spoke of above in a service they call Rogers One Number. Their record is good, and they are probably the only telephone operator forward-looking enough to be able to buffet the real strong winds that look to be coming.
Verizon can be held as a utility since it appears they will begin to price data higher and plan to hold on to customers by including unlimited telephone service. I would expect AT&T to follow suit. So far, everyone is playing nice on price, but the thing is that competition finds ways of bringing down price. I don't know if it will be WiFi only services or Sprint (S) offering some innovative data plan, but it could be a scary time for the data transmission utilities.
And a wild card is what will become of video service. It will require data use and someone else's software, since the operators are not providing it. Will that make it prohibitively expensive to use except perhaps at wireline computers and WiFi locations?
A direct play on OTT telephone services is a small company out of Vancouver called CounterPath (CPAH). Their telephone software (softphone) is essentially the industry standard, and the proof of this is that their softphone is sold through all the important telecom equipment distributors - Cisco, Avaya, Ericsson (ERIC), Broadsoft (BSFT), Alcatel (ALU), Metaswitch, and GENBAND. These distributors are setting up corporations with their own telephone networks. CounterPath recently came out with video apps for the iPhone, iPad and Android, all of which have won awards, and are likely to drive new sales.
While CounterPath has been mainly in the enterprise end of things, its technology powered system operator's Rogers One Number, and they have connections with system operators all over the planet - BT, Deutsche Telekom, AT&T, Verizon, Sprint, and on an on. It is led by an old telephone entrepreneur, Terry Matthews, who has made as many 80 deals in the area, the biggest of which was selling Newbridge to Alcatel for $7 billion (of which he kept $1 billion for himself). So management is in strong hands.
They have some patents, and these may be worth the present market cap by themselves.
While the company has strong prospects the stock has been sleepy, so investors would be well-advised to place limit orders. But if you want to own a company smack dab in the middle of where telephone is going, it will be harder to find a better, well-connected, debt free, product-rich candidate.
In any case, it looks to this observer that we will all be paying a lot more for used to be called telephone service, but what will be in the future some combination of data transmission service and software that manipulates that data .
Disclosure: I am long CPAH.OB.