AT&T's Game Of Squeezing Customers Nears Expiration Date

Aug.23.12 | About: AT&T Inc. (T)

Carriers like AT&T (NYSE:T), formerly SBC, and Verizon (NYSE:VZ), formerly Bell Atlantic and NYNEX, have always been monopolies that want to pretend they are competitive businesses.

Their business model is to become necessary gatekeepers to Internet resources and then squeeze customers for every penny they can get. This puts them at odds with tech companies, which want the lowest possible prices for the widest possible pipes.

Along with squeezing customers for profits, the carriers also try to minimize their own capital expenses, with government subsidies carrying as much of the burden as possible. That's because, thanks to Moore's Law, carriers have a tough time extracting the full cost of new lines and gear -- it becomes obsolete as fast as the laptop on your desk.

If you're looking for an analog to the carrier business model, think tobacco. You're not trying to expand the market, you're trying to squeeze it. Thus the carriers continue to pocket federal subsidies for broadband access, while nearly 24% of rural customers lack broadband 17 years after it first became available. After all, if people got what the government was paying for, the government would stop paying for it.

On the profit extraction side, carriers have long sought to control what services consumers have access to, and charge monopoly rents for the bits used to access those services. Tech companies have responded by making those services part of the phone -- Apple now offers its own texting service on its iPhones.

And the game goes on, with lawyers and lobbyists on the carrier side, technologists and marketers on the equipment side. But as more and more functions become internal to the technology, economizing on the use of carrier bits in favor of bits from the more competitive Internet market, the returns for carriers get lower and the contortions the lawyers must go to for those profits become more torturous.

The game, in short, has diminishing returns.

The latest iteration has AT&T blocking use of Apple's FaceTime app because it's "pre-loaded" on the device, and thus under the control of the carrier. The company wants to force consumers to use its more expensive "mobile share" plans, and is therefore restricting use of the app to those customers.

Technology advocates have responded with petitions to the government and editorials ridiculing the company, essentially urging readers to switch plans. The hope is that government and economic pressure can make AT&T back down.

It can. Until next time. The game will continue because AT&T has to play this way, for business reasons. Which should have AT&T shareholders, and consumers, questioning the business model.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.