Key Telecom Trends: VoIP and Shift to Prepaid Wireless Plans

by: Bullish Bankers

This is part 2 of my Key Telecom Trends article. Part 1 can be read by clicking here. Two other trends in Telecommunications over the past few years that should have a significant impact in the future are:

Voice Over Internet Protocol (VoIP)

Voice Over Internet Protocol (VoIP) emerged on the commercial scene in 2004 harnessing the power of broadband internet connections to deliver unlimited voice plans, both local and long distance, over an internet connection. VoIP has enabled co-workers within a firm or from different companies to communicate through video conferencing. Cisco’s (NASDAQ:CSCO) Telepresence has been a successful enterprise VoIP system for businesses to communicate in a real-lifelike conference room. It has also seen substantial growth over the past year as companies seek to cut travel expenses in a recession, replacing it with videoconferencing like Telepresence. From a consumer perspective, VoIP has became increasingly attractive in order to cut costs as consumers trade down in a recession without sacrificing quality.

Vonage (NYSE:VG) is a pure-play on VOIP with 2.6 million users as of the end of 2008, however, the stock has been on a steady decline since its IPO reflecting its trouble penetrating the home wireline market.

Skype has been the dominant player in the VoIP consumer market as of late with 405 million users at the end of 2008. Skype not only allows people to videochat over internet connections from across the world, but international calling is relatively cheap. For instance, I spent four months in Ireland and I used Skype to call cell phones of friends and family members in the U.S. for just 2.1 cents per minute. However, as a registered U.S. user, it was over 50 cents to call an Irish phone and 25 cents to call Germany; these rates are still relatively cheap and could come down in the near future as Skype expands more into our globalized world. Skype was acquired by eBay (NASDAQ:EBAY) three years ago for $2.6 billion, but they have recently announced that it will be spun off in an IPO in the first half of 2010. Skype has recently released an iPhone (NASDAQ:AAPL) app allowing users to make free calls over a Wi-Fi connection to other Skype users; downloads of the app exceeded 2 million in the first week alone. Users can also make reduced price calls to wireline and wireless phones using money from their Skype account. Skype is also releasing a similar app for Blackberries to make a push into the enterprise VoIP market.

Recent articles from the likes of Business Week, USA Today, and The New York Times have stated that Verizon (NYSE:VZ) and Apple (AAPL) are in talks to release two new iPhone-like devices dubbed as the “iPhone lite” and “Mac Tablet.” The tablet features picture viewing, music and hi-def videos. Articles have also stated that it could make calls over a Wi-Fi network; this ushers in my speculation on the matter. Skype will be the predominant application to place these VoIP calls over Wi-Fi. Several other companies offering VoIP are AT&T (NYSE:T), Verizon, and Vonage.

The Postpaid to Prepaid Shift

With unemployment at 8.9% and consumer spending and discretionary income at rock bottom, prepaid wireless plans are a cheap alternative for U.S. consumers feeling the pinch. In this economic environment, we see consumers trading down in two areas: disconnecting home wireline phones to solely rely on wireless phones and wireless subscribers switching from postpaid contracts to prepaid plans. The postpaid wireless market has continued to decelerate, which has been offset by higher average revenue per user (ARPU) from the growth in data and smartphones.

On the flip side, the prepaid market continues to expand and for the first time ever, prepaid net adds are expected to exceed postpaid net adds in 2009. What attracts consumers to prepaid plans? First off, postpaid plans often have hidden fees on the backend such as overage charges for minutes, texts and internet usage. Recently, prepaid wireless companies have rolled out unlimited plans at low prices ($40-50) which draw lower-income individuals with bad credit scores who are ineligible for postpaid contracts. The plan includes unlimited minutes, texting and web browsing for one low cost paid in full upfront. Consumers do not have to sacrifice popular more sophisticated handsets to trade down to the prepaid plans. MetroPCS Communications (PCS) offers the Blackberry Curve, while both PCS and Leap Wireless (LEAP) offer various Nokia (NYSE:NOK) , Samsung and Motorola (MOT) phones, most notably the new Motorola Hint.

LEAP and MetroPCS are pure-plays on the prepaid wireless market. Both have seen substantial subscriber growth through 2009, and each are up YTD 23% and 11% respectively, while the Technology SPDR (NYSEARCA:XLK) is up 5% YTD and the S&P 500 is down 5%. Although trading down to these plans are easy cost cutting initiatives for consumers, they have a serious disadvantage for frequent travelers. Both LEAP and PCS have limited network coverage areas and are only available in main metro areas. Thus, when traveling outside of these areas, users will be required to pay roaming charges, which will deter many people from making the switch. However, LEAP has reported that its users only roam less than 10% of their total minutes used. These two companies also experience compressed margins due to the rock bottom pricing strategies in place.

An alternative to the two pure-plays, Sprint-Nextel (NYSE:S) has rolled out Boost Mobile’s Unlimited plan. For just $50 per month prepaid, users receive unlimited nationwide talk, texting, web and walkie-talkie. Sprint-Nextel added 674,000 prepaid customers in 1Q09 thanks in large part to the Boost Unlimited plan and its aggressive marketing strategy.

Below is a chart of net adds from the last two quarters to compare prepaid companies to Verizon and AT&T, predominantly postpaid companies:

Net Adds






















Telecom is a rapidly changing industry, serving as the conduit for information flow worldwide. I have mentioned some trends to take note of when analyzing and evaluating your investments and their role in furthering communication infrastructure. Like always, remember to stay ahead of the curve as technology evolves rapidly and investors often flock to the big names when it is too late to reap large gains.

- Jake Kimble

Disclosure: The author’s family is long VZ. The fund the author is associated with is long VZ and CSCO.