AT&T's Announcement Was Inevitable

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If you didn't see this coming, well, go back to sleep under that rock. Yesterday AT&T ( T ) announced that it is ending the unlimited data plan for its smartphone customers, as well as its Apple ( AAPL ) iPad subscribers. Now, before I get into my full rant, oh yes there will be much ranting, let's get the facts out there. If you'd like to read the whole article from the WSJ you can find it here .

Here's the breakdown….

Current AT&T subs can keep their plans until they end, AT&T can't just break their contracts. Here's the meat. AT&T will eliminate its $30 unlimited data plan for new smartphone subscribers starting June 7th. In its place, customers will be offered one of two plans, 200 megabytes of data per month for $15, or 2 gigabytes a month for $25. Users who exceed 2 gigs will pay $10 a month for each additional gig. AT&T is also dropping the $30 unlimited data plan for the iPad that it announced only a few months ago when the product was released. Once again, iPad users currently on the plan will be able to keep their subscriptions.

So, just to be clear, I forewarned you all many months ago that this would happen. Go back and read my 2010 predictions post published on 12/16/09. The post reads:

Starting with AT&T, telecom providers will begin publicly restricting the bandwidth used by mobile internet devices as their networks literally choke on data. I have the feeling that this is already happening in some form or another as they track massive network usage on my iPhone and degrade my service because of it.

I'd say that was smack on. It continues, "the war for net neutrality will become a headline topic as the telecom giants fight the edge developers for control over the future of the internet." And we've seen that take place as well as the FCC has stepped in to regulate for net neutrality.

Oh and just for kicks, the post also said, "Apple will introduce a tablet device, it will sell over 5,000,000 units in the first three months." Well, we're at 2,000,000 in the first 2 months, so I guess I was a little over the top on that one, so I'd lose if we were playing the price is right, but, yea, the thing is a massive hit.

On April 26th of this year I wrote a post titled " In War, Always Leave The Enemy One Exit ". The article generally said that it was now or never for the telecoms. I quote:

Something has to give here, this can't go on forever, and I think we are soon to see a resolution to the issue of the telecom giants paying for the network on which Apple and Google ( GOOG ) make tremendous amounts of money. Maybe the telecoms chose the nuclear option and just stop building their networks holding Apple's feet to the fire.

Not only did they stop building and switch to a WiFi strategy, but now they've thrown down the gate so that they can benefit from the increase in data traffic on their network. So let's just take a look for a second at what this means for everyone involved, starting with me, because hey, at the end of the day it all comes down to how the individual is affected right?

Below is a chart from the AT&T Wireless web site ( click to enlarge ) showing my data usage over the past couple of months. I use my iPhone a lot for stuff like checking the futures on the way to work, reading news on the Bloomberg and NYT apps, checking sports scores, and a host of other non streaming stuff. Most of my data usage is done over the wireless network because I don't use the phone too much around WiFi, mostly because if I'm in a WiFi area I probably have my laptop on hand and I'm using that. So until the whole of NYC is covered with WiFi, I'm reliant on the cell network for my data when I'm away from home or the office.

As you can clearly see, I'm bumping right up into that 200 megabyte limit. So yes, if I were to continue using the same amount of data I use now, I would save about $5 a month.

Now, I'll be buying the new iPhone when it comes out at some point this summer. Hopefully, it will have a front facing camera so that the Skype application actually becomes useful. At that point my data usage will most likely at least double, if not more. I also have the Pandora app downloaded but don't use it, I'll probably start doing so pretty soon. What I'm trying to say here is that I'll end up paying at least the $35 for the 2 gigs, whatever, that's another 5 bucks.

But wait, there's more. AT&T also announced Wednesday that it will finally allow users to tether their phones to their laptops and use them as personal WiFi hot spots. Of course this will cost you an extra $20 per month. So now we get to the meat of the issue here, it's not really about the data that I'm going to be using on my phone, how much content can I really consume on that little thing. The issue is what happens when I tether that phone which is operating on the cell network to my laptop and stream massive amounts of content while I'm on the road, or on vacation, or whatever.

I've got no clue how much data I use on my laptop, I'm kind of like that kid who grew up in the super rich family who doesn't understand the value of a dollar, I don't understand the value of a megabyte. I do know this though, it's far greater than a measly 2 gigs, which means that I would end up paying a ridiculous sum for the service. Turns out, 1 minute of streaming video uses about 2 megabytes of data. You do the math there, that means if you're watching a 24 minute television show like Lost, you're burning through more than 1/4 of your monthly data plan under the new rules.

Going even further, I will most likely be a buyer of the second generation iPad, I skipped on the first because it didn't have all the things I wanted, and I couldn't even use it on the way to work because the subway in NYC doesn't have cell or WiFi service. You're telling me that I won't be using more than 2 gigs on that device when I get it? Hell, I'm sure that thing will be attached to my hip at all times, people will think it's another limb. It's such an amazing device, I can imagine a day soon when I consume most of my media on there.

Ok enough about me though, let's get to the real point of this piece. What does this mean for the telecoms, the hardware makers, and the content providers?

First, the telecoms needed to do this to survive, their business models were broken and they were on a runaway train to nowhere. After this announcement AT&T is still a dumb pipe, and I think they've come to the conclusion that this isn't going to change. The government is going to step in to preserve net neutrality, meaning that the telecoms or cable companies won't be able to downgrade the speed at which you get your data just because it's coming from one place or another. But what the telecoms have done now is go back door, instead they are going to become a toll road, the further you go the more you pay. So in essence, they aren't going to slow down speeds, but they will make it hard to use the network in an unlimited manner. Does this fix their business model, ehhhh, I highly doubt it.

The cellular market is just about completely saturated, which means that the telecoms are betting that they can grow through getting users to pay more for more data. Frankly, I think this is a mistake and it won't work. Would you pay $300 per month for a ton of data? How about $200? The average person is not going to pay more than $50 for data, they can't afford it. I just don't see how they are going to make these numbers add up.

So what about Verizon ( VZ ) and Sprint ( S )? You can bet that Verizon isn't far behind in instituting the same measures, their network is already beginning to get bogged down with data as more users buy Android devices. Sprint is the interesting story. They are trying everything under the sun to gain user base but they just can't seem to push through. When users go to the store, they are hardly looking at the network, they are looking at the hardware, and to a lesser extent the software. For all of you tech nerds out there who think that users make informed decisions based on the operating system, or how great the network is, you need to walk down to your local Best Buy or something and get a clue. People buy with their eyes, their hands, and their wallet. I don't care how good your operating system is, if your hardware is a piece of junk it doesn't matter (see Motorola Droid ( MOT ) or Palm Pre ( PALM )).

Sprint could pull a huge coup if it allows users to continue using unlimited data, which it already has the cheapest plan and fastest network for, and lands a big piece of hardware like the iPhone. I'm not saying it will, but if it does, watch out. Unfortunately they will then soon have the same network issues as the big boys, so really, where's the business model? But in the end I think of the three, Sprint is in the best spot, and if you don't believe me, take a look at what the market thinks. You don't need to be a technical analyst to see what's going on in these charts ( click to enlarge ).

I've been bearish on Verizon and AT&T for so long and I don't feel any different today, I think they are broken companies and broken stocks that aren't worth investing in. Sprint on the other hand has a shot, because they have the ability to grow just through gaining market share, some that the other two stand to lose.

So what about Apple? Well, I can't believe that Steve Jobs is going along with this, I can't believe that only two months after he announced on stage an unlimited wireless data plan for the iPad, that it won't exist anymore. I would LOVE to be in the room when the heads of Apple and AT&T sit down to discuss this stuff. I've got to think that Jobs is scared to shit that these telecoms are going to completely screw him over by putting the kibosh on data. Jobs is trying to revolutionize the way we consume content and then this shit? I've got to think Apple has something up its sleeve to deal with this mess. People will continue to buy iPhones and iPads in crazy numbers because the hardware and the software are just that good. But there will come a day, in the not too distant future, when this becomes an issue, I think it's sooner than we all think.

The worst hurt by this announcement, besides the consumer of course, are the streaming mobile app and web site developers. Thought you were going to watch Hulu on your iPad while riding the train to work did you, think again! Any company which is basing its business on streaming a high volume of content to a mobile device took a hit. There's no doubt that these companies will find a way to make a ton of money, they are the future of content, but this is a big hurdle they are going to have to overcome.

So what's the solution to this problem? It's actually quite simple. It's time to get rid of television broadcasting over the air. Why does it seem to be a right for people to receive free television via their bunny ears? Let's take that spectrum and turn it into WiFi. The government can lease the spectrum to the highest bidder, and then we can all have WiFi that works. The technology is there, I had dinner the other night with a friend of a friend who is working on a project down in the Carolinas where they are able to send out a high speed WiFi signal at a radius of 40 kilometers. Are you kidding me!

The telecoms will fight this tooth and nail of course, because they won't be the ones to provide this service, it will more likely be Google ( GOOG ) or Apple themselves who do it. I highly doubt these companies are going to wait much longer to see how badly the telecoms can screw up their future of getting the web on to mobile devices in a way that makes sense.

When giant companies fall, like we are witnessing with the large telecoms, they don't go quietly, they are going to bitch and moan the whole way down, but have no doubt, they are going down. In the meantime, the question remains, will they drag the content providers and the hardware makers down with them? Will they crush innovation because they themselves aren't getting a piece of the mobile pie? I'm a little scared, and I know others who are as well, the fact that these companies can stand in the way of the mobile web moving forward is a tragedy. Hopefully I'm wrong, but I doubt it.

See also Running the Market Marathon: Why Stocks Are Cheap on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Technology

Referenced Stocks: AAPL , GOOG , MOT , PALM , S , T , VZ

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