The HS Dent Financial Blog

RSS      

Talk is Cheap. Skype is Cheaper.

We’ve written before about how new technologies like mobile phones and, more recently, Skype are transforming the telecommunications industry and bringing the continued existence of the fixed-line phone company into question. (Click here for prior posts).

Today, we read that Skype is also poised to wreak havoc on the current mobile phone revenue model: “AT&T Risks Losing Voice to Skype.”

Bowing to pressure from consumers, AT&T has decided to allow its mobile subscribers to use internet phone applications like Skype on the iPhone.  This has the potential to dramatically lower the costs of voice calls — and also lower AT&T’s revenues as a result.

In virtually all voice plans, consumers must pay more in order to get more minutes.  But in current iPhone data plans, consumers have unlimited data usage.  This means that iPhone users can shift most or all of their voice usage to Skype — which counts as data — and lower their phone bills substantially.

In Thursday’s Wall Street Journal, Martin Peers writes:

While AT&T doesn’t let iPhone customers sign up for data-only plans, customers could downshift from an unlimited voice-minute plan to the lowest tier of minutes. Then they could use Internet services for free or very cheap calls, taking advantage of the unlimited nature of AT&T’s data plans.J.P. Morgan analyst Mike McCormack estimates that voice accounts for $50-$60 of the roughly $95 in monthly revenue generated from the average iPhone user. He estimates that if an average user drops to the cheapest $39.99 voice plan, AT&T would lose between 20% and 33% of voice revenue.

This transformation will not happen overnight.  Skype is a great service, but voice quality can vary at times.  Plus, it can be harder to use for less tech-savvy consumers.  Still, there is no question that this will crimp the phone carriers’ ability to raise rates over time, as rising rates would convince a greater percentage of users to take the plunge and switch to Skype.

AT&T and others could simply raise the cost of their data plans. But as Peers rightly points out, “Charging more for data, which would be complicated by competitive pressure, might not make up fully for the lost voice revenue.”  Furthermore, if data usage were constrained, some amount of traffic would shift to free wi-fi networks (where available).

This is not to say that the mobile carriers will be going out of business any time soon.  But it will likely mean that their profit margins will be slimmer and the economics of the industry far less favorable.   Yet another example of a disruptive technology lowering costs for consumers and shaking the status quo of an industry.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy