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

700,000 Americans abandon their traditional landline phones every month, according to the Economist, and roughly 25% of all Americans are “cell phone only.”

We’ve written in these pages before about how technological and demographic changes are fundamentally altering sleepy old industries like newspapers and college text books.  The revolution in telephony, however, is a much bigger deal involving much larger companies and a lot more money.

Like many revolutions, this one is being led by the young.  The chart below makes a vivid point: younger Americans in their 20s and 30s, who generally tend to be highly mobile (bordering on nomadic) have shunned the traditional home phone en masse, opting to use their mobile phones exclusively. In 2008, more than 40% of the “just out of college” age cohort chose not to bother with a home line, and the number has risen every year.

It’s not hard to understand why.  When you move every 6-months, transferring your home phone service can be a cumbersome drag in an era in which Americans are used to instant service.   It’s also uneconomical for a young single person to pay for both home and mobile service, especially considering that young people spend comparatively little time at home.  (Plus, an iPhone is so much cooler than a home phone, dude.) Read the rest of this entry »

Technology has always been a great disruptor of the existing status quo, and it’s not always pretty.  The Industrial Revolution led to massive displacement of business owners, workers, and tradesmen with pre-industrial skills or inferior products that were no longer in demand.  Likewise, more recent technologies, such as Internet file sharing, have absolutely decimated the recording industry and may soon wreak havoc on the movie industry.   Mobile phones have destroyed the traditional fixed-line telecom business.  And now we see that VOIP (voice-over-Internet protocol) may soon wreck the mobile phone industry.

As we read in Brad Stone’s article today’s New York Times, “Skype, the Web Phone Giant, Bring Cheap Calls to Cellular.”

Stone writes, “Skype, the Internet calling service that has more than 400 million users around the world, is aggressively moving onto mobile phones….  The idea of bringing Skype to mobile phones has always been viewed by cellular operators as potentially threatening.  It opens up the possibility that people will use their data plans to make calls using Skype instead of the more expensive and profitable voice minutes on the carriers’ cellular networks.”

The mobile operators are right to be scared; they of all people should know.  Mobile phones have put regular long-distance call plans into what is almost certainly terminal decline. Read the rest of this entry »

Recessions are a time for “trimming the fat” in family and corporate budgets.  Companies eliminate nonessential projects and reduce their headcounts.  Families reevaluate their monthly expenses and atttempt to cut out redundant bills and services they no longer use.  This happens even during boom times, but recessions have a way of accelerating the process.  For example, the falling cost of mobile phone communication has led millions of Americans to cancel their traditional landline or simply neglect to set one up after moving to a new address.

Newer, cheaper internet alternatives, such as Skype and Yahoo Voice, are also gradually peeling away customers.  Though we have not seen updated statistics, we would assume that this trend has accelerated during the housing crisis and recession.

Likewise, traditional print media have been losing ground to free alternatives on the internet and to news aggregators and RSS feeds.  Many people who continue to get hard copy paper subscriptions of their local paper do so more out of inertia than anything else. Read the rest of this entry »