Telcos Armageddon: The End of the Traditional Phone Company

Given the pace at which data is displacing simple phone calls, many are predicting the end of the traditional phone company over the course of the next several years.

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According to a report released by Ericsson (NASDAQ:ERIC), data usage exceeded voice calls in terms of total cellular network traffic for the first time in December 2009. For the most part, sending and receiving data — whether in the form of email, text messages, Web pages, or tweets — is how we use mobile devices. This kind of usage has serious implications for Verizon (NYSE:VZ), AT&T (NYSE:T),Vodafone (NASDAQ:VOD), Sprint (NYSE:S), and other phone companies, as well as their investors.

Way back in 2003, some market research firms suggested that mobile phone calls outstripped wireline phone calls in the U.S. in terms of total minutes of use. The transformation occurred in conjunction with a general rise in cellphone usage. Now mobile users are taking the next step to 4G LTE, or long-term evolution technology. LTE will transform cellphone voice calls from traditional cellular networks to the Internet over the next couple of years. The transformation will be another streak of data packets on the network, including Web-surfing and tweeting.

As a result, phone companies will be forced to abandon the practice of charging by the minute for calls and may instead offer a simple data contract instead. While this will not be the end of phone companies as we know them, it does mean that companies will face challenges in making the economics work without the assurance of a monthly tax on phone calls. This set-up would improve the positions of dominant carriers like Verizon and AT&T, but their smaller competitors — such as Sprint, Deutsche Telekom, and T-Mobile USA — could suffer.

Even though carriers would be very reluctant to give up their pricing models, it is possible for operators to decide to sacrifice their own contracts just to sell a data contract. That sort of model would be very likely for Sprint, given that the company has struggled to compete with AT&T and Verizon in this country. Sprint is also the only U.S. carrier with unlimited data plans. The model would also be beneficial for Verizon, currently working on intriguing projects with Microsoft’s (NASDAQ:MSFT) Internet-calling product, Skype.

One thing for certain is the cost of carrying increasing amounts of traffic on those new LTE networks is sure to rise. In addition, carriers will be looking for ways to preserve their precious wireless spectrums. Carriers have been so concerned with the issue of limited spectrums that some carriers are considering Wi-Fi networking as a way to supplement cellular, a scenario known as Wi-Fi “offload.”

According to a report late last year by Wireless Broadband Alliance — a trade group that includes Ruckus and other suppliers, there are almost two million public Wi-Fi hotspots deployed around the world, with that figure tripling by 2015. Cisco Systems (NASDAQ:CSCO) and Aruba Networks (NASDAQ:ARUN) are currently selling Wi-Fi gear in an attempt to creep into the Wi-Fi offload market. Towerstream (NASDAQ:TWER) has also been selling companies connections between offices using private wireless networks, and is now adding to its portfolio options for Wi-Fi offload. Meanwhile, Boingo Wireless (NASDAQ:WIFI) has been selling pay-as-you go Wi-Fi connections in airports and hotels around the world.

Cellular business is the biggest in China, followed by India at nearly one billion connections each. The GSM Association — the international trade body for cellular operations — reports there are three billion cellular connections in Asia Pacific, rising to 4.1 billion by 2015, which is twice the expected rate of growth in Europe and North America.

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