This story ran in the print edition of today’s paper:
AT&T’s bid to buy T-Mobile isn’t really a proposal to merge telephone companies. It’s about building a bigger mobile network for accessing the Internet.
As customers move toward smarter and faster wireless Internet devices, the phone part of the cellphone matters less and less. Many of the functions that have been the traditional basis for mobile phone service are now available as free Internet applications. Skype, Google Voice and Viber allow wireless users to make calls over the Web and avoid charges for minutes of use. Texting services such as GroupMe, Beluga and LiveProfile let users tap messages to one another without the fear of blowing monthly limits.
Now the big telecoms are scrambling for new ways to serve consumers, and finding that with so many free and low-cost applications available, the biggest game in town is mobile Web access.
“Customers are getting used to the idea of getting things for free and in other ways than from a carrier,” said Jeffrey Silva, an analyst at Global Medley Advisors. “That puts the onus on wireless carriers to come up with new ways to monetize their networks and get people to stay within their universe of services.”
The transition from their core businesses to the Internet has been rocky.
For years, carriers have enjoyed the lucrative business of providing voice calls and texting, which cost little to operate and reap big returns. With the Internet, carriers saw an opportunity to provide high-speed connections to devices beyond the telephone — not just tablets and smartphones, but even cars, dishwashers and toys.
Wireless carriers have seen revenue from Internet data increase five-fold to $46.8 billion in the past five years. Alcatel-Lucent, a network equipment provider, projects data consumption to increase 30-fold in the next five years.
The AT&T offer to buy T-Mobile for $39 billion, announced Sunday, is in part an effort to capitalize on the data explosion and to compete with industry leader Verizon Wireless. AT&T has said that adding T-Mobile will bolster its high-speed Internet network to better meet President Obama’s goal of expanding broadband access to all corners of the country. Analysts also say that T-Mobile would help AT&T alleviate network congestion, especially in cities, though critics complain that the merger would reduce competition for consumers.
The network is key, because carriers have had little success launching their own apps to attract users. Verizon’s VCast video player is meant to compete with Hulu and YouTube, but has not had nearly as much traffic. Sprint Nextel and T-Mobile have global-positioning apps that struggle to compete with Google Maps. All have talked about social-networking apps, plans that quickly faded with the rise of Facebook and Twitter.
And connecting all those gadgets to cellular networks has proven to be a challenge. Text messages and calls are tiny and cheap to carry compared with streaming a YouTube clip over a mobile phone. The iPhone showed carriers how vulnerable AT&T was to the flood of online traffic that hit the network all at once.
“The question is: how long will it be until this inefficiency is addressed?” Sanford C. Bernstein analysts Amelia Chan and Craig Moffett wrote in a recent report. “Just because there is demand doesn’t mean that consumers are willing to pay so much for a service that costs so little to the operator.”
Many users have caught on. Husun Artrell Davis, known as New York-based “DJ Treble,” hasn’t sent a BlackBerry message, known as a BBM, in months.
Instead, he’s joined most of his friends on LiveProfile, a free app that has amassed nearly 1 million users in three months. He says it’s easy to search for users and invite friends on the app, which he uses many times a day on his iPod Touch.
“It keeps me close to everyone who attends my events, and also helps me meet new people and promote to them,” Davis said. “I can’t do that by text.”
It was only a matter of time before free-messaging apps would hit smartphones, said LiveProfile creator Phil Karl, a 22-year-old recent college graduate. Like many young consumers, he’s become accustomed to getting things for free over the Web.
He stumbled on his business idea one day last year, when he looked at his computer in his dorm room at New York Technical University and realized how many free and cheap apps he was using for phone calls, faxing, e-mail, news and television.
“But what there wasn’t was much innovation around text-messaging,” Karl said. “That’s crazy because most people in my generation text instead of call.”
For now, however, users can’t replace cellphone services completely with Internet apps. About 80 percent of revenues for carriers come from voice and text. Customers have to buy monthly voice services, and sometimes text plans, with Internet data.
AT&T, Verizon Wireless and T-Mobile are all changing their billing plans to take advantage of the trend, moving away from unlimited data in favor of monthly caps on usage.