December 8, 2023

Data Networks Pose a Threat to Wireless Carriers

Wireless carriers now funnel voice and data traffic over two separate networks and charge customers accordingly. In the not-so-distant future, analysts and industry executives say, all mobile services, including text messages and voice and video calls, will travel over data networks.

Microsoft’s recent $8.5 billion deal to buy Skype, the Internet calling service, could accelerate this change — one that is forcing wireless carriers to adapt. Services like Skype can cut into the carriers’ revenues because they offer easy ways to make phone calls, videoconference and send messages free over the Internet, encroaching on the ways that phone companies have traditionally made money.

The telecommunications industry is already in a state of flux as more people disconnect their home telephone lines in favor of cellphones. Now the wireless carriers are looking for new ways to make money based on mobile broadband and applications, rather than voice minutes.

“Eventually, everything migrates to a data channel,” said Brian Higgins, an executive at Verizon Wireless who is developing products and services for the company’s high-speed 4G network. “We’re moving away from silos of communication to one where everything is combined together.”

Analysts tend to agree that Microsoft is not looking to steal business from the wireless carriers. Instead it hopes to revitalize itself by creating innovative software for smartphones and tablets, with Skype’s services built in. Microsoft will need companies like ATT and Verizon Wireless to put their confidence and marketing budgets behind those devices to appeal to consumers.

But the Skype deal also signifies a larger interest in next-generation communications services. It is not just Skype that the wireless companies need to worry about. A bevy of mobile messaging applications, including WhatsApp, Kik, GroupMe and textPlus, allow people to send messages over data networks, sidestepping the cost of sending and receiving standard text messages.

Carriers already must deal with many new competitors in the communications game. Name companies like Apple, Facebook and Google are making services available that traditionally only carriers could offer. Google, like Skype, offers ways to make free phone and video calls over the Internet. Apple lets iPhone owners make video calls.

The ultimate risk for the carriers, analysts say, is becoming “dumb pipes,” providing only the data connection and not selling any more sophisticated communications services themselves.

“Much of the value in communication now sits above basic connectivity,” said Charles S. Golvin, a telecom analyst with Forrester Research. “Things like IM, video calling like FaceTime, and Web conferencing. These are delivered to consumers by companies like Google, Apple and Cisco — not the carriers.”

Chetan Sharma, an independent telecommunications analyst, points to one instance in which the growing popularity of using mobile applications to communicate has hurt a wireless company.

Last month, KPN, a wireless carrier in the Netherlands, cut its profit forecast and reported a 10 percent decline in quarterly revenue from text messaging, which the company attributed to applications that give people free access to voice and text services if they have a data plan.

“It’s an early indicator that it could happen elsewhere,” Mr. Sharma said.

In the United States, no signs indicate that the volume of text messages sent or voice minutes used is in decline, he said. But revenue from voice services has dropped steadily as carriers have move toward unlimited calling plans to stay competitive with one another, lowering the average revenue that can be generated per minute of talk time.

In the United States, Mr. Sharma said, voice revenue has declined 7 percent over the last four years, while data revenue has soared 132 percent. Over all, data revenue now makes up 35 percent of the total revenue for the wireless industry.

Carriers have responded to the shift toward digital communication differently. Some seek to leverage the new wave of services to differentiate themselves and gain an edge over competitors. Sprint, for example, recently united with Google to let its customers link their Sprint phone numbers to Google Voice, a service that rings all of a person’s phones and even Gmail when someone calls that person’s number.

Others, like Verizon Wireless, say there is plenty of money to be made from their mobile data networks. They say demand for data services will drive sales and adoption of smartphones, which are more lucrative to wireless carriers because they require expensive data plans.

“There will be an increased appetite for devices that can access higher bandwidth, which I find very encouraging,” Mr. Higgins of Verizon said.

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