Without dramatic changes in wireless pricing and more careful usage, owning a smartphone will cost an average of $119 a month per phone by the year 2019.

Ever since the largest players in the wireless industry decided to monetize wireless data usage by ending unlimited use data plans, the average monthly phone bills of smartphone users have been on the increase. In 2013, the average cell phone bill was $76 a month, according to Bureau of Labor statistics. That’s up 50% from the $51 a month customers paid in 2007, the first year the iconic Apple iPhone was offered for sale.

Although wireless companies claim their current 4G (largely LTE) networks are robust enough to sustain the growing demand for wireless data until more spectrum becomes available, the transition to next generation 5G technology will dramatically increase the efficiency of wireless data transmission, delivering up to 40 times the speed of existing 4G networks. But if providers are not willing to slash prices on 5G data plans, average usage and customers’ phone bills are likely to soar to new all-time highs, costing a family of four smartphone owners an average of $476 a month.

A study by Wafa Elmannai and Khaled Elleithy at the Department of Computer Science and Engineering at the University of Bridgeport found wireless carriers have given up on monetizing voice and texting services, including unlimited minutes and text messages as part of most basic service plans. The real money is made from wireless data plans which traditionally cost customers between $10.79-16.72 per gigabyte, depending on the carrier and whatever fees, surcharges and required add-ons are necessary to get the service.

Wireless carriers defend their pricing, claiming they have cut prices on certain data plans while granting some customers extra gigabytes of usage at no extra cost. Some evidence shows that carriers have indeed reduced the asking price of delivering a megabyte of data by 50 percent annually. But their costs to deliver that data have dropped even faster, particularly as networks shift traffic away from older 3G networks to 4G technology, which is vastly more efficient than its predecessor.

The end of unlimited data plans by AT&T and Verizon Wireless was key to shifting the industry towards monetizing data usage. The more a customer consumes, the more revenue a carrier earns. But as web pages and applications become more complex and bandwidth intensive, customers will naturally consume more and more data each month, forcing regular usage plan upgrades to avoid confronting overlimit fees. Unless providers pass along more of their savings on traffic costs to consumers, bills will rise.

At current usage estimates from Cisco, the average customer will consume at least 57% more wireless data by 2019 than they do today. To sustain that usage, wireless providers are bidding for additional spectrum rights and are working towards upgrading to next generation 5G technology. But some carriers, including AT&T and Verizon, are also investing in new applications for their networks that include in-car telematics, home security and automation, and online video. Using some of these technologies guarantees an even greater amount of data usage, particularly for online video. Unless customers are careful about their usage and avoid high-bandwidth applications, they are in for a much bigger bill in the future, much to the delight of wireless providers.

While most analysts expect wireless companies will choose to give customers a larger data allowance instead of resorting to fire sale pricing, Elmannai and Elleithy expect that will not be enough to keep cell phone bills stable.

“We will need to reduce the bit rate to (1/1000th) of today’s level in order to receive x1000 of data capacity [at the] same cost [we see today],” the authors conclude. That would mean a low end 1GB data plan on a 4G network would cost just $0.03. Larger allowance plans would cost less than one cent per gigabyte.

The authors of the study expect carriers to price 5G data plans more or less the same as 4G plans, but will probably boost usage allowances to deliver a perception of greater value. But as web applications continue to gravitate towards higher data usage, bills will continue to rise, assuring providers of growing returns even with modest to moderate levels of competition.

At the moment, despite some evidence of price competition, some carriers are still raising prices. Verizon increased the price of its 10GB plan by $20 to $100 a month and T-Mobile raised the price of its unlimited data plan by $10 a month last year.

Out: Hesse

Sprint CEO Dan Hesse has left the building. He won’t be the last.

Hesse was appointed to lead Sprint in December 2007 after the catastrophic mess created when Sprint and Nextel merged. Now he’s gone because of his catastrophic failure to convince regulators a merger with T-Mobile USA made sense.

Brightstar Corporation CEO Marcelo Claure, appointed to Sprint’s board of directors by Softbank Mobile CEO Masayoshi Son earlier this year, is now in charge, and his commitment to save Sprint isn’t much different from what Hesse promised almost seven years earlier.

“The strategy is simple,” Mr. Claure said in an interview Monday. “We have to get back in the game.”

On a company-wide town hall call on Thursday, Claure outlined his three priorities: cut prices, improve the network, and decrease operational costs. Priority number one, price reductions, which have already started.

In: Claure

Claure blasted Sprint’s current pricing models, which he admitted were out of line considering how bad Sprint’s network is these days. He also trashed Sprint’s upgrade efforts, calling the “rip and replace” method of upgrading individual cell sites too slow, admitted social media networks were loaded with negative comments about Sprint’s performance, and that absolutely nobody understood the company’s most recent marketing attempt – a talking hamster selling Sprint’s Framily plan.

“We’re going to change our plans to make sure they are simple and attractive and make sure every customer in America thinks twice about signing up to a competitor,” he said. “When you have a great network, you don’t have to compete on price. When your network is behind, unfortunately you have to compete on value and price.”

Sprint’s network isn’t just behind, it’s downright prehistoric in places. Its 3G network borders on unusable in large cities, WiMAX is on life support, and Sprint’s 4G LTE network expansion is taking so long, by the time it is finished, LTE might be considered passé.  Hesse had avoided a more aggressive timetable to protect Sprint’s share price from the precipitous drop that would come from an upgrade spending spree.

Those days are over.

Claure warned the changes for Sprint would not just include price cuts and upgrades. It will also mean major job cuts, although Claure would not specify exactly how many Sprint employees were headed for the unemployment office. Unlimited data may also be headed for the door – Claure would not commit to retaining the unlimited use wireless data plans Sprint has been known for under Hesse’s leadership. Kansas City officials are also worried Sprint’s new executive team wants to move the company headquarters west, likely to California.

Masayoshi Son and Claure both agree that U.S. regulators were no fans of Sprint either — sending clear and unambiguous warnings that continued efforts to merge Sprint with T-Mobile USA were futile. So a proposed merger between the two companies is off. T-Mobile USA CEO John Legere wasted no time piling on, advising Sprint customers in tweets to #SprintLikeHell to another wireless carrier (preferably his).

Some predictable grumbling from Wall Street has also been heard over Claure’s plans to disrupt the comfortable profits earned by American wireless companies.

“Expect capital spending to rise,” says analyst firm Moffett Nathanson in a research note. “They will also have to cut their service prices, which are simply are too high relative to competitors.”

With a dramatic cut in prices, Sprint’s financials will look “ugly” in the coming quarters.

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Sprint ended talks to acquire T-Mobile US a person with knowledge of the matter said, as regulatory concerns outweighed the potential benefits of combining the third- and fourth-largest U.S. wireless carries. Bloomberg’s Alex Sherman reports on “Market Makers.” (4:07)

[flv]http://www.phillipdampier.com/video/Bloomberg Sprint Faces Tough Road Running Business 8-6-14.flv[/flv]

Craig Moffett, founder of MoffettNathanson LLC, talks about reports of Sprint Corp.’s decision to end talks to acquire T-Mobile US Inc. due to regulatory concerns. Moffett speaks with Tom Keene and Brendan Greeley on Bloomberg Television’s “Surveillance.” (3:25)

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Dish Network Chairman Charlie Ergen said Sprint’s decision to drop its bid for T-Mobile US has opened up more options for his satellite-TV carrier as it looks for ways to expand into the wireless business. Alex Sherman reports on “In The Loop.” (4:01)

[flv]http://www.phillipdampier.com/video/Bloomberg Sprint CEO Right Man for Right Company 8-11-14.flv[/flv]

Patterson Advisory Group Chairman and CEO Jim Patterson and Bloomberg Intelligence Telecom Analyst John Butler discuss challenges facing Sprint’s new CEO Marcelo Claure. Patterson and Butler speak on “In The Loop.” (5:47)

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Bill Ho, principal analyst at 556 Ventures, and Bloomberg Intelligence’s John Butler discuss expectations for Sprint’s new Chief Executive Officer Marcello Claure and look at the challenges he faces as the head of the nation’s number three wireless company. They speak on “Market Makers.” (6:56)

The New York Times recommends the Justice Department and Federal Communications Commission reject Comcast’s $45 billion purchase of Time Warner Cable, if only because the combined company will have an unregulated choke-hold on telecommunications services not seen since the days of the regulated AT&T/Bell monopoly.

In an editorial published Sunday, the newspaper called out many of the “merger benefit”-talking points claimed by the two cable giants as specious at best, hinting some even bordered on misleading:

By buying Time Warner Cable, Comcast would become a gatekeeper over what consumers watch, read and listen to. The company would have more power to compel Internet content companies like Netflix and Google, which owns YouTube, to pay Comcast for better access to its broadband network. Netflix, a dominant player in video streaming, has already signed such an agreement with the company. This could put start-ups and smaller companies without deep pockets at a competitive disadvantage.

There are also worries that a bigger Comcast would have more power to refuse to carry channels that compete with programming owned by NBC Universal, which it owns. Comcast executives say that they would not favor content the company controls at the expense of other media businesses.

The company argues that this deal would not reduce choice because the company does not directly compete with Time Warner Cable anywhere. Comcast would face plenty of competition in high-speed Internet service, they say, from telephone and wireless companies.

The reality is far different. At the end of 2012, according to the FCC, 64 percent of American homes had only one or at most two choices for Internet service that most people would consider broadband. Wireless services can handle streaming video, but many customers of Verizon or AT&T would blow through their monthly wireless data plan by streaming just one two-hour high-definition movie, at which point they would have to fork over extra fees.

Comcast executives argue that companies like Sprint are planning to provide very fast Internet service that will compete with wired broadband. But wireless companies have been working on such services for more than a decade with little success.

Those wireless services that do exist uniformly impose low usage caps and cost considerably more than traditional wired broadband plans, especially when considering the cost compared to the actual speed delivered to consumers.

The Times doesn’t believe imposing a litany of conditions in return for approving the deal, similar to those involving Comcast’s purchase of NBCUniversal, would be sufficient to protect consumers from monopoly abuse.

“This merger would fundamentally change the structure of this important industry and give one company too much control over what information, shows, movies and sports Americans can access on TVs and the Internet,” concluded the newspaper. “Federal regulators should challenge this deal.”

Phillip “Another year, another AT&T deregulation measure” Dampier

It’s back.

It seems that nearly every year, AT&T and its well-compensated fan base of state legislators trot out the same old deregulation proposals that would end oversight of basic telephone service and allow AT&T (and other phone companies in Kentucky) to pull the plug on landline service wherever they feel it is no longer profitable to deliver.

This year, it’s Senate Bill 99, introduced once again by Sen. Paul “AT&T Knows Best” Hornback (R-Shelbyville). Back in 2012, Hornback disclosed AT&T largely authors these deregulation measures and he introduces them on AT&T’s behalf. In fact, he’s proud to admit it, telling the press nobody knows better than AT&T what the company needs the legislature to do for it.

“You work with the authorities in any industry to figure out what they need to move that industry forward,” Hornback said. “It’s no conflict.”

While Hornback moves AT&T forward, “his” bill will move rural Kentucky’s best chances for broadband backwards.

AT&T always pulls out all the stops when lobbying for its deregulation bills. In Kentucky, AT&T has more than 30 legislative lobbyists, including a former PSC vice chairwoman and past chairs of the state Democratic and Republican parties working on their behalf. It has spent over $100,000 in state political donations since 2007.

The chief provisions of the bill would:

• End almost all oversight of telephone service by the Public Service Commission anywhere there are more than 15,000 people living within a telephone exchange’s service area;
• Give Kentucky phone companies the right to disconnect urban/suburban basic landline phone service and replace it with either wireless or Voice over IP service;
• Allow rural customers to keep landline service for now, but also permits AT&T and other companies to effectively stop investing in their rural wired networks.

This year, AT&T apparently conceded it was just too tough to convince the legislature to let them disconnect hundreds of thousands of rural Kentucky phone customers at the company’s pleasure, so this time they have permitted rural wired service to continue, with some exceptions that make life easier for AT&T.

First, the end of oversight of telephone service means customers in larger communities in Kentucky will have no recourse if their phone service doesn’t work, is billed incorrectly, is disconnected during a billing dispute, or never installed at all. The PSC has traditionally served as a last resort for customers who do not get satisfaction dealing with the local phone company directly. PSC intervention is taken very seriously by most phone companies, but the state agency will be rendered almost toothless under this bill.

Second, although existing rural phone customers would be able to keep their basic landline service (for now) under this measure, nothing prevents AT&T from marketing alternative wireless phone service to customers experiencing problems with their existing service. Verizon has attempted that in portions of upstate New York, where telephone network deterioration has led to increased complaints. In some cases, Verizon has suggested customers switch to wireless service instead of waiting for phone line repairs which may or may not solve the problem. New rural customers face the possibility of only being offered wireless or alternative phone services.

Third, provisions in the bill give AT&T and other companies wide latitude to offer wireless or Voice over IP alternatives to landline service with little recourse for customers who only later discover these alternatives don’t support faxes, medical or security alarm monitoring, dial-up Internet, credit card processing, etc.

Fourth, the bill eliminates any requirement imposed upon broadband service in existence as of July 15, 2004. In fact, the measure specifically defines both phone and broadband service as “market-based and not subject to state administrative regulation.” That basically means service will be unregulated.

AT&T’s wireless home phone replacement

Here are some real world examples of where S.B. 99 could trip up consumers:

1. An elderly Louisville couple living the summer months in Louisville discover their phone service has been switched to the U-verse platform over the winter as AT&T seeks to decommission its deteriorating landline network in the neighborhood. S.B. 99 offers customers a 30-day opt out provision upon first notification, allowing a customer dissatisfied with the alternative service the right to switch back to their landline. But this couple was in Florida during the 30-day window, did not receive the notification to opt out in time to act, and are now stuck with U-verse. Unfortunately, the home medical monitoring equipment for his pacemaker does not work with Voice over IP phone service. This couple’s recourse: None.
2. A customer moves into a new home currently served by AT&T’s wireless home phone replacement service. The customer doesn’t like the sound quality of the service and wants a traditional landline instead. Her recourse: None.
3. A retired couple uninterested in broadband service or television from AT&T U-verse suddenly discovers AT&T wants to raise prices on landline phone service, but offers savings if the couple agrees to sign up for U-verse. Instead of paying a $25 monthly phone bill, the couple is now being asked, on a fixed income, to pay $100 a month for services they don’t want or need. Their recourse: They can appeal to keep their landline if they meet the aforementioned deadline, but they have no recourse if AT&T raises rates for basic phone service to make its discounted bundled service package seem more attractive.

Hood Harris, president of AT&T Kentucky, follows the same playback AT&T always uses when pushing these bills by framing its argument around landline telephone service regulation, which is an easy sell for cell phone-crazy customers who have not made a landline call in years:

Harris

Some of Kentucky’s laws that regulate our phones were written before cable television, cell phones, the Internet or email existed.

Because of these outdated laws, providers like AT&T must sink resources into outdated technology that could be invested in the modern broadband and wireless technology consumers want and need.

Every dollar invested in old technology is a dollar not being invested in speeding up the build out of new technology across the commonwealth.

It’s no longer the 19th century coming into your home over the old, voice-only phone network that was put in place under now-outdated laws. It’s the 21st century coming into your home over modern networks. While technology has changed dramatically for the better in just the past few years, our laws have not.

Despite what you may have heard, SB 99 will not remove landlines from rural homes or businesses.

Instead, this legislation puts those customers in charge of deciding which communications services they want and need. If you are a rural customer, for example, you may choose to join the nearly 40 percent of Kentuckians who already have moved on from landline home phones and gone only with a wireless phone, or you may choose a landline phone that’s provided over the Internet (known as Voice over Internet Protocol, or VoIP), or you may choose both a VoIP and a wireless service.

But you do not have to — you can keep your existing landline phone if you like. Under SB 99, the choice is yours.

It’s seems like a logical argument, until you read between the lines. Harris implies that those old-fashioned laws governing landlines you don’t have anymore are slowing down AT&T from bringing about a Broadband Renaissance for Kentucky. If AT&T only was freed from the responsibility of patching up its copper wire phone network, it could spend all of its time, money, and attention on improving cell phone service and bring broadband to everyone. Harris promises every resident will have a choice to get the service they want — wireless or wired — as long as you remember he is only talking about basic phone service, not broadband.

If your community isn’t highlighted on this map, AT&T has a wireless-only future in store for you.

Harris avoids disclosing AT&T’s true agenda. The company has freely admitted to shareholders it wants to scrap its rural wired network, now considered too costly to maintain for a diminishing number of customers. Unlike independent phone companies like Frontier, AT&T has been in no hurry to upgrade these rural customers for broadband service. AT&T has not even bothered to apply for federal broadband funding assistance to defray some of the costs of extending DSL to its rural customer base. With no possibility of buying broadband from AT&T, customers have little incentive to keep wired service if a cell phone will do. But decommissioning landline service in rural Kentucky guarantees these customers will probably never receive adequate broadband.

The “long-term cost reduction” AT&T mentions above is for them, not for you.

AT&T claims it will invest the savings in a wireless broadband network for rural customers, but as any smartphone owner will attest, AT&T’s wireless service is much more expensive than traditional phone service and its data plans are stingy and very expensive. Customers who can buy DSL from AT&T pay as little as $14.99 a month for up to 150GB of usage. A wireless data plan with AT&T for a home computer or notebook starts at $50 a month and only provides 5GB of usage before customers face a $10 per gigabyte overlimit fee. Which would you prefer: paying $14.99 for 150GB of usage with AT&T DSL or $1,500 for the same amount of usage on AT&T’s wireless network?

AT&T’s claims it will expand broadband as a result of not having to spend money on its landline network are specious. In fact, regardless of whether Kentucky passes S.B. 99 or not, AT&T has already embarked on its last known U-verse expansion. Project Velocity IP (VIP) devotes $6 billion to expanding U-verse to 57 million homes, reaching 75% of customer locations by the end of 2015. For the remaining 25% of customers, mostly in rural areas, AT&T’s plan isn’t to spend more money on improved wired service. Instead, it will build out its wireless network to serve the remaining customers with its LTE wireless broadband service — the same one that costs you $1,500 a month if you use 150GB.

Wireless is a cash cow for AT&T, so even saddled with its landline network, the company still spends the bulk of its investments on the wireless side of the business. Project VIP could have devoted all its resources to bringing U-verse to a larger customer base, but it won’t. AT&T sees much fatter profits spending $14 billion now to expand its wireless 4G LTE network and collect a lot more money later from its rural Kentucky customers.

Kentucky residents who don’t have U-verse in their area by the end of 2015 are probably never going to get the service, with or without S.B. 99. So why support a measure that delivers all the benefits to AT&T and leaves you sorting through the fine print just to keep the service you have now at a reasonable price. In every other state where AT&T has won deregulation, it raises the rates with no corresponding improvement in service.

Just how bad can AT&T’s wireless home phone replacement be? Just look at their disclaimers:

AT&T Wireless Home Phone is not compatible with home security systems, fax machines, medical alert and monitoring services, credit card machines, IP/PBX Phone systems, or dial-up Internet service. AT&T’s fine print on its website.

“AT&T’s wireless services are not equivalent to wireline Internet.” Wireless Customer Agreement, Section 4.1.

“WE DO NOT GUARANTEE YOU UNINTERRUPTED SERVICE OR COVERAGE. WE CANNOT ASSURE YOU THAT IF YOU PLACE A 911 CALL YOU WILL BE FOUND.” (All caps in original). Section 4.1.

AT&T’s investment in U-verse expansion is expected to peak this year as part of its “Project VIP” effort to bring the fiber to the neighborhood service to more areas and offer faster broadband speeds to current customers.

AT&T is spending $6 billion over three years to broaden the footprint of U-verse, which now earns AT&T 57% of its total consumer revenues. In 2013, AT&T earned $13 billion in revenue from U-verse, up 28%.

AT&T’s investment in U-verse is dwarfed by the company’s efforts to benefit shareholders. In the last quarter of 2013, AT&T realized $6.9 billion in profits on revenue of $33.2 billion. For 2013, AT&T repurchased 366 million shares of its own stock for around $13 billion and paid out another $10 billion in shareholder dividends. Together, the total return for shareholders for the year was $23 billion and in the last two years AT&T achieved a new record benefiting shareholders with $45 billion in returns. In contrast, AT&T will spend just $6 billion on the current round of U-verse upgrades, with those markets left out likely pushed to wireless-only service if the company succeeds in winning approval to decommission its rural landline network.

Most of AT&T’s revenue growth is coming from its wireless business, particularly wireless data. After AT&T eliminated its flat rate plans, monetizing data usage has become very profitable — $23 billion per year and growing at 17% annually. Because increasing wireless usage forces customers to upgrade to higher cost plans offering more generous usage allowances, AT&T’s average revenue per customer increased by 3.9% — the highest in the wireless industry and the 20th consecutive quarter of customers collectively paying higher cell phone bills.

“The next steps are to make our networks even more powerful and layer on services that will drive new growth in the years ahead,” said AT&T CEO Randall Stephenson.

AT&T is counting on even higher customer bills as the company moves forward on several revenue-enhancing initiatives:

1. Moving an increasing number of customers away from subsidized handsets. AT&T Next allows wireless customers to get a new handset every year, but in return AT&T no longer subsidizes equipment purchases. Instead, most Next customers finance their current phone and will finance their next one, assuring AT&T of a constant revenue stream for equipment. AT&T expects to gradually move away from phone subsidies altogether;
2. Data plans for cars are forthcoming, as auto manufacturers install wireless capability in new vehicles. Many are signing agreements with AT&T that will make it easy for current customers to add vehicles to their existing plan, but customers of other carriers may find signing up for a new plan prohibitively expensive;
3. Internet-connected home security systems are getting a major marketing push in 2014 with advertising blitzes and other promotions. The alarm systems are connected to and use AT&T’s wireless data network;
4. AT&T customers are being pushed to wireless data plans with much higher data allowances than they need, delivering extra profits for AT&T with no impact on its wireless network;
5. AT&T wants to begin selling “sponsored data” services to companies willing to foot the bill for accessing preferred websites. AT&T calls it “toll-free data” but Net Neutrality advocates complain it monetizes data usage and establishes a unlevel playing field where deep pocketed companies can help customers avoid AT&T’s usage meter while others have to contend with customers worried about their data allowance.

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AT&T explains its Next program, which lets customers upgrade to a new smartphone every 12 or 18 months. AT&T doesn’t tell you the plan is effectively a lease that benefits them by not having to pay a phone subsidy worth hundreds of dollars to discount a phone they will eventually refurbish and resell after you return it. AT&T Next, as intended, is an endless installment payment plan that never stops as long as you keep upgrading your phone. You also can’t leave AT&T until you pay your current phone off. (1:30)

A new way for AT&T to end phone subsidies.

Despite fierce competition from T-Mobile, AT&T so far has seen little impact from T-Mobile’s aggressive marketing. AT&T added 566,000 new contract customers in the last quarter and sold 1.2 million smartphones to its customer base. AT&T’s customer churn rate — the number of customers coming and going — remains very low despite T-Mobile’s latest offer to cover AT&T’s early termination fees to encourage customers to switch.

Stephenson says AT&T’s superior wireless 4G LTE network and its larger coverage area make customers think twice about taking their business to a smaller carrier.

In 2014, AT&T laid out these plans during its quarterly results conference call this week:

• U-verse will get an expanded TV Everywhere service allowing customers to view programming on smartphones and tablets inside their home and out;
• U-verse broadband speed enhancements should be available to at least two-thirds of customers, with speeds up to 45Mbps;
• LTE coverage expansion targets are expected to be ahead of schedule;
• AT&T will begin a “big effort” on network densification — adding overlapping cell towers and small cell technology in current coverage areas — to handle network congestion;
• AT&T will focus on improving its wired and wireless networks to prioritize video delivery;
• If approved by the government, AT&T will use its acquired Leap/Cricket brand for aggressive new no-contract plans marketed to customers with spotty credit without tainting or devaluing the AT&T brand;
• AT&T will use its agreements with GM, Ford, Nissan, Audi, BMW, and Tesla to offer AT&T wireless connectivity in new 2015 model year vehicles.

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Bloomberg notes AT&T’s latest financial results are ahead of analyst expectations. Despite competition from T-Mobile, AT&T’s customer defection rate is at a historic low. (2:03)