The Big Problem in Mobile
There's a problem in the mobile sector -- one that may very well threaten the lifeblood of the sector itself, one that has the potential to hinder it in unthinkable ways.
It's the wireless carriers themselves.
Fear and loathing
The current structure of the wireless industry is not conducive to innovation. In fact, it stifles it. If you put yourself in the shoes of the carriers themselves, though, you can quickly see why we are where we are.
From the perspective of a wireless carrier playing in a competitive landscape that's inherently an oligopoly, there are only so many dimensions in which to differentiate and compete, and by "so many" I mean "not many." Without differentiation, carriers get faced with service commoditization and end up competing on price alone, and we all know that only consumers benefit from a price war. And who wants that? Not carriers, that's for sure.
Otherwise they end up like the airline industry, where consumers have little to no brand loyalty and companies get plagued with high cost structures and have difficulty turning a consistent profit. Most flyers don't care which airline they fly, just so long as they get from point A to point B. The problem for carriers is that their service actually is a commodity for the most part. Do you actually care who serves up your data, so long as you get it?
Instead, they try to spin perceived network advantages. With 3G, AT&T (NYS: T) had the "fastest" while Verizon (NYS: VZ) had the "biggest." The same theme is beginning to play out with 4G LTE also. Instead, carriers have relied on device differentiation, which they don't even make. By acting as middlemen between OEMs and the actual users, they're able to exert tremendous amounts of control, stifling innovation.
The one and only
This is why carriers play exclusive devices so aggressively. Apple's (NAS: AAPL) iPhone did wonders for AT&T while it enjoyed exclusivity, which is why Ma Bell's marketing campaign for its exclusive Nokia (NYS: NOK) Lumia 900 topped even its iPhone marketing. Carriers use this to try and lock in customers as a point of differentiation.
Imagine the airlines pulling this move with their devices, the airplanes themselves. Think of seeing a commercial proclaiming, "The all new Boeing Dreamliner, only available on United Airlines!" Yeah, good luck with that.
Life or death
One smartphone-maker exec recently told The Verge: "Exclusivity is the bane of my existence. But it's the only way business gets done." Most OEMs that don't carry the same weight of Apple or Samsung have no choice or bargaining power. Sometimes they even live or die by carriers' choices, like when Verizon pulled out of exclusivity negotiations with Palm years ago in favor of its Droid campaign.
Palm was subsequently relegated to smaller Sprint Nextel (NYS: S) , flailed spectacularly, and was put out of its misery by Hewlett-Packard. Now HP is the one that's miserable. On its third-quarter 2010 conference call, Palm CEO Jon Rubinstein even said: "I agree with your premise that if we could have launched at Verizon earlier, prior to Droid, that we would have gotten the attention that the Droid got, and since I believe that we have a better product, I think we would have even done better."
Less is more
Ever wonder why smaller smartphones cost more (before subsidies) than larger tablets? For example, an iPhone 4S retails at $650, an iPad just $500. The Samsung Galaxy S III retails at $600, the 10.1-inch Samsung Galaxy Tab 2 just $400. The cost differential is far more than just the inclusion of a baseband modem. There are massive licensing and engineering costs related to wireless data technology, particularly for newer devices, plus you have to deal with the carriers.
This is why Amazon.com's Kindle Fire, Google's new Nexus 7, and even Microsoft's first batch of Surface tablets are Wi-Fi only -- to avoid carriers and keep costs down. They can sell directly to consumers.
Sadly, there's no solution in sight for consumers, and it's bound to get worse before it gets better. Wireless carriers' role in the value chain is becoming increasingly important amid the mobile shift to smartphones and tablets.
Carriers know this and are getting desperate to grow their collective power as their biggest cash cows are being threatened. Voice and antiquated SMS texting are on the decline, replaced simply by data. Voice will soon be digitized and transmitted as data, while SMS has always been just data to begin with that carries stupidly high margins. Verizon's new Share Everything plan forces subscribers into expensive unlimited voice and text plans that they don't need and pricey access fees for data.
With the billions upon billions in capital expenditures and miles of regulatory red tape required to enter the industry, there's absolutely no hope of seeing some small disruptive innovator come in and rescue consumers from the clutches of the incumbents.
Apple remains one of the few handset makers that has the bargaining posture to innovate, which is why it still has growth momentum. Sign up for The Motley Fool's brand-new premium research service all about Apple to read more. There is still one thing investors can count on from the wireless carriers: dividends. For more rock-solid dividend stocks, grab yourself a copy of this 100% free report.
At the time this article was published Fool contributor Evan Niu owns shares of Verizon Communications, Apple, Amazon.com, and AT&T, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Microsoft, Amazon.com, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, Apple, and Microsoft and creating bull call spread positions in Apple and Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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