Mobile - the importance of data

Data Services Will Be Key To Mobile Carrier Growth

When telecom firms report second-quarter earnings this month, Wall Street will be looking to see growth in mobile data revenue.

Data services offer the best chance for carrier growth as other areas tail off. Fixed-line businesses for phone companies continue to shrink. Telecom firms are adding fewer broadband Internet customers.

Wireless subscriber growth has buoyed the industry in recent years, but even that growth engine is sputtering. Most people that can afford mobile phones already have them in developed countries, and in some emerging markets as well.

Revenue for providing mobile data services, however, has surged. Attracted by snazzy devices like Apple's iPhone, more wireless users are buying data plans to get Web access, e-mail, music downloads and more.

"The next step in growth is going to be driven by broadband (data) applications," said Henry Ellenbogen, manager of T. Rowe Price's media & telecommunications fund.

Worldwide, phone companies will add 383 million net cell phone users this year, down from 667 million last year, says Allen Nogee, analyst at research firm In-Stat. In the U.S., Citigroup estimates wireless firms added 3.5 million subscribers last quarter, down 27%.

But Goldman Sachs forecasts that U.S. wireless data revenue will jump 45% this year to $33.7 billion.

While text messaging still accounts for almost a third of data revenue, more growth is coming from Internet access, gaming, music downloads and video products, Goldman says. Also, regulators in Europe seek a sharp cut in text roaming charges, which could hurt messaging revenue for carriers like Vodafone and Telefonica.

Data revenue has been key for carriers. In the first quarter, data revenue at AT&T and Verizon Wireless, owned by Verizon Communications and Vodafone, soared. AT&T's data sales rose 57%. (Total sales rose just 6%.) Verizon's data sales climbed 49% to $2.34 billion.

AT&T is the exclusive U.S. provider of iPhone service. AT&T now gets 21.5% of wireless revenue from data products, up from 16% a year ago, UBS Research says.

Apple and AT&T rolled out a new 3G version of the iPhone on July 11. The device runs on AT&T's faster third-generation, or 3G, wireless network. AT&T is subsidizing the cost of the phone, but it has raised data rates by $10 a month, to $70.

AT&T and Apple have retooled their business relationship. Apple no longer gets a cut of AT&T's monthly revenue from iPhone subscribers, in return for the subsidy. AT&T says subsidizing the cost of iPhones could shave its earnings by 10 cents to 12 cents per share in 2008 and '09. Still, analysts say the iPhone should fuel AT&T's subscriber and data revenue growth.

Phone companies will strike many types of revenue-sharing deals with Apple, Google, content providers and phone makers, says Evan Miller, a London-based telecom fund manager at Gabelli Asset Management.

He says that by agreeing to run open networks that let consumers use phones and services of their choosing, wireless service providers will spur data usage.

"All these parties are in a big soup," he said. "In a very real sense they need each other. Ultimately they will craft complex working dynamics that allow them to live happily ever after."

Phone companies are in a strong bargaining position. They own the airwaves. "They aren't making any more radio spectrum," Miller said.

Ian Jamieson, a fund manager at BlackRock, says it's important for phone companies to share in mobile ad revenue. AT&T, Verizon and Sprint Nextel (NYSE:S - News) have mobile ad plans, but they've been delayed by privacy concerns about ads customized based on a person's location.

AT&T is testing mobile ads on the iPhone and other devices. "It's definitely something we're exploring," spokesman Fletcher Cook said.

The first iPhone has been sold in just a handful of countries, but Apple launched the iPhone 3G in 22 countries. It and other data devices will rise in developing countries as prices fall, Ellenbogen says.

"It's not going to be long before the iPhone and similar devices are $50 and sold all over emerging markets," he said. "That's going to be a tremendous (growth) driver."

In the U.S., a big chunk of wireless data revenue comes from laptop PC business users. Wireless firms garner almost 15% of data revenue from laptops, says Goldman.

In developing countries, telecom firms such as America Movil are focusing on 3G services to businesses and consumers with laptops.

"The growth in data and Internet is likely to be wireless-driven and it's a big opportunity for carriers," Ellenbogen said.

Peter Wilmshurst, a fund manager at Franklin Templeton Investments, agrees. "With devices like the iPhone and laptop cards, Internet access will increasingly be wireless," he said.