Cord Cutting for Smartphones: How to Pay $0 for Service

By Markets Fool.com

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Cutting your cell phone bill to $0 sounds great, but it does have drawbacks. Source: Flickr user: TaxRebate.org.uk

If you've been following the greater pay-TV industry over the last few years, you are probably familiar with the term "cord-cutting." Essentially, this is the growing percentage of households choosing to forgo cable and satellite pay-TV packages for streaming-based Internet services like Amazon.com's Prime and Netflix. Once considered a joke, cord cutting has grown in scale enough for major networks and pay-TV companies to provide tailored solutions to this segment.

A major reason for the growth of streaming-based services is the rise of mobile devices that effectively function as second screens. This shift has enriched Apple shareholders while former television producing giants, like Sony, have struggled as their business has become commoditized from low-cost manufacturers and these mobile substitutes. Pay-TV companies have been mostly able to shield investors from the cord-cutting trend, still in the initial phases, by raising prices on existing subscribers and by more effectively monetizing the Internet.

For telecoms like AT&T and Verizon -- whose wireless-delivery business model is similar to pay-TV operators -- the cellular business has been particularly lucrative as mobile devices steal eyeballs away from pay TV. After initially trying to monetize talk and text by volume, the companies have recently taken to data to make money. For investors, any sign this model is threatened, much like pay-TV operators, should be watched closely. And a recent article in The Wall Street Journal outlines a small, but growing trend: cord cutting for wireless plans.

Do you really need a wireless carrier?
An article from writer Ryan Knutson (subscription required), asks that question: Do you really need your cell phone carrier? The article chronicles Knutson's experience using his iPhone without a carrier, essentially living off of Wi-Fi connections for calls, text, and Internet browsing. At the end, Knutson found it "doable," although I feel his story points to more difficulties than his initial assertion.

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Specifically, he references leaning on friends that were on a network, planning routes before leaving because directions may not be available, and skipping a basketball game because the gym did not have Wi-Fi and he was expecting an email. But overall, he has a point: According to Motorola Mobility's president Rick Osterhloh, "The percentage of time that a phone is in Wi-Fi coverage is very high."

In a world that's increasingly being saturated with Wi-Fi, it will only become easier to use your phone's Wi-Fi connection going forward. And you can't beat the cell phone bill for a Wi-Fi-only connection: $0.

Good timing for AT&T and bad for Verizon
In the event Wi-Fi only cell-phone users catches on, this would be bad news for the entire industry -- after all, a falling tide lowers all boats. But perhaps no wireless provider would have more to lose than Verizon Wireless. Not only has the company invested billions to build out its legendary network -- that it charges the highest service costs for -- but it paid $130 billion in 2013 to buy its full wireless business from Vodafone.

Subsequently, the company has experienced stronger-than-anticipated competition from T-Mobile and a resurgent Sprint; last quarter the company blamed competition for wireless margin compression. In the end, it may have bought its wireless business at the worst time under the most favorable assumptions -- especially if the Wi-Fi trend catches on.

Meanwhile, second-largest provider, AT&T, is also facing many of these same issues with competition but has opened up an entirely new market: Mexico. As a part of President Nieto's reforms to break up American Movil's virtual wireless monopoly, AT&T bought Mexican carrier Iusacell and its 9.2 million subscribers for $2.5 billion. Wi-Fi isn't as available in Mexico so that network will be an asset.

In the end, however, this is a small trend but should be watched by wireless investors -- last time I checked, it's hard to beat free. Per the Journal, Jonathan Chaplin at New Street Research estimates Wi-Fi mobile services by cable companies could steal roughly $68 billion in equity value from U.S. wireless carriers within five years of launch. Ironically, cable companies could mitigate the threat of wireless devices by encouraging users to drop the wireless provider.

The article Cord Cutting for Smartphones: How to Pay $0 for Service originally appeared on Fool.com.

Jamal Carnette owns shares of AT&T, Sprint, and Verizon Communications. The Motley Fool recommends Amazon.com and Verizon Communications. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.