Are mobile operators getting short shrift in the age of booming tech stocks? The markets tend to treat the big carriers as value investments—like giant utilities that reliably bring in beaucoup revenue and are in turn expected to fork over big dividend checks. Contrast that to the companies at the other ends of the wireless connections: Google (s GOOG) and Apple (s AAPL) and anyone with an office park in Silicon Valley. They’re expected to be on the forefront of innovation, shoveling their profits back into R&D to develop that next big application or device.
But operators are on the battle lines of cutting-edge innovation alongside their Valley counterparts. They may seem slow and ungainly to most, but they’re the ones deploying LTE and high-speed packet access (HSPA) networks so critical to the mobile data revolution. Yet Verizon (s VZ) and AT&T (s T) are among the more boring stocks of the NYSE, while Google and Apples’ NASDAQ prices pivot crazily.
All hail the smart pipe
Tellabs (s TLAB), however, thinks there’s a way for operators to make the leap from value companies to growth juggernauts and thus enjoy the big stock gains, high price per earnings ratios and low – often non-existent – dividends of their ‘high-tech’ counterparts. Tellabs has commissioned another one of its big market studies telling operators their business (The last one, on the rapid trend toward mobile data unprofitability, attracted quite a bit of controversy), this time from STL Partners.
You can read the full report here, but what the argument boils down to is operators need to abandon the dumb pipe path they’re careening down and build “smart pipes.” Apple and Google may control the devices and application servers at either end of the network, report author Chris Barraclough concludes, but there’s plenty of ways operators can jazz up the data flowing between them. Here’s an excerpt:
“The hypothesis behind this piece of research is that endpoints cannot completely control the network. STL Partners believes that the network itself needs to retain intelligence so it can interpret the information it is transporting between the endpoints. Mobile network operators, quite rightly, will not be able to control how the network is used but must retain the ability within the network to facilitate a better experience for the endpoints.”
What’s a little traffic shaping among friends?
Tellabs and Barraclough propose several ways of doing this, which naturally include many technologies that Tellabs sells: better transport efficiencies such as network sharing and Wi-Fi offload, shaping traffic to prioritize different types of applications based on their use of network resources, and taking advantage of operators’ vast databases of customer information to get some skin in the m-commerce game. The report also recommends that operators abandon per-MB charging models for methods that spread the bill around to over-the-top content providers, advertisers and applications providers, as well as their end customers.
The report’s logic follows that these smart networks will boost return on network investment by as much as 7.5 percent, which STL says is double what the typical operator normally sees. Those increased earnings would subsequently elevate share prices, relieving pressure on operators to return value to shareholders in the form of dividends. Free to invest those earnings back into the company, the cycle will reinforce itself, turning these operators from mere wireless utilities into high-tech wunderkinder.
The fine print
Of course, there are several obstacles that prevent operators from doing just what Tellabs and STL recommend. In fact, the operators would be doing all of these things right now but for the firestorm of protest that would ensue from their customers, public advocacy groups, regulators, and Congress – not to mention the aforementioned Valley companies seeking to protect their own turf.
Start using customer data to ‘optimize’ services and big privacy flags go up. Start discriminating against different bits of data – even if it means getting better video while your email arrives a few seconds later – and operators risk running afoul of emerging, yet still politically contentious, net neutrality rules (though the FCC does seem willing to give mobile operators a pass in its proposed regulations). Plus, the Internet and content companies are perfectly happy with the arrangement they have today: They ride wireless airwaves for free, letting the carriers pass the cost along to their customers.
Also, it might be a bit of a stretch for Tellabs to infer that its customers can boost their stock prices if they would just buy more of its backhaul, mobile offload and policy management gear. But as other Tellabs reports have in the past, this one cooks up some meaty food for thought. Ultimately how their investors, customers and partners view operators’ role in the mobile Internet age will depend on how much and how well they vest themselves in the content and services they’re delivering. They may be spending billions on new networks, but if they become pipes, people will look at mobile broadband access as a commodity, the same way they look at the electricity that powers their gadgets.