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Cutting the cord
Many phone users are abandoning landlines and going wireless. Here's how it could affect telecoms.
March 1, 2004: 4:46 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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SAN FRANCISCO (CNN/Money) - Are you a cord cutter? If not, you probably know someone who is. My 25-year-old brother is one. Chances are, if you don't already know someone who has abandoned his or her telephone landline and gone all-cellular, you will very soon.

In a study released last week, InStat/MDR projects that the percentage of telephone users in the United States who have abandoned their landlines for wireless phones will increase from roughly 5 percent today to 29 percent by 2008.

This migration, if InStat's numbers are to be believed, will have a huge effect on the telecommunications industry as a whole, but will benefit some companies more than others. Let's take a look at who will win and who will lose as more people cut their cords.

Is it a realistic number?

First, however, I should mention that InStat's study has spurred some controversy. Some analysts have called the survey's 29 percent projection "aggressive" and "ridiculous." And while the number does seem a little high, I don't think it's unrealistic.

"This fits right in line with our thesis," says Jim Breen, a vice president at Thomas Weisel Partners in Boston.

According to Clint Wheelock, an analyst with InStat who oversaw the study, three key factors are pushing the cord-cutting trend. First is an overall higher demand for mobility among consumers. Second, most companies with wireless divisions, such as Verizon (VZ: Research, Estimates) and Sprint (PCS: Research, Estimates), have made big capital investments in their infrastructure, improving their nationwide coverage. Third is the continued reduction in retail pricing for wireless plans.

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Wheelock says that when wireless companies can get their cost structure down from the current 3 to 3.5 cents per minute to the 2 cents per minute range, they should be able to offer "all you can eat" pricing similar to that offered for landlines.

Breen suggests a fourth motivation that's coming around the bend: wireless broadband. When companies such as Verizon roll out their cellular broadband networks nationwide, people will no longer need landlines for DSL; they'll be able to get broadband speeds using the existing cellular networks.

The telecom reaction

This cord-cutting migration presents a quandary to many phone service providers, such as Verizon and SBC (SBC: Research, Estimates), that have both landline and wireless phone operations.

"It's kind of like stealing from yourself," says a Verizon spokesperson. Right now, profit margins on landline business are higher than those on wireless, primarily because the landline infrastructure is already in place.

"Some of the copper lines haven't been touched in decades," says Scott Ellison, an analyst with IDC. Most observers I spoke with thought that the net effect of cord cutters for these companies could be a wash, provided that customers don't switch to a competitor's network when they go all-wireless.

Other cellular providers, such as T-Mobile and Nextel (NXTL: Research, Estimates) -- and to some extent Sprint -- aren't encumbered by landline operations, and have been making infrastructure improvements and offering price incentives perhaps in part to lure the cord cutters.

These companies could see significant subscriber gains, Breen says. While there have yet to be ad campaigns aimed at cord cutters, you're more likely to see them from a T-Mobile or Nextel than you are from a Verizon, "because they're not cannibalizing themselves," Ellison says.

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The final group of companies affected by this trend consists of handset makers such as Nokia (NOK: Research, Estimates) and Ericsson (ERICY: Research, Estimates), which will probably benefit tremendously from the cord cutters. That's because consumers who opt to go all-cellular will likely want to upgrade their phones to models with longer battery life, better signal reception, or more Internet capabilities.

"If it's going to be the main phone," Breen says, "people are going to want all the bells and whistles."


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.