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Cellular's data fixation
The phrase of the day is "data traffic." But if customers want adult content, can companies deliver?
October 27, 2004: 3:28 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - Is the wireless phone industry down to its final strike? That's a viable, if loaded, question to ask the industry, which is in San Francisco this week for the big conference of the Cellular Telecommunications and Internet Association.

The industry has swung twice -- on voice and handset sales -- but has not connected with the two business models. It believed it was impervious to the inexorable march toward free that its older landline siblings were experiencing. The last couple of years have shown that's not the case.

"The average revenue per user [ARPU] of voice is going way down," says Becky Diercks, an analyst with In-Stat/MDR.

And the rosy projections for healthy revenues from handset sales have been met with the reality that customers have been trained to expect those handsets for free -- or at a steep discount.

Data services

The industry is now keen for a fastball over the middle to fuel its sustenance and growth. That would be data services.

"Right now the industry is all about data traffic," says Albert Lin, an analyst with American Technology Research. Data traffic is driving much of the growth in the industry these days, with In-Stat/MDR predicting that the total number of data subscribers in the United States will double from roughly 35 million today to more than 73 million by 2007.

Lin called me from the CTIA conference (on his cell phone, prompted by an e-mail delivered via his BlackBerry), where he said everyone was talking about how to continue the growth in data traffic over the network. "Were it not for data services, most carriers would be reporting negative ARPU."

Among the major carriers, Nextel is seeing the smallest growth in data traffic -- and that's a 50 percent jump year over year.

Sprint, which has the largest installed base, is the early leader in data usage with 150 percent year-over-year growth. Its wireless unit contributes more than half of the company's total annual revenue of $24 billion.

Lin says data traffic makes up $1 billion of that total. The major carriers are succeeding in the nascent U.S. market for data services, Lin says, but the success isn't particularly sweet. "They're doing great, but they have to because the voice business and handset subsidization market is terrible."

So right now the industry is casting about for surefire data traffic generators.

One of the big developments coming out of the CTIA conference is the advent of television-quality video over cell phones.

Texas Instruments recently unveiled a new chipset that makes such viewing more affordable, and some wireless carriers have seen success in their early efforts to promote video viewing. Sprint announced it had 150,000 subscribers to its television service, which costs an additional $10 per month.

A radical idea

Here's a radical idea: If these video services take off, the industry may want to consider offering adult content, according to a new report by the Yankee Group.

The study predicts that by 2008, wireless adult content will be a $1 billion market. And if technology history has any constants, one is that porn always jump-starts a new technology. It did it for the VCR, it did it for pay-per-view, and it did it for video over the Internet.

"Adult content has never hurt the growth of any industry from a revenue or profit standpoint," says Adam Zawel, a Yankee Group analyst. "But right now the U.S. carriers don't know what to do with it. They don't know what balance to strike between protection and opportunity."

Of course, adult content is the third rail of any publicly traded company. Although it's an open secret that companies such as Comcast and various hotel chains derive a sizable amount of their revenue from providing adult content, you don't see that broken out in quarterly reports.

But the wireless industry needn't call attention to its adult content offerings. Instead, it can replicate a savvy ad that Vodafone UK recently completed, which promotes its new child protection mechanism for mobile phones that prevents underage users from accessing adult content but allows adults to order it.

That innovation aside, Sprint, with its rapid data services growth and willingness to offer envelope-pushing content, is the cellular company for investors to watch. Sprint is quick to spot a trend and to align itself with strong partners, as we saw when it was the first to offer the Treo 600. (It is also the first to offer PalmOne's new Treo 650 device.)

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It continues to pay off debt and reduce its interest expenses, which helped it to generate strong free cash flow of $439 million last quarter. First Global, which recommends the stock, notes that Sprint's competitors, BellSouth, SBC, and Verizon, derive much less of their revenue from wireless.

But potential investors should be aware of two things. First, Sprint is very expensive right now, trading near its 52-week high, after a recent upgrade by Banc of America Securities.

Second, a bet on Sprint means you're long on the wireless carrier sector, and data services in particular. It's clear that data is the growth engine for this company. If you're bullish on that sector's prospects and can stomach the price, Sprint looks pretty good these days.


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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.