Penny Stock Columns on the OTCBB

Changes in the Telecom Biz and the Disposable Phone

04-11-2008

by Dan Blacharski

Last week I talked about the CTIA conference and the results of the recent FCC spectrum auction, which is destined to make some very big and lasting changes to the telecommunications industry. Besides giving bigger footprints to Verizon and AT&T, the auction brought in some small-timers as well, giving these businesses a leg up in this highly competitive business. But the most important change came from a company that didn’t win a single bid—Google, Inc.

Google entered the auction with the express stated purpose of bidding on the “C” block of spectrum, and had pledged to offer the FCC’s minimum starting bid of $4.6 billion. That’s a lot of money for a company that’s not in the phone business, but the bid was largely a tactical move on Google’s part, to influence the industry. Google didn’t really even want the spectrum, and had it won the auction, would have probably leased it out or resold it. What they did want, was to make sure that the spectrum got sold to someone, and that the minimum bid would be reached.

The reason is that Google had brokered a deal to promise the $4.6 billion minimum, in exchange for a few conditions—and remarkably, the FCC granted at least some of those conditions. Those conditions stated that the winning bidder of the spectrum would be required to allow all third-party applications and hardware handsets to function over services using the spectrum.

That’s a big departure from the US-based telecom industry, which has favored locked phones and proprietary applications (noteworthy example, the iPhone). The deal doesn’t open up the cell phone business across the board, but it does open it up for that one particular piece of business, and it’s a foot in the door. The significance of the new openness is that Google is now free to push its own Android reference model for handsets, and its own ad-supported mobile applications on more cell phones than would otherwise be possible. Long-term, this is going to create some competitive pressure across the industry to open up service to all handsets and applications, so that customers in the US won’t be limited to locked cell phones on offer just from their providers.

This is of course, a double-edged sword. Openness is consumer-friendly. Millions of iPhone users for example, would love to be able to use another service other than AT&T, but cannot. On the other hand, the practice of offering low-cost, subsidized phones in exchange for a service contract may well come to an end. In the States, we tend not to notice that, and I have always used my $15 Motorola. Here in Bangkok however, it’s market prices, with no subsidy—and I paid more than twice that for the same phone.

The Pink Sheets-traded handset manufacturer Hop-On (HPNN) mentioned in my last week’s post bears revisiting in consideration of Google’s action and the inevitable opening up of the industry. Hop-On announced yesterday that they’re selling a low-end GSM phone with no LCD screen, both in the US and Europe. Retailing for $20 in the US and GBP10 in England, the no-frills phone—billed as a “disposable phone”—doesn’t include all the flashy tools that we all know and love. There’s no camera, no web browser, and no PIM utilities—it just makes phone calls. But, what’s important about their phone is that it is going to fit in very well into the new model I see coming down the road. Unlocking phones by the industry will lead to price wars between handset carriers, and there will be a renewed demand for a cheap, basic phone, and I look for Hop-On to cash in on this demand.

The writer does not own shares in the above stocks.

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