Clearwire-Fueled Freebie Services Threaten AT&T, Verizon

AT&T Inc. (T) and Verizon Wireless, working to wring more profit from their next-generation data networks, face a new obstacle: Smaller competitors are offering similar services for free.

FreedomPop, a company funded by Skype founder Niklas Zennstrom, will sell an iPhone case that gives consumers free access to 1 gigabyte of data from Clearwire Corp.’s 4G wireless network. Another Clearwire partner, United Online Inc. (UNTD)’s NetZero, is offering 200 megabytes a month for free for as long as 12 months -- so long as users buy a wireless modem, which can take the form of a small USB stick that plugs into the device.

The freebie approach lets new carriers hook bargain-hunting customers -- with the aim of getting them to pay for extra bandwidth later -- while helping Clearwire (CLWR) recoup some of the billions of dollars spent building its network. For Verizon and AT&T, the top U.S. wireless carriers, the move threatens the combined $12.2 billion they took in from data last quarter.

“FreedomPop could, over time, put pricing pressure on the incumbents,” said Kevin Smithen, an analyst at Macquarie Securities USA Inc. in New York. “They have the potential to be disruptive.”

The phone industry suffered through a similar shakeup in the last decade, when services such as Skype emerged. Founded in 2003, Skype offers free calling between personal computers -- a feature that forced phone companies to cut their long-distance and international calling rates. With 170 million connected users last year, Skype has become the world’s largest international long-distance service. In 2011, Microsoft Corp. (MSFT) acquired the company for $8.5 billion.

Photographer: Jetta Productions

The top U.S. wireless carriers are being challenged in the market of data service. Close

The top U.S. wireless carriers are being challenged in the market of data service.

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Photographer: Jetta Productions

The top U.S. wireless carriers are being challenged in the market of data service.

‘Revolutionizing Catalyst’

What Skype did for voice, Clearwire and partners want to do for data. The idea is to undercut the prices for the service plans that let smartphones and tablets surf the Web and download applications. For now, though, the effect won’t be as dramatic as with Skype, since Clearwire’s network only covers about 70 U.S. cities.

NetZero began a marketing campaign this month, including TV spots and online ads. It also will promote the service to the more than 70 million people who use other offerings from parent company United Online, an Internet service provider.

“Our goal is to be a revolutionizing catalyst to the market,” said Mark Goldston, chief executive officer of Woodland Hills, California-based United Online. “We think we have a pretty big appeal.”

Photographer: Aidan Crawley/Bloomberg

Niklas Zennstrom, co-founder of Skype Technologies SA. Close

Niklas Zennstrom, co-founder of Skype Technologies SA.

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Photographer: Aidan Crawley/Bloomberg

Niklas Zennstrom, co-founder of Skype Technologies SA.

Budget Consumers

He expects the service to attract budget-conscious consumers who use public Wi-Fi hot spots for Internet access, as well as the growing number of people with tablets, though those tablets, too, would need to hook up to a modem. After customers use up the free 200 megabytes, they would have to pay for data. Prices start at $9.95 a month for 500 megabytes.

FreedomPop, meanwhile, offers additional data for a penny a megabyte -- beyond the free 1 gigabyte. The company could attract 1 million subscribers in about two years, Smithen estimates. Tony Miller, a spokesman for Los Angeles-based FreedomPop, declined to discuss the company’s marketing plans.

Clearwire stands to benefit if either service catches on. FreedomPop probably pays Clearwire about $10 per gigabyte of capacity, Smithen said.

“It could be worth a couple of hundred million dollars a year, with high margins,” he said.

The Bellevue, Washington-based company could use the boost. Clearwire’s stock has fallen 93 percent since peaking in 2007. The company lost more than $2.5 billion over the past five years as it built out its network. Sprint Nextel Corp. (S) is currently its largest customer.

Price Hikes

The new services may attract users who are frustrated by rate increases at AT&T and other carriers. In January, AT&T raised the price of its data plans for new customers by $5 a month. Verizon announced plans for a $2 fee on some users in December, then backed away from the proposal after complaints from outraged customers. Verizon also stopped offering unlimited data plans to new users last year.

Carriers are coping with burgeoning data traffic, forcing them to be more vigilant about customers’ data usage, said Steve Clement, an analyst at Portland, Oregon-based Pacific Crest Securities LLC.

“The trends recently have been to increase prices to deal with scarcity,” he said. Without a viable competitive threat, prices will at least stay at current levels, if they don’t rise higher, he said.

Mark Siegel, a spokesman for Dallas-based AT&T, and Brenda Raney, a representative for Basking Ridge, New Jersey-based Verizon Wireless, declined to comment.

Wireless ‘Duopoly’

In recent years, the U.S. wireless market has turned into “a duopoly,” with AT&T and Verizon grabbing most new wireless subscribers, according to Craig Moffett, an analyst at Sanford C. Bernstein & Co. The two companies have generated 85 percent of the industry’s free cash, not including funds that were reinvested back into building out networks, he said.

Other companies are competing on price, even without going the freebie route. Republic Wireless, a division of Bandwidth.com Inc., offers unlimited voice, text and data for $19 a month. The company, which resells network capacity from Sprint, is rolling out a trial version of the service and filled up all the available spots in eight hours. The service doesn’t require users to sign up for a contract.

‘Freedom Model’

“Traditional telecom is all about control,” said Republic Wireless General Manager Brian Dally. “On the Internet, we are used to a freedom model. We stand for bringing those Internet values to telecom.”

Lower-priced wireless services are already putting the squeeze on existing carriers in other countries. In Canada, for instance, new entrants to the market have undercut data pricing by 83 percent, according to a report last year from Convergence Consulting Group. Convergence expects new carriers to have 4 million subscribers, or 12 percent of Canada’s wireless market, by the end of 2014. That’s up from 5 percent at the end of 2011.

Across the border, U.S. consumers also are increasingly looking beyond the main four carriers, said Emily Smith, an analyst at Pyramid Research. Young people in particular may be interested in something like FreedomPop, she said.

“There’s a growing awareness among American consumers that there are cheaper alternatives to the top four,” Smith said.

To contact the reporters on this story: Olga Kharif in Portland, Oregon, at okharif@bloomberg.net; Alexander Yablon in New York, at ayablon@bloomberg.net

To contact the editor responsible for this story: Thomas Giles at tgiles5@bloomberg.net

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