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Wireless Goes Un-American: Verizon Communications Inc. (VZ), AT&T Inc. (T)

A ridiculous standard
The logic behind the new law seems to be that since you can find some unlocked phones, there is no need to guarantee your right to unlock the one that you actually want and have paid for. The argument made by the carriers is that since Verizon, AT&T, and others pay large subsidies to the manufacturer in order to offer the devices at reduced prices, they are entitled to a voice. This money is gradually recouped over the course of the contract term, but unlocking the phone has the potential to undermine the process, or so say the carriers.

This seems to completely ignore the reality that there are significant early termination fees charged by these companies, all but ensuring that the carrier will recoup its lost subsidy; what is lost is the profits that would have been earned if the customer stayed under contract. Furthermore, there is no exemption to the exemption that says that the carrier is obligated to unlock the phone after you have satisfied the contract term. Essentially, you have paid for the phone over the course of your contract, but you are still not allowed to use the device as you deem best. But this is the land of the free.

The investment implications
In anticipation of the law taking effect, both Verizon and AT&T rose sharply during last Friday’s session. The new provision will make it easier for carriers to retain clients in two primary ways. First, because the top carriers tend to get exclusive access to some of the most coveted phones on the market, sales of these devices through the carriers will remain strong. Given that illegally unlocked phones are, well, illegal, people will be less anxious to buy them.

The second way in which both Verizon and AT&T will benefit is that clients will be less likely to switch carriers at the end of their respective contract terms. If you can no longer legally switch carriers without buying a new phone, you will be arguably less likely to switch. While the number of individuals to whom this applies may be limited, the numbers must be significant enough that the market took notice and moved the stocks. I am not certain that the news is sufficient to qualify as a positive catalyst on its own, but the other circumstances surrounding both of these companies warrant a closer look.

I realize that a comparison between entertainment content and software code is both one I made and not a particularly fair one, yet the two are tied together. I strongly believe that ownership should be unencumbered by the need to stick with the carrier that sold the device. This is a bad law and one that should be shouted down.

The article Wireless Goes Un-American originally appeared on Fool.com and is written by Doug Ehrman.

Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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