Time to hang up on the mobile-phone industry

With reports indicating that deep-pocketed Google Inc. (NASDAQ: GOOG) and Apple Inc. (NASDAQ: AAPL) may soon enter the wireless fray (see "Apple eyes the wireless auction") and news earlier this month of MetroPCS Communications Inc.'s (NYSE: PCS) proposed $5 billion buyout of Leap Wireless Intl. Inc. (NASDAQ: LEAP) to create a fifth national wireless carrier, industry revenues and margins could soon be under pressure.

Costly equipment upgrades. Bloomberg noted yesterday that, "AT&T Inc. (NYSE: T), Verizon Wireless (majority-owned by Verizon Communications (NYSE: VZ)) and other mobile-phone companies may need costly equipment upgrades to comply with new rules aimed at helping 911 emergency operators locate callers." That follows from a U.S. Federal Communications Commission vote to make wireless carriers "test their 911 location systems at the local level, instead of statewide, within five years."

Heightened regulatory pressures. ConsumerAffairs.com reported that a "rising tide of consumer discontent" had spurred efforts by the FCC and members of Congress to limit the fees wireless carriers charge subscribers who want out of their contracts early.

The website noted the introduction two days earlier of the "'Cell Phone Consumer Empowerment Act of 2007,' sponsored by Senators Amy Klobuchar (D-MI) and Jay Rockefeller (D-WV), [which] would mandate that carriers prorate termination fees, to be reduced by 50 percent after the first year of a two-year contract."

The measure would also "prevent wireless carriers from charging fees for service beyond those expressly required by local, state, or federal law, and to expressly notify customers if any service request or upgrade would trigger a contract renewal, as well as giving customers 30 days' notice to cancel the contract."

Economic woes. The bursting housing bubble and the meltdown in the subprime finance industry have hit the construction, real estate, and financial services sectors especially hard. While there has been little in the way of media comment about potential spillover effects on the mobile-phone industry, odds are that individual and business-related credit problems will increase, while growth prospects for these traditionally high-usage segments will be diminished.

Shifting industry power balance. Unlike in Europe, for example, the U.S. mobile-phone market has been tightly controlled by the wireless operators, generally at the expense of the equipment makers. But that may be set to change.

According to a February Wall Street Journal report, "How Steve Jobs Played Hardball In iPhone Birth," technology powerhouse Apple played one carrier against another and was able to extract important concessions from industry giant AT&T Inc. that potentially signals a shift, however small, in the established dynamic.

With the window of opportunity now open, other handset manufacturers will likely also look to gain an advantage, which could eventually lead to the oligopoly-busting introduction of full-featured models not tied to any one network.

Other risks. Many companies and sectors face the threat of unwelcome lawsuits, and the mobile-phone industry is no exception. According to Dow Jones Newswires and others, "NTP Inc., the patent-owning entity that got $612 million out of a suit against BlackBerry maker Research in Motion Ltd. (NASDAQ: RIMM), [recently] hit the nation's top four wireless carriers with similar lawsuits." While it is too soon to say for sure what the outcome will be, the development nonetheless adds a measure of uncertainty to the outlook.

Negative technicals. Relative to the S&P 500 index, the Dow Jones U.S. Telecommunications Sector recently broke down below key short-term support and is testing new four-month lows. That suggests that at least some institutional operators have been lightening up their holdings in the group under cover of overall market strength.

In sum, the combination of negative factors bodes poorly for a group where perfection seems to be fully priced in. In my view, it's time to hang up on the mobile-phone industry.

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.