News that Apple's (AAPL) Steve Jobs thought of releasing the iPhone without carrier support, building an Apple-branded WiFi network instead, obscures a bigger story.
This is the ongoing power shift from the companies that run networks to those that sell technology, from the core of the network to the edge device.
Around the middle of the last decade, during the height of the “feature phone” era, I attended a CTIA show in Orlando, where Verizon Wireless (VZ) executives all showed up wearing black suits, like Mafia dons, insisting that every bit running through their networks would be a service, defined by them, controlled by them, with Verizon getting a cut.
I thought of that earlier this year when Apple rolled out its own SMS service, a Web-based offering run from inside the phone that bypassed the highly profitable SMS services run by, among other carriers, Verizon.
Apple has always had a testy relationship with carriers, and some, like former Apple executive Jean-Louis Gassee, have even suggested that Apple simply buy a carrier with its huge cash hoard. As I've noted before Sprint (S), the third-largest carrier, would be very affordable.
Why has this not happened? It's because Apple does not want to subject itself to the same set of economic forces it's driving. That force can be summed up, simply, as “bits is bits.”
When bits are bits, when there's no difference between the bits making up an episode of The Simpsons and those representing a picture of your dog, when there's no difference between voice bits and SMS bits, then the people who sell bits are selling an undifferentiated utility. The value of their “monopoly” infrastructure degrades.
What's true for phone companies is also true for cable companies. Services like Google TV, Amazon (AMZN) Prime and Netflix (NFLX) or Wal-Mart (WMT) Vudu streaming are all designed to replace the control cable operators like Comcast or Time-Warner have over viewers, as well as that held by Fox (NWS), Disney (DIS), Viacom (VIA) and the other TV and cable network producers.
A single broadband Internet connection, costing roughly $50/month, can deliver whichever movies, TV shows, or Internet videos a user may desire. The intermediaries disappear. Bits become just bits.
These trends are reflected in the behavior of stocks over the last several years. Comcast (CMCSA), Verizon and AT&T (T) have all gone basically sideways while the device makers, starting with Apple, have done nothing but go up.
As new channels like Netflix have emerged, they, too have zoomed in value. But even while each of these new channels can be brought to Earth by the refusal of networks or movie studios to do business with them, News Corp., Disney and Viacom are little-changed from their values of five years ago.
Bits are bits. Devices are channels through which consumers can buy what they want to see or do directly. Past intermediaries are becoming commodities, utilities, dead money. Their stocks may rise or fall day-to-day, but this larger trend is set, and will remain in place.
Disclosure: I am long GOOG.
