Wireless profits rise, but how much of it is your money?

Even in tough economic times, almost everyone's wireless expenditures are growing. So it's understandable if a lot of your corporate wireless dollars are going to the big carriers' revenue top line. But how much is going straight to their bottom lines? Quite a lot, according to new earnings reports for the first quarter from AT&T and Verizon.

Both carriers are reporting wireless margins north of 40%. AT&T posted a 40.9% margin out of its wireless business for 1Q09. Verizon Wireless is doing even better, with a 46.0% margin. Forty-six percent! Hmmm.

Okay, I can see some asterisks flying at me from the carrier PR people, so let's apply them. These are "EBITDA" margins. That's a good old piece of telecom financial gobbledygook. But it basically means that these are the margins attributable to the fundamental cash business of the wireless houses, before pesky items like interest payments that their corporations owe to bondholders or accounting adjustments like depreciation.

Still, it's a real profit measure, not simply an initial input like "gross margins." (Those of you in businesses that sell actual, physical "stuff" will recognize gross margins as simply retail sales of the things you sell minus the wholesale cost of the same things.) EBITDA does include such additional operating expenses as people and marketing. AT&T, for example, has heavy acquisition costs per subscriber for the iPhone. That's in there, and they're still making money.

In fact, the "flash notes" from several brokerage houses that popped into my inbox after each of these earnings reports immediately highlighted these EBITDA wireless profit stats. The telecom analysts who are left on Wall Street wouldn't do that if it weren't a meaningful measure of the operating health of the business. So how much are you contributing to the, um, "health" of your wireless carrier(s)?

What I find interesting is not just the profit momentum that AT&T and Verizon have in the wireless arena, but also the fact that wireless performance is now universally cited first in reports on the telecom industry. I've remarked in the past about how Sprint is viewed as entirely a wireless carrier, and Wall Street doesn't know or care about its wireline business. But I've picked up recent references in the general media to the entire global telecom industry as principally a wireless voice and data game.

This puts enterprises in a bit of a funny position. Mobile voice and data connectivity is very important to business success, and it's broadly demanded by the end-user base. But until some generation of broadband fixed wireless access finally takes hold to replace the wireline last mile, the core enterprise WAN market will still be tethered to the ground. That's not really true of the consumer market anymore. Many younger consumers have no use for the "phone company" in the old landline sense unless it provides a completely bundled, broadband package that includes TV service, too -- and then it wouldn't be over any copper wires.

That puts the landline business in survival mode, and adept enterprises know how to play their wireline vendors against this reality. What's more, because enterprises can and do design competitive bids for complete end-to-end networks that -- at least within a given country -- can be responded to comprehensively by at least two players, they can get straight-up bids and drive down costs to the point where carriers are willing to sharpen their pencils to stay alive.

But on the wireless side, growth is soaring and additional factors come into play. Coverage differences and roaming issues remain. End-user vendor preferences intrude in a way they never did on wireline. And some enterprises simply don't know what to ask for, financially, in their wireless procurements. Consumers seem to have notionally set a baseline of 50 bucks a month per calling plan, and device/accessory costs add up. Wireless carriers are all too happy to imply that the best that corporations can do is just get a little bigger discount because they're buying in bulk. That doesn't really do the trick, and the result is a lot of gravy left on the table to fund carrier profits.

On the other hand, the very existence of robust wireless earnings at the major carriers suggests a great opportunity for savvy enterprises with wireless procurement know-how. My TC2 colleague Ben Fox, along with LB3's Kevin DiLallo, will be speaking on wireless services procurement as part of an intense, day-long workshop on "Negotiating Network Deals in a Tough Economic Climate" on May 28 in New York. We're keeping an eye on carrier financial results and their interplay with competitive forces. For many if not most enterprises, the wireless side is the source of a good deal of the opportunity for improvement today.