iPhone May Drive Telecoms Paranoia In 2012

NEW YORK (TheStreet) -- Words like détente and duopoly are regularly used by consumers and industry skeptics to describe the telecom sector, which is dominated by giants AT&T(T) and Verizon (VZ) , as second tier players like Sprint(S) , MetroPCS(PCS) , Leap Wireless(LEAP) and T-Mobile USA struggle.

Despite moving to usage-based data pricing in 2011, AT&T and Verizon continue to add to their market dominance. But paranoia cuts both ways.

Both carriers have spent billions to build networks to handle rising smartphone data loads, all with an uncertain payoff that's tempered by the safety of their 5% dividend yields.

Conflicting fears of concentration and uncertain capital investment returns in the telecom sector have now evolved with Verizon's move to a "share everything" plan, which allows families to bucket mobile devices, in addition to talk, text and data usage onto one bill. As Investors weigh a fast changing industry, they should focus on carrier relationships with Apple(AAPL) as an early read on whether AT&T and Verizon are primed for rising returns on their network investment, or whether their feared 'duopoly profits' will fizzle.

Verizon's pricing change indicates that it is focusing on adding smartphone and tablet devices to its network, while connecting phone bills directly to data usage, over a mélange of data, text and talk. When AT&T follows suit, both carriers will need to prove that device-based network growth -- led by smartphones like the iPhone -- can be done profitably.

Meanwhile, headwinds like subsidies to gain iPhone subscribers, consolidation among second-tier players, and the emergence of DISH Network(DISH) as a competitor loom as threats to AT&T and Verizon.

For instance, Craig Moffett, a Bernstein analyst and sector skeptic, questions whether the center can hold on the prospective profits that some fear will gush into AT&T and Verizon, at the expense of consumers.

"I think the end of the year is going to look more like the beginning of the year than people think," says Moffett. By that he means a return to challenging revenue per user trends that put wireless investment returns at or below AT&T and Verizon's cost of capital, after they recently posted strong quarters.