Speed Trap Ahead for U.S. Telcos

Apple’s (ticker: AAPL) unveiling last week of a new iPad with LTE cements its importance. LTE is branded as a kind of 4G service.

Verizon Communications’ (VZ) wireless unit has been the leading proponent in the U.S., but one day it is expected to be deployed by just about every phone company around the globe.

For consumers, it’s fast, really fast.

LTE’s “theoretical maximum” speed, as nerds put it, is 300 million bits per second. That’s as fast as the fastest WiFi networks in homes and offices.

The telephone companies are happy because LTE not only moves units of phones, but also lets carriers squeeze more bits out of each hertz, the fundamental unit of measurement of wireless spectrum.

“It’s the closest thing we’ve seen to a win-win in telecom,” says Craig Mathias, principal with wireless consultancy Farpoint Group; what benefits the phone company has sometimes come at the expense of what consumers want.

LTE already has deepened the disparity among U.S. carriers.

Verizon and AT&T (T) are far ahead of others. Verizon has the ability to serve 200 million U.S. citizens in various markets across the country with LTE, versus 75 million for AT&T. Sprint-Nextel (S) is just getting started.

“To the extent people realize LTE is a faster download, it will be a competitive advantage,” says Piper Jaffray’s Chris Larsen, as will the breadth of the LTE coverage.

LTE “should help Verizon continue to capture the lion’s share of new smartphone subscribers, and potentially a much higher share of tablet subscribers,” says Davenport & Co.’s Drake Johnstone.

For Verizon and AT&T, the benefits nevertheless are not clear cut.

For one thing, LTE is just at the beginning of the road.

“It’s a big, shiny, empty network at this point,” says Jennifer Fritzsche, who follows Verizon for Wells Fargo.

As that service fills up, it will require increasing capital investments.

A recent report by Cisco Systems (CSCO) said that while LTE and other 4G connections are only 0.2% of all mobile connections, they generate 6% of the traffic.

Moreover, the true payoff only comes if customers are satisfied, not disappointed. And that will depend on how expectations are managed.

Times have changed since the very first iPhone was introduced in 2007, when Apple reportedly demanded that any carrier selling the phone provide unlimited monthly data subscriptions. Both AT&T and Verizon now cap how much you can use.

The problem is that with fancy gadgets such as the new iPad and, presumably, the next iPhone, users will bump up against the reality that faster speeds just let them blow through their contracts quicker.

“Any customer who succumbs to the temptation to download a movie on their iPad via LTE will soon learn the error of their ways,” with a fat phone bill, says Craig Moffett, who follows the phone companies for Bernstein Research.

As a result, Farpoint’s Mathias expects more interest in what’s called “WiFi offloading,” where customers are bumped from LTE onto the nearest WiFi network.