As you are aware from the barrage of TV commercials, AT&T (T) and Verizon (VZ) are both vying for the growing wireless market with new phones, claims of the best wireless coverage and now dropping prices.

The charts below show why the fight continues to get more aggressive in the telecom industry.  The CAGR is expected to grow at a respectable 6.6% between 2007 & 2012.  Wireless is the largest segment and expected to grow from 47% of total revenue to over 56% by 2012. The total opportunity for global wireline and wireless revenue is projected to expand from $1.65 trillion in 2007 to over $2.27 trillion in 2012.

In addition, new entrants like Apple (AAPL) and Google (GOOG) are adding pressure as they rip down the walled gardens that have existed for too long and focus on consumers.  Apple’s goal is to sell hardware and apps while Google focuses on ads.  Gartner just released a report that estimates that Apple was responsible for 99.4% of mobile app sales in 2009.  AT&T and Verizon should have owned this market.  In any event, consumers are winning with better phones, more services, options and ultimately lower prices but this isn’t necessarily good for AT&T & Verizon.

Industry Overview

Wireless Accounts

Wireless is the most important category with the largest long-term opportunity for the carriers.  Verizon grew retail customers to over 86 million in Q309 and added 1.2M accounts.  Average revenue per user (ARPU) was 52.78.  See Verizon full report here.  AT&T has ~82 million wireless subscribers and an ARPU of $61.23.  AT&T added 2 million subscribers in Q3.

Revenue Growth

AT&T’s growth in revenue is closely correlated with the introduction of the iPhone.

iPhone on Verizon

2010 should get even more interesting as Verizon is expected to carry the iPhone and many users that have been frustrated with AT&T’s coverage may be all to excited to switch. Verizon’s red map commercials have been pretty effective in convincing AT&T customers that Verizon will allow you to use the iPhone as a phone.

Long-Term Growth

The chart below shows Verizon’s growth over the last 10 years.  Revenue grew by over 228% in the last decade but net income only grew .17%.

AT&T performed better over the last decade with revenue up 297% and net income up by 150%.

Capital Expenditures & Profitability

Both are spending heavily on CAPEX with Verizon spending 126% of operating income and AT&T at 85%.

AT&T’s profit margin consistently more than doubles Verizon’s in the 10% range.

Stock Performance

If you have owned either company over the last decade, you have seen the stock price drop considerably but the dividend has provided some relief.

Conclusion

The established telecom players could go the way of newspapers if they aren’t careful. Mobile usage is expected to explode over the next decade with lots of companies keen on disrupting the market.

AT&T and Verizon should stop focusing on each other and turn their attention to the consumer. Otherwise, you might see Apple, Google or some other player radically disrupt the entire industry more than they have to date.

AT&T is currently valued at nearly $152 billion with Verizon near $85 billion.  Like the overall the telecom industry, AT&T and Verizon generate lower profit margins, on large debt, with declining wireline businesses and high SG&A expenses.  In general, these are not the characteristics that drive strong earnings growth or strong stock performance.

The macro theme for the wireless space is extremely positive and we expect lots of innovation and some great investment opportunities.  However, AT&T and Verizon have not proven that they can adapt at this point and we are avoiding the stocks as a result.

You can access full telecom industry metrics or setup your custom watchlist here.