• by Pam McGill , Greg Mishkin , October 29, 2014

The quarterly earnings reports from major wireless carriers last week will soon be historic documents. Long the core moneymaking, solid-margin business that drove decades of growth for these companies and their investors, the wireless telephone industry in America is facing the kind of business model and consumer behavior evolution that marked the telecommunications industry’s prior transitions from telegraph to telephone and from wireline to wireless telephony.

The big question among industry insiders used to be when this watershed would happen. Now that it has begun, the new question is whether these companies can make the next evolution into the enablers of the “Internet of Things” (IoT) or whether they’ll be beaten there by Google, Apple, Amazon and other upstart competitors.

Once T-Mobile took the inevitable but disruptive step of blowing up the standard model of long-term contracts and subsidized phones with its “Uncarrier” no-contract, no-subsidy campaign, American wireless carriers started down the road to commoditized, low-margin status—“dumb pipes,” as the industry bluntly phrases it.

While consumers are still loyal at the moment to their wireless carriers, the relative importance of phone brand and mobile operating system (OS) has skyrocketed in recent months, paralleling the realization among American consumers that mobile phones are actually quite expensive.

When consumers are faced with a $650 retail-priced iPhone 6 rather than a $199 subsidized version, the purchase begins to be treated as a luxury good and planned accordingly. (Used phone markets and hand-me-down structures within families are also becoming more common.)

Very quickly, the wireless carrier becomes a secondary consideration, especially if there’s no exclusive phone availability. Rather, price (or value) and service become the determining factors, and with the improved reliability of the carriers’ networks the service component is becoming increasingly undifferentiated in consumers’ minds.

Having been down this road before, the wireless carriers have been looking individually and as an industry at what’s next. It’s clear that a commoditized wireless phone business in the U.S. will no longer be a sufficient growth engine to satisfy investors. While overseas expansion into new high-margin markets is one solution and will grow in importance thanks to elimination of tariff barriers, the primary domestic strategy for these companies will be to connect all of the components of their customers’ lives through the growing IoT.

As more of the devices we own become nodes on the network—from our phone, thermostat and car to our fitness equipment, refrigerator and smoke detectors—ubiquitous and seamless connectivity will be required to make them all function effectively. To become indispensable providers of high-margin, value-added expertise and connectivity, carriers are not only investing in infrastructures, like AT&T’s WiFi buildout, but also investing directly in solutions such as Verizon’s 2012 acquisition of Hughes Telematics. The combination of ubiquitous network and value-added proprietary devices or solutions is a model that has a comfortable familiarity to the industry and its investors.

The problem, however, is that the big telecommunications companies aren’t just competing with each other. They’re also competing in consumers’ minds with companies like Google and Apple. When surveyed as to which companies they’d consider for home automation and high-speed internet connectivity, consumers had little love for wireless carriers outside their own provider.

With the exception of AT&T, these carriers fared poorly next to Google and Apple in consumers’ minds as the potential trusted source for these types of services. And, given the investments that Google has made in technologies that tie directly into this future such as Android, Google Fiber, Nest devices and self-driving cars, consumers are making the assumption that they’ll have an opportunity to choose Google over their incumbent carrier if they so desire for these future services.

Should Apple wish to enter this nascent market, it will likely employ its common strategy: Identify the opportunity, then create its own proprietary walled and curated environment to its dedicated partisans.

To consumers, the IoT is the future. But they’ve become accustomed to having the future brought to them by these newer companies, not by telecommunications companies.

This is where the danger lies for the legacy carriers. They are caught between a traditional business model that will see their margins commoditized over the course of the next few years as their customers come off legacy contracts. Skeptical consumers can’t envision their legacy brands as innovative leaders in the “next big thing” and aggressive and nimble competitors that are capable of taking them on in potentially-lucrative business models.

Carriers are going to have to move faster than the technology state of the art in order to be ready to capitalize. To succeed in this new world, they’re going to have to listen to their customers and lose some of their traditional risk aversion.

In the new telecommunications industry, the real risk is going to be in standing still. The next few years will show which, if any, of these companies are ready for the race that lies ahead.