The global explosion in wireless phones was the world’s biggest communications story in the last decade. The next 10 years, however, will belong to a second wireless revolution: the widespread adoption of so-called “smart phones” that literally upload and download every form of content imaginable.

Apple’s (NSDQ: AAPL) iPhone and Research in Motion’s (NSDQ: RIMM) Blackberry are at the top of the food chain now. But they’re rapidly being joined by a host of would-be competitors anxious to help meet accelerating demand for connectivity from every continent. Google’s (NSDQ: GOOG) Droid, for example, has already enjoyed great success–and the game is only beginning.

Sign-ups of wireless customers have slowed overall–even in the developing world–as the market has become ever-more saturated. In contrast, demand for data services on wireless phones, from e-mail to music and movie downloads, continues to accelerate. That’s especially true in developed countries, where wireless penetration rates have little room to grow.

Verizon Communications (NYSE: VZ), the biggest US retail wireless service provider by subscribers, saw its data sales again rise nearly 50 percent in 2009. Data services are nearing a third of overall revenue, as the company and its major rival AT&T (NYSE: T) continue to transition from simple communications companies to diversified connectivity providers.

By 2017, the US wireless industry is projected to generate over $100 billion from services such as text messaging, GPS, and movie, music and information downloads. And that forecast could prove extremely conservative, as sales of smart phones continue to defy estimates.

Smart phones account for only 11 percent of the world’s mobile handsets; penetration remains under 20 percent in the US. This leaves plenty of room for further growth.

Two groups will benefit from the second wireless revolution. The first group includes companies that make the smart phones and outfit the networks that enable wireless communications. The other is a small group of service providers that continue to consolidate market share globally in an industry where economies of scale, market reach and financial power are increasingly critical.

Investor expectations for some equipment makers are very high, which makes meeting projections difficult. Apple has demonstrated that it’s up to the challenge, but most competitors have not.

On the other hand, expectations for service providers are extremely low. One reason is that many investors have continued to concentrate on the wrong factors when assessing the industry’s value.

For a long time, conventional wisdom held that the industry was in an inexorable decline as customers defected from the copper wireline connections that have linked the country for more than a century.

That belief faded as wireless became a growing part of the business, and providers have remained very profitable. But the underlying pessimism has remained; many investors continue to focus on the fate of the wireline business as an offset to wireless growth.

As a result, they’ve ignored the explosive overall growth in the communications business. The wireless explosion transcended the credit crunch and subsequent recession–and this trend is set to accelerate as the global economy cycles out of its current woes.

Builders

Nokia (NYSE: NOK) has been a leader in mobile handsets for most of the industry’s history and holds a global market share near 40 percent.

The company’s forte remains lower-end, entry-level handsets, a lower-margin segment but still key in fast-growing emerging markets like China and India. Nokia has developed outstanding brand recognition in these markets.

Nokia is one of the few manufacturers that offer smart phone-like functions in many of its handsets. Although consumers in emerging markets might not shell out USD100 a month on a data plan, Nokia can sell them some basic add-on services for USD8 to USD10 a month.

Nokia retains leadership in smart phone operating systems, thanks to its strong ties to Japan’s NTT (NYSE: NTT). But the company has been losing ground to Apple and Research in Motion in the high-end smart phone market, particularly in the US.

The good news is Nokia is making major inroads. The company experienced several delays in new smart phones released through 2008 but recently introduced its newest handset, the N97, on time.

Nokia also owns 50 percent of Nokia Siemens Networks (NSN), a manufacturer of equipment used to build mobile telecom networks. NSN successfully bid on bankrupt Nortel Networks’ wireless network infrastructure business, a deal that beefed up its weak position in the North American telecom equipment market. Nokia is a buy up to USD15.

Research in Motion’s (NSDQ: RIMM) calling card is the BlackBerry, the dominant brand in the US smart phone market with a market share over 50 percent. Research in Motion retains major competitive advantages in the market for large corporations thanks to its proprietary BlackBerry Enterprise server system. The system provides superior security and faster e-mail delivery than competing systems such as Microsoft’s (NSDQ: MSFT) Active Server.

Economic weakness has slowed corporate demand for new smart phones, but it remains a high-margin business line for Research in Motion. And as the economy recovers, sales should surge as companies upgrade systems and handsets to newer models.

Since the release of the sleek BlackBerry Pearl in 2006, the company has aggressively targeted the retail market. Consumers now account for more than half of all BlackBerry sales, as opposed to 20 to 25 percent before the Pearl launched. Although consumers are more price-sensitive, it’s a much larger market than enterprise and has stronger growth potential.

The BlackBerry faces plenty of competition, including the latest iteration of the iPhone. But given smart phones’ still-low penetration, there’s plenty of room for multiple competitors. The real market losers have been traditional cell phones.

The release of new iPhone handsets has proved a growth catalyst for RIM because it raised consumer awareness of smart phones. In fact, since the release of the first iPhone, BlackBerry’s global market share has doubled.

And the company plans to release two new handsets over the next six months, the BlackBerry Tour and a new generation of the popular Storm. The company focused on improving its user interface to appeal to consumers, and both phones are likely to be strong sellers. Research in Motion’s shares trade at their lowest price in some time and are a buy up to 70.

According to a recent study by Cisco Systems (NSDQ: CSCO), wireless data traffic will increase by 66 times over the next five years;  accelerating this trend will be the roll-out of fourth-generation (4G) mobile networks that are more than 100 times faster than existing 3G networks.

This explosion in growth represents a major opportunity for mobile phone carriers but presents a key bottleneck: building out their networks to accommodate all that traffic.

Ericsson (NSDQ: ERIC) has been a leader in network development for many years and continues to boast one of the top customer lists in the world. The company’s fortunes have waned in the past couple years, as many major communications companies have pulled in their horns.

The company, however, remains committed to its product line and being a major player in the connectivity explosion. Management announced it will spend 15 to 16 percent of its projected fiscal year 2010 sales on further research and development. That’s one of the highest for any large company, and it comes in spite of aggressive cost cutting elsewhere.

The company’s biggest problem is the money losing equipment venture with Japanese giant Sony (NYSE: SNE). Yet management remains committed to its long-term plans and enjoys one of the most advanced technology infrastructures in the world.

Ericsson’s greatest strength over the long haul is its strong presence in China, where it’s been a major player for some time. Some projections indicate that the country will account for half the communication industry’s capital spending in 2010, or some USD50 billion.

Until the global economy shows signs of life, Ericsson’s shares are probably going to remain in the same trading range. But for patient investors, Ericsson is a buy up to USD11.

Service Providers

AT&T (NYSE: T) and arch-rival Verizon are in the sweet spot of the explosion of global connectivity. That’s the primary driver of their business in the 21st century. And the key device is the smart phone, which both companies recognized very early in the game.   

Both added large numbers of wireless phone customers in the fourth quarter of 2009, adding to strong gains they made throughout the year. AT&T gained 2.7 million new users, as it continued to enjoy major success marketing Apple’s popular iPhone. Full-year additions hit 7.3 million, pushing overall subscribers to 85.1 million. Customer turnover, or “churn,” fell to just 1.19 percent of postpaid users.

Most important of all, average revenue per user rose 2.6 percent during the quarter, as the company continued to sell advanced data services to its customers. Data revenue soared 26.3 percent, a major factor behind the company’s $17.1 billion in free cash flow, up 28.4 percent from year-earlier totals.

Those are explosive numbers, particularly when matched with the company’s continued success converting its local phone customers to its high-speed broadband service. Television subscribers nearly doubled in 2009, and wireline data services rose 18.8 percent. The company was also successful in shaving costs ahead of the loss of local phone business. Overall earnings were up 25 percent to 51 cents a share, matching the Street’s expectations.

As for Verizon, despite not being able to offer the iPhone yet, the nation’s largest wireless company reported strong customer growth; 2.2 million new users brought its total to 91.2 million. Wireless data revenue was up 45.9 percent, continuing the robust growth of recent quarters. Data revenue per retail user rose 20.5 percent, and post-paid churn was just 1.06 percent–still the best in the industry.

As has been the case for many years now, Verizon lost more basic local phone connections. But it also continued to grow its wireline broadband FiOS business at a solid rate, despite the weak economy. The company also spent $17 billion upgrading its wireless and wireline networks, which topped the first-ever Zagat Wireless Carriers Survey of providers around the world.

A one-time charge to earnings of 77 cents a share to account for layoffs of 13,000 workers in the wireline business triggered a headline loss of 23 cents per share. Excluding the charge, profits of 54 cents a share met the Street’s estimates. Free cash flow was up 14.5 percent to $31.6 billion.

The wireless giants’ fourth-quarter earnings weren’t immune to the economy’s weakness. But both covered their 6 percent-plus distributions comfortably, backing up recent payout increases. Both maintained extremely strong balance sheets and continued to show robust growth in key operations.

These qualities make AT&T and Verizon attractive options for income-seeking investors. That doesn’t make them immune from negative commentary, nor does it mean their share prices are suddenly going to sprout wings. But it does mean they’re resilient, solid holdings for even the most conservative portfolios. And in a dangerous environment like this one, that’s really the only important thing.

AT&T plans to spend another $18 to $19 billion on its network in 2010. That’s a clear sign that traffic is on the upswing. But it also showcases the huge free cash flows that make such spending possible, as well as the fact that return on this invested capital is immense, as it adds on new users and grows revenue from data services. That’s a formula for extending the company’s dominance in the US connectivity business, even as it pays a very generous and safe dividend of 6.6 percent. I call that deep value and rate AT&T a buy up to 30.

Verizon Communications’ biggest ongoing challenge is completing the sale of 4.8 million rural phone lines to Frontier Communications Corp (NYSE: FTR). The deal, which is still trying to win all of its needed regulatory approvals, will dramatically shift the company’s revenue balance away from its traditional phone business, spurring earnings growth. Even if it still can’t offer the iPhone, iPad or any other Apple device, the company is still growing rapidly. Verizon is a buy up to 35 for anyone who doesn’t already own it.