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Wireless price war's good for consumers, but challenges carriers

Wireless price war's good for consumers, but challenges carriers

More than any time in the past decade, wireless customers are reaping the benefits of a carrier price war over smartphones and tablets

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More than any time in the past decade, wireless customers are reaping the benefits of a carrier price war over smartphones and tablets, as well as monthly data service contracts.

The news isn't as good for the major wireless carriers, based on earnings reports earlier this week from Verizon Wireless and AT&T. Sprint is expected to be the hardest hit when it reports earnings Nov. 3.

While it is just a single quarter, Verizon slightly missed profit estimates in its latest report on Tuesday. Its earnings were 89 cents a share, a penny below the average analyst estimates of 90 cents compiled by Bloomberg, even as sales climbed 4.3% to $31.6 billion.

AT&T on Thursday reported quarterly earnings of 63 cents a share, just below the 64-cent analysts estimate, according to Bloomberg. Revenues were $32.96 billion. More significantly, AT&T said its revenue growth would range from 3% to 4% for 2014, down from a previous projection of 5%.

Long term, customers will see the impact of lowered profits resulting in lower investment in wireless network growth and innovation in new technology, analysts said.

Earnings reports for the fourth quarter, which come out in January, will give a better picture, but analysts said they definitely see the impact on AT&T and Verizon profits of an ongoing price war kicked off by T-Mobile US in 2013.

"Ultimately, when there's a slowdown in carrier profitability, it hurts the ability of the companies to invest," said Roger Entner, founder and lead analyst at Recon Analytics. "In the wireless industry, it's particularly impactful because as wireless usage flows up, that increases the need for more network capacity, and more capacity only arrives when companies are investing in more cell sites, new technology and the like. That's the danger of a price war. It's a longer-term effect, not a short-term effect."

For now, however, customers who aren't wireless investors are texting smiley faces all the way to the bank.

The main instigator of all the price cuts has been the nation's fourth-largest carrier by subscribers, T-Mobile, which introduced new deals for customers seven times after first dubbing itself the "Un-Carrier" in March 2013. T-Mobile, mostly owned by Deutsch-Telekom, grabbed the attention of its bigger rivals by dropping contracts, subsidized phones, overage fees for data and early termination fees.

"The profit warnings we hear about AT&T and others are clearly tied to the impact T-Mobile has had," Entner said.

T-Mobile reported 50.5 million subscribers in July and is widely expected to gain enough subscribers to bump Sprint out of third place after its next earnings report on Tuesday. Sprint with follow with its earnings report the following week.

Entner and other analysts say T-Mobile will continue its price-cut and service innnovations until it finds a buyer after Sprint abandoned attempts to do so earlier this year.

"T-Mobile will keep pushing, pushing and pushing on UnCarrier announcements until somebody buys them," Entner said. "But there are very few companies out there to buy them due to lack of capital. The U.S. Senate needs to approve a deal, and I doubt the Senate will approve a sale of T-Mobile to a Russian or Chinese carrier" due to national security concerns.

Looking closer at Verizon's earnings report, its price cuts for smartphones and tablets purchased on two-year contracts helped the company add 1.52 million contract customers in the quarter. About 65% of the new wireless service contracts came from Verizon's tablet sales, some given away for $50 or even for free.

At AT&T, analysts said the carrier slashed prices to gain customers, and succeeded in gaining 785,000 monthly, postpaid subscribers during the quarter. Chief Financial Officer John Stephens said so far in 2014, AT&T has added 2.4 million postpaid subscribers, double the pace of 2013. Total churn (customer defections) grew slightly to 1.36% (from 1.31% a year earlier), but Stephens nonetheless called it "solid results in a challenging environment" and noted that the prepaid customer churn had dropped to 0.99%.

Sprint, under new CEO Marcelo Claure, has made some of the biggest sacrifices to hold on to, or increase, subscribers. Earlier this week, Sprint announced a Family Share Pack plan that offered 1 GB of data for $20 a month for up to 10 lines, double the data offered by Verizon and more than three times the data offered by AT&T for the same price.

"The worst hit by T-Mobile's moves is definitely Sprint, which is still losing customers as it lowers prices, so it's getting a double hit," Entner said. At its next earnings report on Nov. 3, he predicted the pace at which Sprint is losing customers will go down, "but Sprint is still losing them and will drop to fourth place."

The numbers are close. Sprint had 54.3 million subscribers in its latest report in July, just ahead of T-Mobile's 50.5 million. Both Verizon and AT&T are much bigger, with AT&T at 116 million wireless subscribers and Verizon at 123 million as of July.

The risk for Sprint in lowering prices to gain customers is that revenues or profits could suffer, potentially undercutting Sprint's investment in network improvements. It's the same dilemma for all the carriers.

"Low price alone does not keep customers," said Jack Gold, an analyst at J. Gold Associates. "You have to offer quality service. But the flip side is that if you keep your competitors' profits low, then they don't have the resources to invest in upgrades and new services. This is a pretty classic economic model playing out."

Gold said the situation among big wireless carriers in the U.S. is "really about survival of the fittest." Even though consumers may feel a deal on a service or product offer is important to grab, Gold warned: "Aggressive competition, if it gets too aggressive and unchecked, ultimately results in fewer competitors longer term, leading to rising prices and less choice. Consolidating markets are not always good for the consumer, but often good for the vendors."

Bill Menezes, an analyst at Gartner, said the long-term effect of today's price and contract battles could lead carriers to reduce spending on long-term construction plans or even on buying up more wireless spectrum at auctions.

"If you are buying spectrum or improving network density, you need cashflow to do that," Menezes said. "Verizon has a big debt load since it bought Vodafone, and AT&T is looking to expand with a purchase of DirectTV."

Verizon last year was rumored to be interested in expanding its network into Canada, while AT&T has been rumored to be interested in buying up spectrum in Latin America, but instability with earnings could shelve growth plans, he added.

Whether their profits are really being hit, "the Q4 earnings reports will be the tell-all," Menezes said.

In the short term, wireless customers can benefit and leave the earnings headaches to the CFOs.

"Consumers should be happy when prices go down, although that might debilitate the ability of the service providers to give you a good experience." Entner said. "But that impact wouldn't happen until a couple of years. Until then, I'd say, enjoy it."

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Tags wireless carriersat&tmobileBloombergVerizon Wireless

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