Carriers' price war in the U.S. bad for Wall Street, great for Main Street
AT&T is offering up to $450 to T-Mobile customers who leave the latter for the nation's second largest carrier. Sprint threw its hat into the ring with its new Framily plan that allows as many as 10 unrelated people to share an account. And while all of these lower priced options are great for consumers, they make it harder for the carriers to show revenue growth.
Wall Street analysts are concerned that the tail is wagging the dog. Verizon and AT&T control 67% of the U.S. market for mobile wireless service, and AT&T's reaction to what has amounted to taunting by T-Mobile CEO John Legere, has them scratching their heads. Jefferies analyst Michael McCormack pointed this out when he said, "The most disappointing thing is that AT&T is reacting to T-Mobile. How long is it before Verizon reacts?" Wall Street would prefer that Verizon and AT&T ignore T-Mobile or else a price war might breakout. Again, it would be bad for Wall Street, but great for Main Street.
T-Mobile has led the way over the last few months, led by its charismatic CEO John Legere. The executive has tossed out those Harvard and Wharton textbooks on how a business should be run, and has led the industry to make some very consumer friendly changes. T-Mobile has ended subsidized pricing on new phones and the accompanying 2-year contract. It offers customers multiple phone upgrades in a 12 month period, and has eliminated roaming for data used in over 100 foreign countries. T-Mobile also offers tablet owners 200MB of free data a month. While the carrier has added more than 2.6 million new subscribers over the last two quarters, all of these promotions have to affect the bottom line.
The public sees this back and forth between T-Mobile and AT&T as a way to score lower prices, but analysts seem to believe that both participants are going overboard. Kevin Roe of Roe Equity Research calls this whole battle between the two operators as an "unhealthy market dynamic," and sees AT&T continuing to react to Legere's red cape until it can stop the exodus of customers leaving for T-Mobile.
Legere might be the first CEO of a public company to shrug off the risk to profits of a price war. Already considered to be extremely pro-consumer, at CES he said that he would rather give consumers a good deal even if it means not matching the profit margins achieved by rival firms. Such blasphemy used to be rewarded with a pink slip issued by a company's board. "We can be very profitable,"said the executive, "but I don't think you need to make 55 points of EBITDA margins." T-Mobile has a long term goal of a 34% to 36% EBITDA margin. Verizon and AT&T have higher EBITDA margins of 51.1% and 42% respectively.
Despite T-Mobile's bold moves, Verizon Communications CEO, and former Verizon Wireless CEO Lowell McAdam said that T-Mobile can't buy loyalty and that Verizon customers who switched will eventually return. Sprint CEO Dan Hesse chimed in with a similar statement. The other day, John Legere said that if everyone in the U.S. switched to T-Mobile, Americans could save $20 billion. While obviously this will not happen, it is an indication of the amount of money that could be cut from carriers' bottom lines. And that is what makes Wall Street nervous. Main Street, on the other hand, wouldn't mind seeing this price war escalate.