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

Matt Hamblen | Oct. 27, 2014
Profits are in doubt at big carriers, posing concerns about long-term network, spectrum investments.

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."

 

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