The past week has been an eventful one for the U.S. telecom sector. The battle for Clearwire heated up with DISH Network (NASDAQ:DISH) offering a $4.40 bid per share for the carrier, topping Sprint’s (NYSE:S) already increased bid by nearly 30%. Verizon (NYSE:VZ) extended its existing four-year contract with the National Football League by another four years, agreeing to pay $250 million per year for the rights to live stream all the NFL matches to its subscriber’s smartphones. With Verizon winning the initial LTE war, AT&T (NYSE:T) is stepping up efforts to shore up subscriber adds in a saturated wireless market by offering promotional offers and schemes that will have an impact on margins in the near term.
DISH raised its buyout offer for Clearwire to $4.40 per share late last week valuing the wireless service provider at $6.5 billion and topping the offer Sprint had made the previous week. The satellite provider made an offer of $4.40 per share to Clearwire’s shareholders - a premium of about 30% over Sprint’s $3.40 per share bid. With its recent moves, DISH has made it amply clear that it wants to be an aggressive player in the wireless industry.
However, merely outbidding Sprint won’t help DISH acquire Clearwire. Sprint, being Clearwire’s majority shareholder with more than a 50% stake, needs to sign off on any acquisition bid before the deal passes regulatory muster. While regulatory approval may not be tough to garner considering that the FCC will only be pleased with more competition in the industry, asking Sprint to part ways with Clearwire will require some convincing. Although Sprint has said that its earlier offer was its "best and final" one, it is most likely going to either match or increase its bid given how central Clearwire is to its future LTE plans. This will however leave less capital for Sprint’s LTE expansion plans and might cause Softbank to view Sprint as a less attractive acquisition option.
Verizon’s NFL Deal
With the wireless market getting saturated, carriers are looking for ways to differentiate and better monetize their existing subscriber base as the demand for mobile data grows. Verizon recently extended its exclusive contract with the National Football League to offer subscribers the ability to live-stream all NFL games on Verizon phones via the carrier’s NFL Mobile app. The current deal gives Verizon permission to offer live streaming services for Sunday, Monday and Thursday night games. Starting 2014, the contract extension will kick off, giving Verizon subscribers access to all home-market Sunday afternoon NFL games as well. The deal, which will cost Verizon about $250 million annually, is about 40% costlier that the current four-year deal that is set to expire in 2014.
Verizon is betting that having exclusive access to popular content will not only help it differentiate from rivals in a saturated market but also cause its subscribers to spend more on mobile data and upgrade to the higher tiers of its shared data plans. The advent of 4G LTE has made access to high-speed mobile Internet possible, and easy viewing and streaming of large-sized video files on the go is opening up new avenues for carriers to pursue growth. As smartphone penetration rises and it gets tougher for carriers to increase ARPU levels simply by driving smartphone sales, we are likely to see the wireless industry put greater emphasis on services and video content that help increase data demand.
AT&T’s Margin Impact
Having trailed the industry leader Verizon in adding wireless subscribers in recent quarters by a big margin, AT&T is stepping up its efforts to bridge the gap. The second largest wireless carrier in the U.S. announced Thursday that it will add a higher than expected 500,000 wireless subscribers during Q2 2013 on the back of several successful promotions that it ran during the quarter. This net adds guidance is a good 70% higher than the previous quarter and over 50% more than the number of subscribers it added in the year-ago quarter. The high cost of promotions and subsidies on smartphones sold will however cause margins to shrink. AT&T expects Q2 EBITDA margins to be comparable to last quarter, implying a y-o-y decline of around 180 basis points.
However, the margin compression should not be much of a concern since the carrier has, in return for the subsidies, locked its subscribers into two-year postpaid contracts. The near-term margin hit will therefore be more than compensated for by the regular service fees that the subscriber is obligated to pay AT&T over the term of the contractual period. A saturated wireless market however means that AT&T’s subscriber gains this quarter are coming at the expense of its rival carriers. It will be interesting to know if Verizon or one of the smaller carriers is facing the brunt of AT&T’s aggressive marketing campaign this quarter. If AT&T is being successful in weaning subscribers away from Verizon, it may even decide to continue its margin-compressing promotions for a few more quarters.
Disclosure: No positions.