Many income investors have Verizon Communications Inc. (VZ) and AT&T, Inc. (T) in their portfolios. They believe these two mega-cap telecoms to be safe, long term, sleep-well-at-night, income-generating investments. That may not be the case.
Verizon and AT&T have fortress-like wireless carrier businesses in the U.S. Their plans usually lock up consumers in fee-laden contracts for 24 months. The two companies combined hold approximately 70% of the U.S smartphone market - call it a duopoly if you will. But cracks are starting to appear in the castle walls. Rivals, eyeing the carriers 50% profit margins, are beginning to move in.
The cell phone market is changing; most buyers now want smartphones. The problem? Not everyone can afford Verizon and AT&T's, pricey, restrictive, 24-month, no-upgrade, contracts. Up until recently there were few alternatives. Now, however, competition is showing up and it's very visible to consumers with outlets in Wal-Mart (WMT), the U.S.'s largest retailer.
No, the menace is not from a small upstart - which could be bought out to make it go away. Rather, it's from two overseas titans which see opportunity in the U.S. for prepaid (no-contract) and less restrictive postpaid plans. This spells trouble for the Verizon and AT&T as contract plans are very profitable to them.
America Movil: A Latin American Giant
Carlos Slim is Mexico's - and the world's - richest man. He and his family own some 55% of America Movil. Although not particularly well known to U.S. investors, America Movil is the largest telecom in Latin America and has more subscribers than Verizon and AT&T combined.
Now, the company, through its subsidiaries, is increasing its presence in the U.S. America Movil offers prepaid phones through its TracFone, Net10 Wireless, and Straight Talk brands.
Straight Talk Android smartphones can be bought at Wal-Mart for as little as $79.95. Unlimited talk, text, and data is only $45 a month - about half that of Verizon and AT&T. If you want out, just stop making the monthly payment; it's no problem. Net10 has similar type plans and is also available at Wal-Mart. Net10's rather blatant slogan: No Bills, No Contracts, No Evil.
Deutsche Telekom: The European Union's Largest Telecom
Bonn based Deutsche Telekom AG is Germany's - and the European Union's - largest telecom. Deutsche Telekom owns 74% of T-Mobile US, Inc. (TMUS), a company formed when T-Mobile merged with MetroPCS last May. MetroPCS prior to the merger was (and still continues to be ) a no-contract mobile seller. T-Mobile started trading on the NYSE in May of this year.
Last July T-Mobile broke the 24-month contract ranks (which it was losing anyway to Verizon and AT&T) with its new JUMP (Just Upgrade My Phone) program. This program allows subscribers to upgrade their phones every 6 months. Since the program started T-Mobile's earnings and subscriber growth have surged. It all adds up to better, less expensive choices for U.S. wireless subscribers.
Wal-Mart - The U.S.'s Largest Retailer
So there you have it. Two large international telecoms, American Movil and Deutsche Telekom, are now offering, through their subsidiaries, no-contract mobile phones in the U.S.'s largest retailer - Wal-Mart. The threat to Verizon and AT&T, with their high margin contracts, is clear.
In the past, cell phones offered on a no-contract basis tended to be older models. That is no longer always true. Apple's best-selling phone, the iPhone 5, less than a year old, has been available at Wal-Mart without a contract for almost a year. Apple's new models, the iPhone 5c and iPhone 5s, will soon also be at the large retailer. Wal-Mart has also sold the Galaxy S III with no-contract on Straight Talk for 17 months.
Conclusion: Sell Verizon and AT&T
Verizon and AT&T are facing heightened competition as subsidiaries of two large international telecoms expand into the U.S. market. These discounted plans in the U.S. largest retailer maximizes exposure. Especially alluring to wireless subscribers are the no-contract plans these subsidiaries offer; they usually save subscribers some 50% on monthly charges.
Investors in Verizon and AT&T need to be aware of this threat as these company's profits will likely be hurt as 24-month contract give way to postpaid plans. The two major carriers face lower margins and earnings. With this in mind, investors should seriously consider selling Verizon and AT&T.