- AT&T, Sprint, Verizon, and T-Mobile will all be affected by innovative and lower cost alternatives.
- More competition will equal lower ARPU for all carriers.
- New entrants pose challenges similar to those faced by the retail industry 40 years ago.
Thesis: Major carriers such as AT&T (NYSE:T), Sprint (NYSE:S), Verizon (NYSE:VZ), and T-Mobile (NYSE:TMUS) will face mounting pressures from advancements in technology and new entrants. This will happen over the next decade.
The major carriers are, in my opinion, in a no-win scenario from new competition. AT&T has responded to T-Mobile's MetroPCS with Aio Wireless. Aio Wireless is now known as Cricket Wireless after a recent merger. Cricket offers unlimited talk and text plans, with data for $35 per month (on auto pay), and without data for $25 per month. This is well below AT&T's average rate per user, or ARPU. This makes me ask myself, is AT&T competing with T-Mobile or itself? The ultimate result will be a lower ARPU for both carriers.
Quarter two results are fast approaching. However, for the basis of this article we are going to use first quarter (Q1) 2014 results as the benchmark for discussion. If you take a look at Quarter 1 results for T-Mobile, they are now the fastest growing network and have an average ARPU of $50.01, down sequentially for several quarters now. Here is how that stacks up against rivals:
Quarter one ARPU
No longer reported, assumed to be around AT&T.
Each figure received from companies' Q1 2014 financial results or verified through multiple outlets. Figures varied around the web.
What we are not going to cover in detail are the macro improvements to the U.S. economy. This could change in the future, and would have a negative effect on the top four carriers.
T-Mobile versus the other major mobile carriers has been the argument of pundits for a while now. T-Mobile has been relentless with their Un-carrier Revolution. However, AT&T and Verizon have continued to add new subscribers, disproving everyone who predicted a mass exodus. Sprint lost subscribers in Q1 2014, nowhere near the number of new customers acquired by the top three. The majority of new customers are actually just that, new customers.
AT&T and Verizon both have different lines of business, other than mobile, to promote bundling and the cross selling of products. For this article we will only be focusing on mobile.
There are many other mobile players in the United States. We will refer to them as ankle biters. They bark really loud, but only bite off a small piece of the overall market share. In cases that they have been able to secure market share, such as MetroPCS, they are usually acquired by a larger carrier (in this case T-Mobile).
All of the ankle biters operate as a Mobile Virtual Network Operator, or MVNO. As an MVNO they enter into agreements with Verizon, AT&T, Sprint, T-Mobile, and U.S. Cellular for use of their networks.
This is the same old story. For now, AT&T and Verizon have been able to fend off the ankle biters, despite doom and gloom predictions about lower margins and ARPU dropping off. All of this, in my opinion, is due to the improving economic conditions, not changes AT&T or Verizon have made.
Every now and again a new entrant comes along that is worthy of analysis. That entrant is Republic Wireless, part of parent company Bandwidth (a private company).
Republic is in its early stages, launching in 2012. They recently introduced a lower priced smartphone, the Moto G, for $149. Previously they had only offered the Moto X, at a $299 price point. This was a high hurdle for some new customers.
What makes Republic different? Republic encourages its users to rely heavily on Wi-Fi for calling and data usage. Plans start at $5 per month for unlimited talk and text over Wi-Fi, or $10 per month for unlimited talk and text over Wi-Fi and cell networks. You can review the rest of their plans here. Republic faces challenges of its own, such as the lack of local numbers in some areas and number portability.
The targeted customer of Republic does not use a lot of mobile data. All plans come with a hard cap of 5 GB of data per month, more information here. The major carriers still have an advantage when it comes to unlimited mobile data.
How do you compete with a wireless carrier like Republic? For AT&T, Verizon, Sprint, and T-Mobile the answer is, you don't. You sit around and wait for an advantage to take them over, or offer superior products and service to prevent your own customers from leaving.
If Republic's concept proves successful, expect other new entrants to jump on the same bandwagon, possibly backed by larger names like Google (GOOG, GOOGL) and Amazon (NASDAQ:AMZN). Google just announced plans to launch 180 satellites to spread Wi-Fi internet access to underserved areas worldwide. These companies are known for taking on projects that may not be profitable now, but have the ability to change industries over time.
In the early 1980's Sears Roebuck, now Sears Holdings (NASDAQ:SHLD), faced a rapidly expanding competitor, Wal-Mart (NYSE:WMT) whose first store opened in 1962. Sears never adapted to the changing industry, but had the opportunity early on. Wal-Mart changed retail from a personal experience to a one-stop shop cheap commodity. Sears had lifetime warranty Craftsman tools and Wal-Mart had alternatives at half the price. Over time, consumers chose the latter. New entrants, like Republic Wireless, have the ability to cause the same disruption in the wireless industry.
The end result will be good for consumers and difficult for the top wireless carriers. The current major carriers have been able to innovate and create different revenue streams, such as AT&T's move to sponsored data. But, I see no answer to Republic's price points.
For now, AT&T and Verizon offer some of the highest yields in the S&P 500 Index, and their stocks are close to 52 week highs. They may look like safe bets, but then again, so did Sears Roebuck in the 1970's. My long-term outlook is continued pressure on margins and disruption by new and innovative entrants to the industry.
Forward looking statements: The majority of this article is written for the long-term investor. This is a thoughtful analysis of major impacts ahead for the wireless carrier industry. Changes, like the ones discussed, happen over long periods of time, not tomorrow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.