- We believe that Sprint could reduce prices by 20-25% on average to become competitive again.
- AT&T and Verizon will have no choice but to cut prices as well if they don’t want to lose share at a fast pace in the important Q4/iPhone refresh period.
- The potential pressure on earnings is clearly manageable but a price war will obviously be negative for sentiment.
As T-Mobile cut prices by 15%, Sprint could go for -20/-25% on average
The price war initiated in 2011 by T-Mobile (NYSE:TMUS) is now escalating as both Verizon (NYSE:VZ) and Sprint (NYSE:S) are rolling out new pricing plans. Verizon has just introduced new single-line pricing that offers subsidized customers unlimited talk, text and 2GB of data for $60/month ($90/month previously) or $50/month under Edge. And Sprint has just announced a new family plan which offers four lines and 20GB of data for $160/month ($200/12GB previously), compared to the $210/month charged by Verizon and AT&T (NYSE:T) and the $180/month charged by T-Mobile for similar plans.
Sprint's new pricing plan is attractive but it mainly targets data-hungry families, suggesting that this move is just a first step. Other plans are likely to pop up in coming days as Sprint's new CEO Marcelo Claure announced a few days ago that the carrier would introduce "very disruptive" pricing plans this week. Notably, Sprint could offer an unlimited talk, text and data plan for $50 a month, $30 less than the similar plan from T-Mobile and something AT&T and Verizon don't offer.
These initiatives make sense in view of T-Mobile's successful pricing strategy. The company, which had lost more than 2m postpaid subscribers in 2012, gained more than 2m subs in 2013 and is on track to gain close to 4m this year as its ARPU declined 15% on average (when comparing T-Mobile's Q2 11 postpaid ARPU around $57 with the Q2 14 ARPU around $49).
This suggests that Sprint could at least mimic T-Mobile's price cuts (around -15%), or even go beyond considering that Sprint displays the largest postpaid ARPU among the four carriers ($61 vs. AT&T at $60, Verizon at $57 and T-Mobile at $49). If Sprint delivers on its promise to disrupt the market, it could lower prices by 20-25% on average.
AT&T and Verizon could derate as earnings growth outlook gets tougher
Back in 2011, AT&T reacted quickly to T-Mobile's move as it lowered service prices and adopted installment plans for devices (AT&T Next). 2014 is unlikely to be different: while Verizon preemptively cut single-line pricing during the weekend, both AT&T and Verizon will have no choice but to cut most pricing plans if they don't want Sprint and T-Mobile to grab market share at a fast pace. Interestingly, Sprint is rolling out these cheaper plans just a few weeks ahead of the likely iPhone 6 release, suggesting that Sprint could gain many high-end subs in the important calendar Q4 if AT&T and Verizon do not move...
Assuming that both AT&T and Verizon implement 5% (base case) to 10% (worst case) price cuts over coming years (and reduce their opex accordingly), we get to the following outcomes:
- A -4% to -8% impact on Verizon's EBITDA (note that the company generates 80% of its EBITDA from wireless).
- A -3% to -6% impact on AT&T's EBITDA (note that the company has a wireless exposure limited to 55% of its EBITDA).
The potential pressure on earnings is clearly manageable and is unlikely to materially affect the companies' dividend policies. That said, a price war will obviously be negative for sentiment and AT&T and Verizon will find it increasingly difficult to grow revenues and earnings.
In addition, the situation could only get worse if a low-cost player enters the U.S. wireless market. We are skeptical that French carrier Iliad (OTCPK:ILIAY), which offers unlimited talk, text and 20GB of data in France for EUR20/month or $27/month, will take over T-Mobile but who knows…
Against this backdrop, we believe it's safer to sell and take profits on AT&T and Verizon, which are trading close to their record highs.