Mobile Phone Wars: Keeping My Distance

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Includes: T, VZ, WMT
by: Karl Denninger

Verizon (NYSE:VZ) reported results Monday morning:

Profit, excluding severance and other costs, amounted to 60 cents a share, New York-based Verizon said today in a statement. That compared with the 59-cent average of estimates compiled by Bloomberg. Sales rose 10 percent to $27.3 billion, compared with the average $27.2 billion projection.

Yeah, but....

Verizon added 1.3 million wireless customers in the quarter, including customers obtained through acquisitions. That surpassed Fritzsche’s 1.13 million projection. Sales of data services rose 48 percent and accounted for about one-third of customers’ bills. Customer turnover rose to 1.49 percent from 1.33 percent a year earlier.

A bit of hair on that dog - acquisitions tells you nothing about organic growth. The other interesting component is the data services pricing and growth - this has been a push for a long time, and remains so. The surprise is that 1/3 of customer billings is now data, and that it continues to accelerate.

On the worrisome side is the growth in churn - that's a 12% increase and definitely not going the right way. It's showing up in the internals of the firm's performance too:

Net income attributable to Verizon fell 30 percent to $1.18 billion, or 41 cents a share, from $1.67 billion, or 59 cents, a year earlier.

Verizon said in July it planned to cut 8,000 employees and contractors in the second half, with additional cuts to come in the next few years. AT&T (NYSE:T) reported last week it had almost 19,000 fewer employees as of Sept. 30 than a year earlier.

I hope Verizon likes competition, because there are two potential cannibalization effects staring them in the face.

The first is "Straight Talk" from Wal-Mart (NYSE:WMT), which is Tracfone's latest foray. It is a "you buy the phone" plan with the price of the phone being anywhere from $40-100 (depending on the device) with service plans being either $30 or $45/month - the latter being unlimited voice, text message and (on-device) data. There are no contracts - and Tracfone runs on top of Verizon's service as an MVNO (essentially a bucket shop that buys blocks of time and resells).

In the "more conventional" carrier arena, T-Mobile launched "Project Black" Sunday. This is a direct assault on Verizon and AT&T, and comes in two "flavors" - a subsidized contract-style agreement (2 year) as with everyone else where the phones are cheap, and then a second, non-subsidized plan that is $10 cheaper per month.

The "gotcha" here is the non-contract plans for places like Verizon. Now you can buy from a national carrier unlimited talk and text (SMS, MMS) service for $60 - if you bring your own handset. Being SIM-based, this means you can buy the phone you want from anywhere, including on eBAY, have no contract commitment (get upset, you leave!) and pay $60/month (plus taxes of course.)

The same plan from Verizon is $119 - twice as expensive.

Yes, you get a handset subsidy. So? That handset subsidy costs you $60/month, or $720 a year! If you want the handset subsidy (and contract) from T-Mobile, it is available - for another $10/month.

If you don't need unlimited talk the contrast is still striking. A 1,000 minute plan from T-Mobile on their new plan is $50/month, while the same thing from Verizon (900 minutes, as close as they get) is $80.

Eek.

Now Verizon will counter, I'm sure, with "the nation's largest 3g network." And this means what, when the price is nearly double?

What's even worse for Verizon is what will happen to them when people figure out that "Straight Talk" (sold only at Wal-Mart) offers the same network for $45/month - unlimited use, or $30/month for 1,000 minutes and 1,000 text messages.

Sprint (NYSE:S) started this price war several months ago with their "unlimited everything" plans in an attempt to halt what had become arterial bleeding in their subscriber count. It doesn't appear to have worked all that well, but it has put incredible pressure on the other carriers, with the MVNOs (Straight Talk, Boost, etc) coming at everyone from the bottom end and now T-Mobile coming at them from the "nationally-recognized carrier" side.

I can't get excited about Verizon, given the pricing realities.

The question for T-Mobile is whether they can build out enough 3G capacity to matter. I've been a customer of theirs since 2000, and one of the maddening realities of their service is that in many areas their data is still GPRS (~40kbps), even though EDGE (~160kbps) is only a software upgrade and backhaul capacity improvements. Yet despite EDGE being available essentially nationwide on AT&T for several years, T-Mobile has simply refused to put the (relatively small) amount of money into that network upgrade. When you're in a 3G service area (which isn't much of the landmass, but does cover a fair number of people), the higher speed is nice - but the fallback once you drive outside of a major city is severely disappointing.

Data service is nice and profitable for the operators, but how much monetization of their claimed "best network" Verizon can accomplish given the pricing pressure is another question entirely.

I'd stay away from all of the carriers right now - placing bets in an industry where price wars are active is a dangerous game, as it is difficult to determine what the internal cost structures of the various players really look like, and therefore, who can wield the longest knives and yet not cut their own throat.

Disclosure: No position.