Mobile Industry Profit Pain Has Just Begun

| About: SoftBank Group (SFTBY)
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Summary

The four big mobile carriers are playing a "great game" and price wars are just one part of it.

Expect a big merger next year as rivals compete for DISH spectrum.

SoftBank will be the long-term winner, but you'll have to wait for your profit.

The rollover in Verizon (NYSE:VZ) stock shows the market war among U.S. mobile carriers is now fully engaged, following the latest price cut by Sprint (NYSE:S). The next time the war breaks out in corporate boardrooms, expect DISH Network (NASDAQ:DISH) to be a prime beneficiary.

But let's start this "great game" story from the beginning. For years, mobile telephony was a comfortable duopoly between AT&T (NYSE:T) and Verizon, one good enough that Verizon had the confidence to finally buy out its partner, Vodafone (NASDAQ:VOD), early this year.

This made analysts so confident that at least one here was predicting a 30% gain in Verizon stock over the next 12-18 months.

The Vodafone deal saddled Verizon with enormous debt. Its debt-to-assets ratio is about 50%, double that of AT&T. The two smaller rivals, T-Mobile (NASDAQ:TMUS) and Sprint, aren't doing much better in that regard. Sprint carries $32 billion in long-term debt against $86 billion in assets. T-Mobile holds almost $17 billion in long-term debt against almost $50 billion in assets.

It is Sprint, however, that most bears are watching, because it's controlled by Japan's SoftBank (OTCPK:SFTBY). Having declared its latest network upgrade "substantially complete" the company has agreed to cut some Verizon and AT&T bills in half.

Except for the continued existence of T-Mobile, which Sprint tried to buy in the summer, what is happening today is exactly what happened after SoftBank bought control of Vodafone Japan nearly a decade ago. Back then, Vodafone was in roughly the same position regarding NTT DoCoMo and KDD that Sprint is in now regarding Verizon and AT&T - a poor third. But aggressive promotions transformed that market. Most consider Japan today to be a three-way oligopoly, and SoftBank leads through third party sales.

This is the plan for the U.S., and will likely be the plan for Europe once the U.S. plan is fully executed. SoftBank's aim is to become the first global phone carrier. As part of that effort, SoftBank is now pulling profits from Japan, and has an enormous cash base due to its stake in Alibaba (NYSE:BABA), which exceeds that of Yahoo (YHOO).

Sprint has also quietly joined with T-Mobile to add GSM support to its phones and will launch SIM cards aimed at unlocking phones - locked phones are at the heart of the Verizon-AT&T duopoly. Some say that 2015 is a "make or break" year for Sprint, but it's in this game for the long haul. And the way to play Sprint, if you like it, is to buy the parent, SoftBank.

Despite short-term pain for all four of the carriers, this is still a great business to be in, evidenced by the $38.4 billion in bids at the latest AWS-3 spectrum auction. There is another way to get spectrum as well - buy DISH. While chairman Charlie Ergen and his team have been getting shut out with their own acquisition efforts - they failed to buy both Sprint and Clearwire, which Sprint now owns - they have given big profits to shareholders by becoming a tastier target in their own right.

One way to minimize the cost of a take-out is to split the company, buying the wireless assets while passing the satellite service on to a company that needs vertical integration, such as CBS (NYSE:CBS). That's a complex deal, which will take time to get past rivals, but it's the kind of bid you can expect in 2015, and it will probably come from Sprint. DISH is a buy based on its takeover potential - ignore the fundamentals.

The rest of the carriers are all short-term shorts, especially Verizon, but out of the whole lot the one with the best potential is AT&T, which still has dry capital powder. Sprint will be there, too, but you can probably pick it up at lower prices next year. You can probably pick up all four carriers at lower prices next year. The most bullish move you can make this month is to shop for their services, then get in on the fireworks next year.

Disclosure: The author is long S.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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