The latest buzz taking the wireless industry by storm is T-Mobile US, Inc.’s (TMUS - Free Report) decision to abolish overage fees, unfolding the company’s latest strategy under the Un-carrier move it started last year. This implies that customers of T-Mobile US will no more be required to pay extra charges for using voice, text or data service beyond their subscribed plan.
While the strategic decision is a welcome change for wireless users, it also calls for heightened competition and price war against major national players like AT&T, Inc. (T - Free Report) , Verizon Communications Inc. (VZ - Free Report) and Sprint Corporation (S - Free Report) . Further, it also presages a radical change in the pricing model of the industry, as these charges contributed significantly to the top line of the carriers.
T-Mobile in its attempt to fortify its position in the U.S. telecom industry eliminated annual service contracts. With the introduction of its Simple Choice plan last year it began gradually axing overage fees.
The company in its press release mentioned how 20 million Americans were affected by overage charges in 2013 and the top three players made around $1 billion by levying these fees.
T-Mobile CEO John Legere, in his statement, took a clear stance on discarding overage fees and highlighted it as a predatory practice undertaken by wireless carriers. He also challenged other big players to abolish their overage fees that impose an added cost burden on consumers.
However, the street remains wary of T-Mobile’s strategic step as the company’s share price went 1% down to $26.74 at the end of trading on Monday. We believe that in a market where prices remain highly competitive and every pricing strategy is imitated by close competitors, it will be difficult for other players to remain unaffected by T-Mobile US’s new move.
This indicates that we are to see more such changes in pricing policies of other companies in the coming days, which are likely to affect their overall revenue models. Especially for small carriers, the decision will mean a drastic change, which can hardly be affordable given the scale of operation and revenue generating abilities of these companies. As a result, we see a significant headwind hitting the market valuation of some of these telecom companies in the near future.
How the new changes will be accommodated by other carriers will presumably decide the market movements of these stocks. We believe that while T-Mobile US has set a new trend by axing overage charges to lure customers, following it as an industry norm and adopting a new pricing model by all telecom carriers will depend upon the long-term viability of such changes.
While AT&T currently sports a Zacks Rank #2 (Buy), T-Mobile US, Verizon and Sprint carry a Zacks Rank #3 (Hold).
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