The U.S. postpaid wireless market continues to witness intense pricing competition. Uninterrupted advancement in wireless technologies has aided telecom operators to adopt newer business models in order to stay in the game. Notably, postpaid wireless customers are those who are billed monthly and considered more profitable to telecom operators.
Technological upgrades and breakthroughs have resulted in cutthroat price competition. Product life-cycle and upgrade-cycle have been reduced drastically as several firms are coming up with new products and services within a short span of time. Increasing competition is compelling players to offer heterogeneous and bundled services to retain market share.
Disappointing Start in 2018
After a lackluster 2017, the U.S. wireless service operators have failed to turn their fortune around in 2018 so far. Year to date, the share price of all four major wireless operators – Verizon Communications Inc. (VZ - Free Report) , AT&T Inc. (T - Free Report) , T-Mobile US Inc. (TMUS - Free Report) and Sprint Corp. (S - Free Report) – declined 8.5%, 14.1%, 9.3% and 11.2%, respectively.
Intensified pricing competition resulting in lower ARPU (average revenue per user) and margins, massive investment for upcoming 5G wireless network and fiber optic buildout resulting in low free cash flow and severe competitive pressure compelled the investor’s to shift focus on other growth-oriented industries.
Ever since President Trump came to power, the telecom industry circle has been rife with speculations that the Trump administration may pave the way for consolidation of the U.S. wireless industry. The previous Obama regime was very firm on the issue of consolidation by not allowing the number of national wireless service providers to decrease below four in order to eliminate monopolistic power.
However, the newly restructured Federal Communications Commission (FCC) under Trump’s presidency has given enough indications of its leniency compared with the Obama administration. Consequently, on April 2018, T-Mobile US and Sprint decided to merge their businesses.
If the deal finally sees light of the day, both T-Mobile US and Sprint will benefit significantly. At present, Verizon and AT&T together control around 68% of the U.S. wireless market. The merged entity of T-Mobile US and Sprint with around 32% market share will be a formidable challenger to both Verizon and AT&T.
Entry of New Players
Largest cable MSO (multi service operator) and media behemoth Comcast Corp. (CMCSA - Free Report) has already forayed into this field with its Xfinity Mobile offering. Presently, the company is utilizing its MVNO (mobile virtual network operator) agreement with Verizon to use the latter’s wireless network along with its own WiFi network to offer mobile services.
Another cable giant Charter Communications Inc. (CHTR - Free Report) is reportedly inching closer to launch Spectrum Mobile wireless services. Like Comcast, the company has an MVNO agreement with Verizon as well as its own WiFi network to offer mobile services.
Additionally, Comcast has acquired 73 licenses in the band of 600 MHz auctioned by the FCC. Charter Communications has also launched experimental field trials of the 5G wireless network. These trials come on the back of spectrum test licenses granted to it by the FCC. Moreover, both the companies have formed a partnership for software and backend systems needed to support the two mobile networks.
Both Comcast and Charter Communications carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows year-to-date price performance of six stocks mentioned above.
The U.S. telecom market continues to witness intense pricing competition, as success to a great extent depends on technical superiority, quality of services and scalability. Competition is likely to increase further in the U.S. wireless industry in 2018 with the entry of cable MSOs. Moreover, the proposed merger of T-Mobile US and Sprint will only worsen the situation for incumbents like Verizon and AT&T.
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