We believe that the wireless majors, AT&T (T) and Verizon Communications (VZ) may be lulled by the proverbial calm before the possible storm. While these giants remain eminently solid, yet their outlook is opaque. Also, issues such as huge capital costs, uncertain returns on investment, high penetration rates and churn (customer switch) rates provide continued room for concern.
Furthermore, the proposed $39 billion merger between AT&T and T-Mobile USA to create the largest mobile phone entity shows increased chances of failure rather than success. The deal is under regulatory attack even as AT&T is seeking to divest substantial assets to salvage the takeover.
Sprint Nextel Corp. (S), although much smaller than the majors, is capable of engaging in aggressive price warfare. Also, calling plans are being treated as commodities. One must remember that there is an element of intense competition from the prepaid wireless service providers, MetroPCS Communications (PCS) and Leap Wireless International (LEAP), which keeps rates down. Both run low-cost business models, which enable them to roll out a range of cheap service plans.
Cable companies, such as Comcast (CMCSA) and Time Warner Cable (TWC), are a threat too, in the sense, they provide long distance telephony as part of their subscription.
Thus, recent price discounts and promotional warfare may provide headwinds, to an extent, to short-term earnings. Already, despite rising penetration of smart phones, average revenue per user (“ARPU”) has dropped over the last few years.
The majors are confronted by a slew of New Age competitors. Microsoft (MSFT) recently took over the Internet call provider Skype Technologies. Skype receivers do not need assistance from the voice, data and text provisions of the wireless majors. Further, Google (GOOG) Voice enables free calls and messages to U.S. phone numbers.
The majors have thus far benefited from text messaging on which margins were higher. Yet, this business faces a bleak future as smart phone customers can transmit text messages without reimbursing the majors. Apple (AAPL) has a built-in messaging feature into its iPhone. Facebook has capabilities which reduce the need for a conventional text messaging service.
To sum up, the dominance of the majors is now diffused with manufacturers of equipment and software. AT&T and Verizon may be on a slippery slope with competition from traditional and emerging threats looming large in the horizon.
APPLE INC (AAPL): Free Stock Analysis Report
COMCAST CORP A (CMCSA): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
LEAP WIRELESS (LEAP): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
METROPCS COMMUN (PCS): Free Stock Analysis Report
SPRINT NEXTEL (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
TIME WARNER CAB (TWC): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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