Wireless price war drives down costs for consumers, sales for carriers
Verizon Wireless once promised customers an unrivaled network with clear calls and fast downloads in exchange for expensive cellphone service.
But no longer. With network improvements industrywide, a price war is breaking out.
Verizon Wireless and AT&T Inc. warned separately this week that their fourth-quarter profits probably would take a hit because they had to keep up with discount pricing in an increasingly competitive market in the last year.
Shares of all four major U.S. carriers tumbled Tuesday, ranging from about 3% at AT&T to more than 8% at T-Mobile US Inc.
For the first time in recent years, industry analysts said, many customers have strong options. Verizon Wireless, the nation’s largest carrier by customers, is feeling the heat because of revamped networks at Sprint Corp. and AT&T Inc. and an expanding list of unlimited packages at T-Mobile, including one announced Tuesday.
Though customers are still coming through Verizon’s doors at a good pace, they’re paying less because of promotional offers such as a $150 credit for every smartphone line switched to Verizon. It’s a dynamic that “will put short-term pressure” on profit margins and earnings per share, Verizon said.
“The question now is, ‘Is Verizon going to risk losing business or keep following the crowd?’” said telecommunications industry analyst Jeff Kagan. “We’re watching the wireless industry transform itself because No. 1 right now is customers want to pay less for service.”
The shift began about 20 months ago when T-Mobile began discarding two-year contracts, eliminating the subsidies of several hundred dollars for new phones and offering customers the ability to pay for devices in monthly installments.
The aggressive tactics continued into this year. T-Mobile sharply reduced the price of international plans and allowed music streaming that would not count against data usage.
On Tuesday, T-Mobile said it would reduce the price of a two-line plan with unlimited calling, texting and data to $100, from $140. Each additional line costs $40, meaning a family of four would save 50% compared with a comparable Verizon plan, according to T-Mobile.
The company also restored a previously offered deal of $100 for four lines with 10 gigabytes of data a month and unlimited calling and texting.
T-Mobile’s so-called uncarrier effort has pushed it close to overtaking Sprint as the nation’s third-biggest cellular service provider. Even though T-Mobile’s service might be spotty in some areas, boisterous Chief Executive John Legere has won the marketing and pricing games, analyst Kagan said.
Both AT&T and Sprint have rolled out their own offers this year to keep pace.
AT&T Chief Financial Officer John Stephens warned Tuesday that AT&T would see an uptick in the percentage of customers leaving its network this quarter. Between the customer losses and the promotions to new ones, margins will be down, he said.
Stephens also pointed to the latest iPhone as adding to the competition. In September, Apple Inc. launched the iPhone 6 on all four carriers for the first time. Despite the pressures, he said, profit margins for the entire year will be comparable or better than last year.
“In all this noise, in all these promotional offers and all this stuff going on, we’re having one of our best years for churn,” Stephens said at a conference hosted by research firm UBS.
Customers are seeing through all the headlines and finding unacceptable details in the promotions, Stephens said. Having a broad and fast network coverage will be the ultimate thing that wins over customers, he said.
Verizon social media workers are making similar pleas. They’ve jumped into Twitter conversations to hold on to frustrated customers who post online about their desire to switch to deals with other carriers.
Sprint regional Vice President Kevin Kunkel said his company is counting on a combination of an improved network, especially in Southern California, and good pricing to attract customers. Last weekend, Sprint began offering to cut service charges in half for customers switching from AT&T and Verizon.
“We wanted to rumble with the big guys,” Kunkel said. “It’s the boldest statement we’ve made that Sprint is the best place to be in this super-competitive marketplace.”
The deal has drawn scorn from customers annoyed that they have to buy new phones from Sprint to take advantage of the offer. And T-Mobile’s Legere blasted Sprint for not making a similar deal available to existing customers.
“That makes my head spin, and it’s exactly the kind of BS we’re on a mission to end,” Legere said.
Meanwhile, Sprint said it could offer 20 gigabytes, or double T-Mobile’s new deal, for $100 on a four-line plan.
Analysts worried that the escalating price competition would hurt customers in the long run if it limits the investment that service providers can inject into network upgrades. The providers said that shouldn’t be an issue for now, though costs for new signal space are exceeding expectations.
Wall Street, though, pushed shares of AT&T down 99 cents, or 2.9%, to $32.89. Sprint tumbled 18 cents, or 3.8%, to $4.57. Verizon Communications Inc., parent company of the mobile carrier, lost $1.98, or 4%, to $46.92. And T-Mobile sank $2.35, or 8.3% to $25.85.
At the end of June, Verizon Wireless controlled 34.4% of the U.S. wireless market, followed by AT&T with 32.6%, Sprint with 14.7% and T-Mobile with 14.2%, according to equity research firm Oppenheimer & Co.
The short-term outlook, though, looks great for smartphone users like Michael Galli.
The 39-year-old wanted to leave a Verizon plan that he shared with a stepbrother. Galli walked into a Sprint store in Glendale nine days ago and came out with a Samsung Galaxy Note Edge that’s costing him $35 a month for two years.
He said he could afford the fancy gadget because of the money he’s saving on the service.
“For the same price, I’m getting unlimited data versus 2 gigabytes at Verizon,” Galli said of his $45 unlimited-everything plan. “To me, that’s a no-brainer.”
He has had issues receiving texts and calls near his Lake Balboa home. Sprint told him he would have to accept slower service near home because of a technical glitch.
“I still wouldn’t switch back to Verizon,” he said. “I like the honesty. I like the rate plan.”
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