Shares of AT&T held firm late Wednesday after the carrier’s wireless business posted some lackluster fourth-quarter results that nonetheless managed to meet analysts’ expectations—to one degree or another, anyway. The No. 2 U.S. carrier lost 67,000 postpaid net phone customers, marking its ninth consecutive quarter of defections—but significantly beating analysts’ expectations—and wireless revenue was 0.7% lower than the year-ago period as ARPU continued to slide.
But investors didn’t seem displeased by AT&T’s earnings as the company’s stock inched up less than one-tenth of a percent in after-hours trading Wednesday.
Contrast that with Verizon, which just a day earlier saw its stock slide more than 4% after its 167,000 postpaid handset net adds, easily beating analysts’ estimates. Postpaid ARPU was down 7.6% year-over-year, however, which led to the shortfall, and service revenue shrank 4.9% year-over-year. Worse, Verizon executives said wireless revenue won’t return to growth this year—and some questioned whether it could finally see growth again in 2018.
The market-share gap—and the network gap—continue to narrow
Meanwhile, Sprint continues to claw back market share in an ultra-competitive environment, but its subscriber growth is coming at a cost. Last quarter, for instance, the nation’s smallest major carrier posted 347,000 net postpaid phone adds, way up from 62,000 during the same period a year ago, as its overall customer count grew by 740,000.
But much of that traction was surely due to Sprint’s promotional offer to cut monthly bills in half for users who switch from competitors, and the carrier still posted a net loss of $142 million for the quarter. That promotion will almost surely end soon—it simply doesn’t seem financially viable in the long term—and whether Sprint can return to profitability as it regains market share is far from clear.
The notable discrepancy among major carriers, of course, is T-Mobile. The nation’s third-largest carrier has yet to report fourth-quarter earnings, but its third quarter of 2016 was another beauty: It added more than 2 million net customers, marking its 14th straight quarter of more than 1 million net adds, and gained nearly 1 million net postpaid customers.
And it managed to boost the bottom line as it grew market share: T-Mobile reported $7.1 billion in service revenues during the third quarter, up more than 13% year-over-year, and its $9.2 billion in total revenues marked an increase of 17.8% over the prior year.
“In the third quarter, when Verizon and AT&T each reported losses of postpaid phone subscribers and negative wireless revenue growth, T-Mobile quietly once again gained both market share and market strength, capturing more than all of the industry’s revenue growth and subscriber growth in Q3,” Craig Moffett of MoffettNathanson wrote at the time.
A race to the bottom in basic wireless services?
T-Mobile’s progress is particularly notable because—unlike its larger competitors—it has increased as the carrier has remained focused on its core business of providing wireless services. But analysts have begun to question whether that strategy is viable over the long haul. Like Sprint, T-Mobile rolled out so-called unlimited plans several months ago, then doubled down on that strategy earlier this month when it killed its longtime Simple Choice plans entirely and started to include taxes and fees in the price of its new T-Mobile One plans.
The move will surely appeal to customers looking for a better deal, but it also prompted MoffettNathanson to downgrade T-Mobile shares to neutral from buy, citing concerns about the overall U.S. wireless market as competition increases. T-Mobile’s momentum over the last few years is undeniable—and incredible—but whether it’s sustainable is another question.
The challenge for U.S. mobile network operators, then, is to find ways to differentiate their offerings in an era of nearly ubiquitous—and nearly commoditized—connectivity. AT&T’s massive media strategy is bold, to be sure, but it’s a big bet with an enormous downside. Verizon’s more deliberate moves may be wiser in the long term, but wireless revenues look bleak for at least the next year, and the prospects for monetizing 5G—a segment in which Verizon is clearly a leader—are uncertain. And Sprint and T-Mobile are gaining shares of the traditional wireless market, but the value of that market may be on the wane.
Carriers still have plenty of opportunities to make money in wireless, of course. Investing in spectrum—particularly mid- and high-band spectrum—can ensure they can meet ever-increasing demand for mobile data, and densifying their networks is also crucial. And there is no shortage of business cases for the IoT, from connected cars to smart cities to healthcare. The era of making big money from basic wireless services is coming to an end, though. Carriers who recognize that and develop innovative new strategies and business models will thrive. Those who don’t face a bleak future. - Colin | @colin_gibbs