How to summarize the wireless industry’s second quarter of 2020? A number of narratives could do the job, according to the Wall Street research firm MoffettNathanson.
Industry ARPU growth and service revenue growth have turned negative. The cable industry’s vision of a hybrid MVNO/MNO model continues to gather momentum. 5G still doesn’t have any use cases, but carriers are racing for spectrum to support 5G.
“Verizon risks falling behind. AT&T risks falling apart. Dish’s network strategy still doesn’t hold up to scrutiny,” wrote analyst Craig Moffett in a Q2 report for investors today. But if there’s a single through-line that ties many disparate observations together, “it is that everyone is chasing T-Mobile.”
Other investment analysts are singing a similar tune. Analysts at New Street Research favor T-Mobile among the wireless carriers in large part because of its spectrum advantage: two times that of AT&T and three times that of Verizon. “They have an advantage with the type of spectrum they have too; their large 2.5 GHz holdings are particularly well suited to 5G,” wrote analyst Jonathan Chaplin in a recent report.
Moffett’s target price for T-Mobile’s stock, which the firm rates as Buy, is now $158, up from its previous target price of $136. The firm rates Verizon as Neutral with a revised target price of $59, a decline of $3 per share versus its previous target of $62. It’s assessment of AT&T is Sell with a target price of $24.
Total service revenue for the Big Three wireless carriers slipped into negative territory in the second quarter of 2020, Moffett said. Only T-Mobile materially grew service revenue in the quarter, at 1.7%.
Verizon’s service revenue was roughly flat, and AT&T’s dropped to -2.4%, he said. “To be sure, few companies, and fewer sectors, were able to grow revenues in the quarter,” Moffett added. “But telecom services was, to some, a category that should actually grow.”
In the current climate, Moffett doesn’t see signs of a return to the price wars of 2014-18. The issue that affects all the carriers is lack of travel due to the COVID-19 pandemic, which means they’re not getting the roaming revenues to which they’ve become accustomed. The elimination of many late payment charges, in line with the FCC’s Keep Americans Connected pledge, also weighed on carriers’ ARPU.
The loss of roaming revenue was a bigger drain on AT&T and Verizon, however, particularly when it comes to international roaming. T-Mobile has long included “free” international roaming in its monthly unlimited price, leveraging its relationship with parent Deutsche Telekom, so the reduction in travel had a much more limited impact on T-Mobile, Moffett noted.
Subscriber trends did improve for the Big Three in the quarter, all of which added phone subscribers. However, Moffett said it’s important to understand that unit numbers in the second quarter come with "a very large asterisk." Results were muddled by the different approaches the carriers took to counting high-risk and past-due subscribers protected from disconnection orders under the FCC’s pledge and by T-Mobile’s reclassification of various Sprint subscribers to conform to its own reporting methodology.
The cable factor
Count cable as chasing T-Mobile as well. In the first quarter of 2020, the cable industry actually accounted for more than all of the industry’s phone subscriber growth. With a more “normal” industry growth rate in the second quarter, cable’s share of phone net additions fell back. “Still, at 35% of the industry’s net growth, Cable’s share of growth in the second quarter was relatively high,” Moffett said.
If the cable industry is to mount a more serious threat to the wireless industry, the companies will have to significantly lower their costs. In order to do that, Comcast and Charter Communications need to offload more traffic from their Verizon MVNO agreements and onto their own networks.
That means they need spectrum, most likely via the current CBRS auction. Moffett noted that Comcast is currently the only meaningful holder of wireless spectrum among the cable operators, having acquired about 10 MHz of in-footprint 600 MHz spectrum in the incentive auction.
LightShed Partners analyst Walter Piecyk pointed out that Charter added the most postpaid subscribers in the second quarter, and it has new unlimited HD video plans, starting with $55 for one line compared to $90 from Verizon and $85 from AT&T and T-Mobile. When content savings are added into the plans, Charter offers four lines for $220 versus Verizon’s four-line plan for $198 and $185 from AT&T and $187 from T-Mobile.
Moffett noted that the cable operators’ plans are most comparable to the entry-level, no-frills unlimited plans from the Big Three, whose more expensive options generally reflect features like higher data allowances before de-prioritization, higher-quality video streaming, more hot spot data and free access to certain streaming services.
“To be sure, the ability to mix and match unlimited lines with pay-by-the-gig lines expands Cable’s appeal to some multi-line customers – Verizon’s recent move to offer mix and match is likely in direct response to cable’s offering of the same – and Altice’s plans are aggressive by any measure … even though Altice’s market footprint is relatively small,” Moffett wrote.
Altice launched its infrastructure-based MVNO mobile service last year with $20 unlimited plans.