T-Mobile, cable and Dish Network are well positioned to benefit from the trends as the U.S. heads into a recession while Verizon and AT&T “will be caught between a slowing industry and share loss to challengers,” according to analysts at Wall Street firm New Street Research.
T-Mobile has been a favorite among New Street and other investment analysts as its merger with Sprint puts it in a much more favorable position to compete against Verizon and AT&T. T-Mobile’s spectrum position, including its 600 MHz and the 2.5 GHz it’s getting in the Sprint deal, gives it valuable low- and mid-band spectrum as the industry moves to 5G.
“Investors are concerned that T-Mobile might suffer from higher churn and bad debt, given a customer base with lower credit quality,” wrote New Street analysts Jonathan Chaplin, Spencer Kurn and Philip Burnett. “We find no evidence for this trend from the last recession and no reason to think it will be a major factor in this recession. We think it is far more likely that T-Mobile will gain share at a faster pace as households become more price sensitive. The relaunch of the ‘New T-Mobile’ with unified pricing will be fortuitously well timed. Cable companies and Dish also stand to benefit.”
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The New Street team is forecasting slower growth in wireless customers as a whole as households get more price sensitive, with share shifting from postpaid to prepaid and within postpaid to lower priced carriers. If T-Mobile, Dish and cable are well positioned to benefit from the trends, then Verizon and AT&T “will be caught between a slowing industry and share loss to challengers.”
The analysts point out that T-Mobile has the largest and fastest-growing prepaid business. In addition, they expect T-Mobile should gain share in postpaid as consumers become more price sensitive, given that they are priced at a ~20% discount to Verizon and AT&T. “Share gains offset slower industry growth, leaving T-Mobile with similar retail customer count after adjusting for the recession,” they wrote. “Revenues and EBITDA are modestly lower. T-Mobile is our top pick in the sector.”
For Verizon, “we expect postpaid subscriber growth to grind to a halt,” they said. “The company’s prepaid business is too small and poorly positioned to offset the pressure in postpaid (they have been losing subs in prepaid for years). We have lowered our revenue and EBITDA for 2020 and 2021 to reflect lower retail subscriber growth. Verizon has a strong, defensive business, but they are less well positioned than T-Mobile.”
As for AT&T, it will be caught between slower industry growth and a share shift to lower priced carriers as well, according to the analysts. “We expect postpaid growth to turn negative,” they wrote. “AT&T has a large and growing prepaid business that should see growth improve (Cricket); however, it likely won’t be enough to offset pressures in postpaid. We have lowered revenue and EBITDA to reflect lower retail subscriber growth. AT&T’s wireless business will be OK (though estimates need to come down); their other businesses are more challenged.”
Dish's prepaid boost
Thanks to the government's remedy in the T-Mobile/Sprint merger, Dish, which reportedly revealed job cuts over the weekend, is switching up its business and acquiring Sprint’s prepaid division, led by the Boost Mobile brand.
That business has lost subscribers in the last few quarters, however, the New Street analysts expect this business to return to growth under Dish’s management, and that will be helped further by share shifting to prepaid. “We don’t know what Dish’s strategy will be,” they wrote. However, “for now we assume they price in-line with T-Mobile (Metro) and AT&T (Cricket).”
For the cable companies, most households can save money with cable’s mix-and-match offering of unlimited and by-the-gig plans. Bundling cheap wireless with fixed broadband should also help the companies take share in the fixed market.
Wireless is a small part of the thesis for the cable companies at this stage, but the analysts believe wireless will become much more important if the cable companies buy spectrum later this year. Cable companies, including Charter Communications, have actively participated in CBRS and C-band proceedings at the FCC for some time now.
April 1: It began
The New Street analysts said they’re not economists but they assume a recession began on April 1, which happens to be the day T-Mobile closed its merger with Sprint. A day before, T-Mobile CEO Mike Sievert basically said it was now or never as the COVID-19 crisis was closing the doors at the banks that would make the deal happen.
“In short, if we do not close the transaction on April 1, it is conceivable that we may never be able to do so,” Sievert told members of the California Public Utilities Commission (CPUC) at the time. T-Mobile and Sprint closed their transaction before getting the CPUC’s approval; a vote is scheduled for April 16.
In a separate note for investors, policy analyst Blair Levin said New Street doesn’t believe the merger's early closing created a material risk for the combined company. Last week, the companies announced they would delay actions to integrate their operations in California until the vote, he noted. While the California public advocates continue to protest the process by which the companies attempted to avoid jurisdiction over Sprint’s wireline facilities, “the resolution will not have a material effect on the new enterprise,” he concluded, noting there’s still a dispute over conditions.
In his first blog as CEO published today, Sievert promised the “un-carrier” will continue blazing a new trail in wireless and not be like the “other” carriers. “Our new goal is to build the world’s best 5G network, delivering innovation, speed, and value,” he said. “With the New T-Mobile, you will never be forced to choose between low prices or a great network again, because with the new T-Mobile network, we’ll give you BOTH.”