The land grab for subscribers has been motivating mobile operators to slash prices for months, as the four major carriers compete not only with one another but also with the mobile virtual network operators that lease their spectrum. Wi-Fi-first operators Google Fi and Republic Wireless are now offering customers refunds for unused data, adding a new layer of competitive pressure.
Of course the vast majority of subscribers are still choosing the established nationwide carriers that can offer a wide range of device choices. And while it may seem as if the major carriers will cut prices indefinitely, there are signs that the price cuts will stop as service revenue is threatened.
“The sky is not falling on pricing, despite cries around me that it is,” said analyst Jennifer Fritzsche of Wells Fargo Securities. “AT&T has made what I would call a purposeful decision to not match Verizon’s price point. Verizon, all second quarter, has advertised around $80 for 10 gigabytes of data. AT&T has stayed at that $100 price point for the similar amount of data.”
Those divergent price points are impacting revenue. Analyst Kevin Smithen of Macquarie Securities is advising clients to buy shares of AT&T and sell Verizon Communications. He expects to see a 1.9% drop in Verizon’s wireless service revenue for the second quarter based on pricing pressure. So far, Verizon has managed to protect profits, but the same cannot be said for Sprint or T-Mobile US.
Fritzsche thinks that T-Mobile US may soon give in to the pressure to be profitable. She expects T-Mobile US parent Deutsche Telekom to rein in the “un-carrier” if data discounts continue to erode profits.
“At some point, and I think we’re getting to that point, you really have to focus on profitability,” she said. T-Mobile US has been the primary instigator of the current price war competition, so a change from the un-carrier could relieve pricing pressure throughout the industry and transfer more costs to consumers.
Fritzsche also noted that Sprint’s abandonment of its “iPhone for Life” promotion and its adjustments to the “All-In” plan will amount to a price increase for subscribers.
“That is essentially a $10 price increase, something we haven’t seen from that company in a very long time,” she said. Fritzsche thinks that Sprint’s move, combined with AT&T Mobility’s refusal to cut prices, add up to a move toward “rationality in pricing.”
That “rationality” may eventually include a true end to unlimited data plans. Analyst Iain Gillott of iGR Research estimates that roughly one-third of all U.S. mobile subscribers are still on some kind of unlimited plan, a luxury he expects to see disappear.
“Simply put, the operators cannot afford the network traffic associated with a truly unlimited rate plan in the era of LTE,” said Gillott. He thinks that as carriers become desperate to wean customers from grandfathered unlimited plans, a new round of price cuts could take hold. “It is likely the operators will offer great deals to these subscribers to get rid of the unlimited plan – something like 30 gigabytes per month for $100 to share with the family,” he predicted.
Analyst Iain Gillott contributes regularly to RCR Wireless News. You can read his columns here.
Analyst Jennifer Fritzsche shared the following disclosures in early July 2015, prior to the interview shown above:
I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
Wells Fargo Securities, LLC maintains a market in the common stock of Lumos Networks, Zayo Group Holdings, Inc., InterXion Holding N.V., InterNap Network Services Corp., Level 3 Communications, Inc., Cogent Communications Group, Inc., Equinix, Inc., FairPoint Communications, Inc., Frontier Communications Corp., Consolidated Communications, Inc., T-Mobile US, Inc., Dycom Industries, Inc., United States Cellular Corporation, NTELOS Holdings Corp., Cincinnati Bell, Inc., CenturyLink, Inc., Crown Castle International Corp., SBA Communications Corp., AT&T, Inc., Verizon Communications Inc., Sprint Corporation.
Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for Sprint Corporation, Verizon Communications Inc., AT&T, Inc., CenturyLink, Inc., United States Cellular Corporation, Zayo Group Holdings, Inc. within the past 12 months.
Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from Zayo Group Holdings, Inc., Lumos Networks, Level 3 Communications, Inc., Windstream Corporation, Consolidated Communications, Inc., Frontier Communications Corp., FairPoint Communications, Inc., Equinix, Inc., Cogent Communications Group, Inc., United States Cellular Corporation, Dycom Industries, Inc., T-Mobile US, Inc., CenturyLink, Inc., Cincinnati Bell, Inc., NTELOS Holdings Corp., AT&T, Inc., SBA Communications Corp., Crown Castle International Corp., Verizon Communications Inc., Sprint Corporation.
Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Sprint Corporation, Verizon Communications Inc., Crown Castle International Corp., SBA Communications Corp., AT&T, Inc., CenturyLink, Inc., United States Cellular Corporation, Consolidated Communications, Inc., Zayo Group Holdings, Inc. in the past 12 months.
Wells Fargo Securities, LLC and/or its affiliates, have beneficial ownership of 1% or more of any class of the common stock of Level 3 Communications, Inc., Cincinnati Bell, Inc., SBA Communications Corp.
SBA Communications Corp., AT&T, Inc., Crown Castle International Corp., Verizon Communications Inc., Sprint Corporation, CenturyLink, Inc., United States Cellular Corporation, Zayo Group Holdings, Inc., Consolidated Communications, Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to SBA Communications Corp., AT&T, Inc., Crown Castle International Corp., Verizon Communications Inc., Sprint Corporation, CenturyLink, Inc., United States Cellular Corporation, Zayo Group Holdings, Inc., Consolidated Communications, Inc.
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An affiliate of Wells Fargo Securities, LLC has received compensation for products and services other than investment banking services from Sprint Corporation in the past 12 months.
Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from CenturyLink, Inc., Dycom Industries, Inc., T-Mobile US, Inc., Equinix, Inc., Cogent Communications Group, Inc. in the past 12 months.
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12
WELLS FARGO SECURITIES, LLC Fritzsche’s Forum EQUITY RESEARCH DEPARTMENT
Communications Inc., Sprint Corporation, American Tower REIT, Inc., CenturyLink, Inc., United States Cellular Corporation, T- Mobile US, Inc., Level 3 Communications, Inc., Windstream Corporation, Zayo Group Holdings, Inc., Consolidated Communications, Inc., Cogent Communications Group, Inc.
Wells Fargo Securities, LLC or its affiliates managed or co-managed a public offering of securities for an affiliate of Consolidated Communications, Inc., United States Cellular Corporation, CenturyLink, Inc., Sprint Corporation, Crown Castle International Corp. within the past 12 months.
Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from an affiliate of Crown Castle International Corp., Sprint Corporation, CenturyLink, Inc., United States Cellular Corporation, Consolidated Communications, Inc. in the past 12 months.
A member of Research Management currently has a long position in the securities of Verizon Communications Inc. Wells Fargo Securities, LLC, or any of its affiliates, has beneficial ownership of 5% of any class of common stock of Cincinnati
Bell, Inc.
AMT: Risks to the stock include reduced wireless capex related to consolidation and technological advancements that enhance the voice capacity of wireless carrier networks. CBB: Risks to our range include increased competition from cable VoIP offerings, wireless substitution, and higher than expected capital spending.
CCI: Risks include reduced wireless carrier capex related to consolidation and technological advancements that enhance the voice capacity of carrier networks. CCOI: Risks to our valuation range include execution risks, Internet growth slowing down, the lack of scale, technology change and unfavorable change in regulations.
CNSL: Integration of its Enventis Corporation acquisition, regulatory changes that could further impact USF/ICC revenue and higher than expected capital needs. CTL: Risks include flat-to-little growth, increasing competition, integration risks related to Embarq and regulatory uncertainties (related to ICC and USF reform).
DY: Risks include dependence on capex programs of a concentrated customer base and the cyclical and seasonal nature of its revenues. EQIX: Risks: Potential for a weak economy to impact IT spend, increasing power/cooling requirements, and competition. FRP: Risks include an intense competitive environment and legacy access line churn.
FTR: Risks include the VZ and T line integration, cable competition, and regulatory uncertainties. INAP: Risks include pricing pressure in the IP business, data center competition, and lack of ownership of hard assets. INXN: Risks include unfavorable changes in FX, competition and regulatory delays in the merger with Telecity. LMOS: LMOS investment risks include intense competitive landscape, concentrated shareholder ownership and continued decline in the legacy business. LVLT: Risks include a levered balance sheet, integration issues, declining prices and regulatory risks. NTLS: Risks include increasing competition and FCF pressure from exiting its Eastern markets and building its LTE network.
S: The primary risks to our Sprint thesis include increased pricing pressure and churn due to slowing growth in the wireless business, the rapid decline in wireline voice revenue, and its LTE network build. SBAC: Risks include the potential for reduced wireless carrier capex, technological advancements that enhance carrier voice capacity, and interest rate risk.
T: Risks to our valuation range include an increased exposure to difficult enterprise customers, the weakening economy, the large wireline footprint which reduces the wireless benefit, and a moderately aggressive broadband strategy. TMUS: Risks to our range include increasing competition from larger carriers, higher churn associated with the company’s customer base, and customer reception of the Value plan initiative.
USM: Risks to the shares achieving our range include the potential for increasing price competition, lack of marketing scale relative to national peers, and a slowdown in industry subscriber growth. VZ: Risks include slow growth due to VZ’s proportionate wireless revenue not offsetting wireline exposure, continued price competition in the enterprise segment and a costly FTTP (FiOS) rollout.
WIN: Risks include flat-to-little growth, increasing competition, integration risks and regulatory uncertainties. ZAYO: Risks include the highly capital intensive nature of Zayo’s business model, integration risks from its history of acquisitions and competitive pressures, particularly within Lit Services and Mobile Infrastructure.
Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue.
I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
Wells Fargo Securities, LLC maintains a market in the common stock of SBA Communications Corp. Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in
the next three months from SBA Communications Corp., Crown Castle International Corp. Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Crown Castle
International Corp., SBA Communications Corp. in the past 12 months. Wells Fargo Securities, LLC and/or its affiliates, have beneficial ownership of 1% or more of any class of the common stock of SBA
Communications Corp. SBA Communications Corp., Crown Castle International Corp. currently is, or during the 12-month period preceding the date of
distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment
banking services to SBA Communications Corp., Crown Castle International Corp. Wells Fargo Securities, LLC or its affiliates has a significant financial interest in SBA Communications Corp. Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in
the next three months from an affiliate of SBA Communications Corp., Crown Castle International Corp., American Tower REIT,
Inc. Wells Fargo Securities, LLC or its affiliates managed or co-managed a public offering of securities for an affiliate of Crown Castle
International Corp. within the past 12 months. Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from an affiliate of Crown
Castle International Corp. in the past 12 months.
AMT: Risks to the stock include reduced wireless capex related to consolidation and technological advancements that enhance the voice capacity of wireless carrier networks. CCI: Risks include reduced wireless carrier capex related to consolidation and technological advancements that enhance the voice capacity of carrier networks.
SBAC: Risks include the potential for reduced wireless carrier capex, technological advancements that enhance carrier voice capacity, and interest rate risk.
Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue.
STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock’s total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock’s total return will be in line with the market over the next 12 months. HOLD
3=Underperform: The stock appears overvalued, and we believe the stock’s total return will be below the market over the next 12 months. SELL
SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.
As of: 7/8/2015
45% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform.
54% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform.
1% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underperform.
Wells Fargo Securities, LLC has provided investment banking services for 43% of its Equity Research Outperform-rated companies.
Wells Fargo Securities, LLC has provided investment banking services for 32% of its Equity Research Market Perform-rated companies.
Wells Fargo Securities, LLC has provided investment banking services for 36% of its Equity Research Underperform-rated companies.
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SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
