The Dow Jones Industrials (^DJI 0.69%) surged 181 points on Wednesday, breaking out of its funk as the Federal Reserve reiterated its generally accommodative position on interest rates. After March's meeting, investors had feared that the Fed would be quick to push rates higher starting sometime next year, but the release of the minutes from that meeting today painted a different picture. Still, even big gains for the Dow Jones Industrials weren't enough to prevent telecom stocks AT&T (T 1.17%) and Verizon (VZ 2.85%) from losing ground Wednesday.
At first glance, good news on the economic front should be positive for the wireless industry. Both Verizon and AT&T have continued to make large investments in their respective networks, with Verizon just earlier this week making a deal to acquire the wireless assets of a major regional carrier, which includes valuable spectrum that Verizon can use to make further enhancements. AT&T has so much invested in wireless that it will change its advertising slogan to "mobilizing your world," emphasizing the future direction of the telecom industry even as it tries to phase out landlines and other antiquated technology. If low interest rates spur more economic growth, then Verizon and AT&T should benefit.
But competition has played a key role in holding Verizon and AT&T back. Today, T-Mobile announced a new $40 plan with 500 megabytes of data and unlimited talk and text that doesn't include any automatic overage fees. Rather than simply charging people when they go over their limit, the new plan will measure data use and prompt users to make additional payments if they want to boost the amount of data they use in any given month. Moves like this have forced AT&T and Verizon to follow suit, and the net impact could be falling profit margins throughout the industry.
Another competitive threat could come from the cable industry. As consolidation hits that industry hard, cable operators will do battle with traditional telecoms to an even greater extent, with package deals that encroach on each other's territory. Verizon and AT&T could stand to win as much as they lose from the fight, but success is far from assured on that front.
The wildcard for AT&T and Verizon is whether they make moves to expand internationally. With Verizon having made its big takeover of its wireless segment and with AT&T having decided to make a big repurchase of up to 300 million shares, it seems less likely that they'll take on an acquisition to expand globally. In the long run, though, international expansion might be essential if the companies want to grow further.
Investors are shunning AT&T and Verizon despite their high dividend yields because of uncertain about their future growth prospects. But if the industry reaches a new competitive equilibrium rather than flaring out in a cutthroat price war, then Verizon and AT&T both stand to do quite well in the long run.
