The Dow Inches Higher as AT&T Gets Little Boost Over Verizon From Amazon's Fire Phone

The Dow Jones Industrials (DJINDICES: ^DJI  ) managed to claw back from earlier declines to post a modest gain Thursday, with the average closing almost 15 points higher on the day. Yet, even though the health-insurance and energy areas showed substantial strength today, AT&T (NYSE: T  ) had a relatively muted move in its share price, gaining less than half a percent as investors failed to react all that positively to the company's being the exclusive carrier of Amazon.com's (NASDAQ: AMZN  ) new Fire smartphone, which was announced yesterday. The fact that neither AT&T nor Verizon (NYSE: VZ  ) moved much in light of the event shows just how difficult it is for companies to generate growth from new hardware offerings, and how competitive factors other than hardware have gained in importance during the years.


Source: Amazon.

AT&T's modest gains paled in comparison to the impact that its exclusive arrangement to carry the iPhone had on the company in the mid-2000s. Part of the trouble that AT&T investors might foresee is that Amazon did something very different in its pricing strategy than it had with tablets and other device releases in the past. Amazon has developed a strong reputation for pricing technology at rock-bottom levels, instead relying on the positive network effects of future sales to justify getting devices into customers' hands as quickly as possible. But with Amazon charging $199 for a Fire phone with a two-year exclusive contract on AT&T, the new smartphone doesn't offer any price advantage over an iPhone 5s or a Galaxy S5. It's true that the $199 also buys you a year's subscription to Amazon Prime, but many believe that the technical specifications of the Amazon Fire phone aren't strong enough to justify the cost.

Yet, the bigger issue for both Verizon and AT&T involves smartphone penetration. At this point, it's hard for either carrier to generate new business without poaching from each other, as those who are most interested in having devices requiring wireless-network access mostly already have them. For example, AT&T has little incentive to press hard on Amazon Fire phone sales if it only would result in buyers giving up other existing smartphone service that they already have with AT&T.

Meanwhile, competition remains the primary threat for AT&T and Verizon, as smaller carriers continue to pressure their peers on pricing. Without any truly groundbreaking new devices on the horizon, Verizon and AT&T will have to make do with the business that they already have. It will be far more important to retain current customers than to expect huge growth opportunities among those who've gone so long without smartphone access.

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