Verizon Communications (NYSE:VZ) has stood its ground on maintaining premium pricing in the face of significant discounting from the likes of AT&T (NYSE:T) following a movement started by T-Mobile (NASDAQ:TMUS). However, is this a good idea for the company, and which of these three remains the best investment value given these pricing changes?
The pricing war saga begins
T-Mobile has been at the epicenter of a pricing war that has transformed the telecom industry with competitive data usage plans. Throughout 2013 and into 2014, we've seen T-Mobile work its strategy, including in January when the company offered up to $350 to pay early termination fees from competing carriers.
Of course, T-Mobile then offers many of those same customers its growing prepaid service with unlimited data, voice, and talk for $80 per month. As a result, both its post and prepaid subscriptions grew significantly in 2013 versus 2012.
In the first quarter, the company added 1.2 million prepaid subscribers and 465,000 postpaid. In the prepaid space in particular, both AT&T and Verizon have struggled, forcing the former into aggressive discounting.
AT&T follows suit, but Verizon won't buy customers
AT&T has followed T-Mobile with countless wireless plan cuts, most recently by bundling data in a family plan and then cutting the prices of these bundled plans.
As a result, AT&T actually saw higher subscription growth in the first quarter versus Verizon, a feat that rarely occurs. While this may be a fluke, Verizon has taken a stern stance in protecting its premium pricing strategy, with its CFO saying in March that Verizon will not buy customers.
However, with poor performance, Verizon is starting to show signs that even it will budge in offering discounted services. For one, Droid Life reported on July 3 that Verizon's prepaid plans will now be offered with 4G support. This comes shortly after the company's decision to avoid 4G prepaid services in fear of cannibalization of its more profitable postpaid plans, thus showing some level of uncertainty.
Will there be backlash?
AT&T was praised following its first-quarter report when it outperformed Verizon in subscriber growth, but was then criticized for forecasting no revenue growth in the second quarter. With that said, Verizon still has a lot of leverage because it hasn't taken the full-blown plunge into discounting mode, like T-Mobile and AT&T. This gives the company a lot of options about how to monetize subscribers in the future.
For example, BTIG recently forecasted low to single-digit revenue growth for Verizon's wireless business in 2014, and a 5% decline for AT&T in the second half of the year. The reason is lower revenue per user for AT&T -- BTIG estimates a 10% drop, meaning AT&T is betting on the increased subscriber growth being beneficial long-term. Meanwhile, Verizon's premium approach may work short-term, but given the recent success of T-Mobile and AT&T, it's unclear what the fundamental future holds long term.
Where to invest?
With all things considered, there is still a lot of uncertainty surrounding Verizon and AT&T, with both massive companies executing very different strategies. Albeit, T-Mobile is the only company that has demonstrated consistency in driving both revenue and subscriber growth.
Ironically, much of this comes at the expense of AT&T, who's failed acquisition attempt gave T-Moibile several billions in cash and spectrum to implement such aggressive company-changing initiatives. In other words, it remains the safest long-term bet today, with so many questions left unanswered.
Verizon may not be ready to fully compromise with the aggressive pricing strategy taking place within telecom, but recent actions illustrate that the company is feeling pressure to act. The fact that shares of both Verizon and AT&T have been so volatile in the last year is a true testament to the fact that investors have no clue about how subscribers will respond to new pricing initiatives. Therefore, with so much uncertainty, only one thing is for sure: T-Mobile started this war, and, so far, it's winning the fight.
Brian Nichols owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.