The Worrisome Wireless Pricing Wars

Pricing wars and low customers additions should have investors on alert at domestic wireless providers including AT&T, Verizon Communications, and T-Mobile.

Jul 21, 2014 at 12:30PM

A couple of notable trends are making investing in the domestic wireless space a concern. The stocks trade at multiyear highs and a pricing war triggered by T-Mobile (NASDAQ:TMUS) is causing average revenue per user, or ARPU, to decline -- at least in the case of AT&T (NYSE:T). The combination usually doesn't go hand in hand , especially considering the domestic market is virtually saturated with users, causing Verizon Communications (NYSE:VZ) to struggle with customer additions since it hasn't entered the pricing wars.

Any pricing war should always alert investors to pending stock losses, but with AT&T trading sideways for nearly two years now do investors really have cause for concern?

A worrisome trend
The aggressive pricing moves by T-Mobile led BTIG analyst Walter Piecyk to warn of potential ARPU declines at AT&T. The analyst said the culprit was AT&T's elimination in February of device leasing requirements for existing subscribers to sign up for shared plans in the 10-gigabyte range. The move immediately caused a flood of customers to the shared plans that could reach 60% of total subscribers by the end of 2014. Piecyk said he expects service AT&T revenue to decline by up to 5%. Even worse, he expects the annual decline to hit 10% and cause ARPU to drop below $60 by 2015.

Verizon isn't seeing the same impact to service revenue, since it placed greater barriers on customers switching to lower data pricing plans. The analyst said he only expects 30% of smartphones acquired during Verizon's second quarter to be leased by customers, placing less pressure on ARPU.

Lack of customers
The biggest problem facing wireless carriers is that virtually all Americans now have wireless phones and the vast majority are using smartphones. That makes it difficult to grow service revenue, especially when a weaker third or fourth largest competitor is willing to lower pricing. AT&T and Verizon are faced with the options of keeping pricing stable and not adding subscribers or cutting ARPU and gaining a few subscribers.

That trend was very evident in the first quarter, as T-Mobile added over 2 million net customers while both AT&T and Verizon struggled to keep subscriber totals flat from the previous quarter. While AT&T added 625,000 net postpaid subscribers of apparently questionable quality and recently guided toward adding roughly 800,000 in the second quarter, Verizon Wireless added only 539,000 net subscribers.

Foolish takeaway
Based on the analysis from BTIG, Verizon and especially AT&T are likely hoping for an eventual merger between Sprint and T-Mobile. Any combination that creates a large third domestic wireless provider could end the push to attract customers at all costs and allow for stable pricing and strong margins among the remaining companies. Outside a merger, the only hope appears to be for a push to higher data plans in the 20-gigabyte range that would strain the networks of both Sprint and T-Mobile and provide advantages for the most advanced networks of AT&T and Verizon Wireless.

Lower revenue from existing customers is always a worrisome trend, especially in a saturated market. If a provider can't add customers, revenue is going to head in the wrong direction, and that is never good for a stock. With the sector, especially AT&T, trading at recent highs, the combination doesn't add up for stock gains going forward in the wireless business.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Mark Holder and Stone Fox Capital clients own shares of AT&T.; 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers