Will a Sprint Corporation Price Cut Force AT&T and Verizon to Follow?

The company's new pricing puts it on par with T-Mobile, which has been growing, in large part, due to offering lower prices.

Aug 20, 2014 at 12:30PM

Sprint (NYSE:S) has followed T-Mobile (NASDAQ:TMUS) in lowering prices for family plans, which could force industry leaders AT&T (NYSE:T) and Verizon (NYSE:VZ) to do the same. The move comes just a few weeks after the company's long-expected merger with T-Mobile was called off, and Sprint's CEO Dane Hesse was replaced by Marcelo Claure. Sprint majority-owner, SoftBank's CEO Masayoshi Son, installed Claure, who founded phone distributor wireless distribution company Brightstar Corp., to shake things up, and as a counter to T-Mobile's outspoken CEO John Legere.

Claure wasted little time making an impact introducing a bold new price point for families, while scrapping the company's heavily advertised Framily plans. The new offering, dubbed Sprint Family Share Pack, matches T-Mobile's $100 pricing for four lines -- which is well below AT&T's and Verizon's prices for similar plans -- while offering more included data. Like T-Mobile, Sprint is also offering to pay early termination fees to customers willing to switch to its new plan.

The move gives Sprint and T-Mobile, the number three and four mobile carriers, similar strategies. It also makes it less likely that the two companies will steal customers from each other. With Legere stating that his goal is to make up the 3 million customers who separate the two rivals, Claure's actions have likely made it that  T-Mobile will need to steal customers from AT&T and Verizon to do so.

How is the Sprint deal different from T-Mobile's?
T-Mobile offers families up to four lines with 10GB of included data for $100. Sprint's deal is a little more complicated.

The carrier is offering up to 10 lines for $100, with 20GB in shared data plus a limited-time bonus of 2GB per line, up to 10 lines. That means a family with four phones would share 28GB of data each month through Sprint, but only 10GB with T-Mobile. It's not entirely an apples-to-apples comparison, as T-Mobile customers get access to a number of popular streaming music services that don't count against their data cap.

Sprint makes it clear that Claure sees a combination of price and data as the driving force for consumers. Claure told Bloomberg:

We did a lot of research with customers. Data use is growing exponentially; customers are getting angry at a bill that is larger than they expected. We decided to make it easy and double whatever is in the market. This is the best offer ever in the marketplace.

That may be true, and while T-Mobile customers are unlikely to switch just for the extra data, AT&T's and Verizon's customers are likely to be tempted. How the two larger companies will respond is yet to be seen, but Legere took quickly to Twitter to tout his company's network over Sprint's:

While Legere's tweets can often be passed off as simple bluster, he has a point when it comes to networks. Sprint has the worst overall network quality of the four national carriers, according to a report issued Tuesday by RootMetrics. Verizon topped the chart, with AT&T close behind, while T-Mobile was declared most improved.

Network quality is harder for consumers to see than price and how much data is included. No matter how many tweets Legere sends, it's clear that Sprint now has a deal which makes it a serious rival when it comes to being the low-cost alternative to AT&T and Verizon.

What are AT&T and Verizon doing?
T-Mobile has added at least 1 million subscribers in each of the last five quarters, while Sprint lost 220,000 subscribers In the second quarter of 2014, and more than 2 million in 2013. The growth for T-Mobile has not had a major impact on AT&T or Verizon, which both gained millions of wireless phone subscribers in 2013 (more than 5 million for Verizon, and nearly 3 million for AT&T).
Both larger companies have tweaked prices lower on their multi-line offerings, with AT&T heavily advertising its four lines with 10GB of data plan for $160. Verizon's "More Everything" plan is a nearly identical offer. In cutting prices, Verizon was able to do a better job in protecting its average revenue per user.
AT&T posted a 7.7% decrease in ARPU for the second quarter for post-paid (contract) customers, but the wireless division's revenues rose 3.7% year over year, to $17.9 billion, due to equipment sales. Verizon raised its ARPU slightly for the period during the first quarter, and 4.7% year over year, while growing revenue from $20 billion in Q2 2013 to $21.5 billion in Q2 2014. If T-Mobile's efforts are hurting the big two, it's someplace other than the bottom line.

What will AT&T and Verizon do?
Being more expensive has not hurt AT&T or Verizon so far. If both companies can continue to grow without cutting prices (and profitability), there is no reason to respond to what their smaller competitors are doing.
T-Mobile has been pursuing the un-carrier strategy and offering lower prices for more than a year, but only launched its $100 family deal in July; so it's too early in the game to say whether lower prices alone will be enough to get people to leave. It's possible that Sprint joining T-Mobile with a lower-priced offering will be a consumer tipping point. Until there are signs of that, AT&T and Verizon can afford to charge more, while justifying it by pointing to the RootMetrics report that shows the two leading carriers to have the top networks.

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Daniel Kline has no position in any stocks mentioned. He is a Sprint customer. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

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