AT&T's Entrance Into the Wireless Price Wars Just Got More Complicated

AT&T's decision to lower prices has put it in a war it can't possibly win.

Aug 31, 2014 at 9:30AM
Wireless

Source: macobserver.com

Sprint Corporation (NYSE:S) and T-Mobile's (NASDAQ:TMUS) U.S. pricing war has grown vicious, to say the least, as each carrier seems to change its prices daily to undercut the other. Sprint and T-Mobile are Nos. 3 and 4, respectively, in terms of U.S. subscribers in the telecom industry, as both Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) lead both carriers by nearly twofold. Yet, despite AT&T's size advantage, the company has felt the need to enter this ongoing price war, a decision that might have an unfavorable outcome.

The newest saga unfolds
After months of trying to acquire T-Mobile, Sprint backed out, and is now competing against the former to gain new subscribers. Throughout much of 2014, T-Mobile launched several campaigns, like its "Breakup Letter" to competing carriers to gain new subscribers, and is offering to pay early termination fees, among other deals.

T-Mobile has lowered the cost of data and phone plans so much that it's hard to keep up; but with Sprint backing out of its sought-out acquisition, it, too, has stepped up its incentive game. Specifically, Sprint undercut T-Mobile by $20 on both its unlimited data and family share plan last week.

So far, T-Mobile has responded by offering new customers who "bring a friend," 12 months of LTE data at no charge. However, given Sprint's aggressive strategy, T-Mobile is sure to respond.

The reason behind price cuts
T-Mobile's and Sprint's plans are clear -- both carriers want to grow. Sprint and T-Mobile are very close in terms of post and prepaid subscribers. Yet, T-Mobile has added at least 1.5 million net new customers for five consecutive quarters, while Sprint has slipped back to negative territory, losing subscribers in recent quarters.

Wireless Marketshare

Source: radiosurviver.com.

Nonetheless, AT&T and Verizon are both twice the size of Sprint and T-Mobile in terms of subscribers, with Verizon saying it won't buy subscribers. However, AT&T has been far less emphatic, cutting prices on family and individual talk and data plans. While AT&T has already cut prices on several occasions, research firm BTIG puts these cuts into perspective, saying the lower prices could result in revenue losses of 5% year over year during the back half of 2014, depending on subscriber growth.

Therefore, AT&T is clearly hoping that lower prices will attract new subscribers, thereby growing revenue long term amid this price war. Initially, the plan worked well, as the carrier added 625,000 new postpaid customers during the first quarter, outperforming Verizon, which gained just 539,000, and did not cut prices.

Unfortunately, AT&T's strategy has lost some of its steam because, in a seasonally strong second quarter, it gained just 1 million postpaid subscribers. While this is better than the first quarter, it lags the 1.4 million that Verizon added without dropping its prices. As a result, Verizon's revenue increased 5.7%, while AT&T grew only 1.5%.

What's the problem?
Aside from underperforming revenue growth, AT&T has another problem it must address: The company has already entered the price war, and is now miles behind both T-Mobile and Sprint. With AT&T heavily advertising its new price cuts, and both of its smaller peers charging lower prices, what will the company do?

Company

Unlimited Data

Family Plan 20GB Data

Sprint

$60

$160

T-Mobile

$80

$180

AT&T

N/A

$310

On the back of a disappointing second quarter, and after already committing to lower prices, AT&T has put itself in a predicament where it might once more lower prices. Up until now, the company has not offered unlimited data, charging $80/month for 6GB.

As of today, AT&T is still underperforming Verizon with lower prices. Therefore, Verizon comes out on top as the superior investment, letting its market-leading 4G LTE coverage speak for itself, and attract customers.

Foolish thoughts
Perhaps the biggest concern for AT&T investors is that the company didn't need to enter this war. It already had a 50 million-subscriber lead on both T-Mobile and Sprint, so without drastically better subscriber growth, AT&T has done nothing but remove revenue from its business.

Verizon is in the best position, because it has the ability to do whatever it wishes with prices; but AT&T cannot raise prices so soon after lowering them. Yet, even after lowering prices, it is still uncompetitive with T-Mobile and Sprint. In retrospect, this ordeal serves as proof that there's value in premium services and a market-leading network, something AT&T should have embraced rather than ignored.

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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.

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