When it seemed like T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) were on course for a successful merger agreement last month, I wrote that Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) would be two of the biggest beneficiaries if a deal went through. Fewer competitors means more profits to go around for the players that remain.
But with Sprint's dwindling hopes of a buyer swooping in and snatching it up, it may be forced to refocus on its bottom line instead of attracting new customers at any cost. A shift in focus would benefit competing carriers, including its former suitor, T-Mobile. That's the crux of the argument posed by analyst Craig Moffett, who writes, "All players will benefit if Sprint, as seems likely, adopts a less promotional pricing posture as they attempt to balance the competing priorities of debt service and network reinvestment."
Indeed, there's no longer a clear buyer for Sprint, and the company is being forced to become self-sustaining. Sprint could struggle to differentiate its product and attract new subscribers without its extremely low pricing. That leaves more subscribers on the table for T-Mobile, Verizon, and AT&T.
Winning customers on price
Sprint has run several major price promotions over the last couple years. To its credit, the promotions have done a good job of winning new customers from competitors, but it hasn't helped grow the top line.
Over the last two years, Sprint has added nearly 1.7 million postpaid phone subscribers and 1.1 million total postpaid connections. Its prepaid and wholesale and affiliate connections, meanwhile, have fallen considerably. Overall, service revenue fell from $6.9 billion in the second quarter in 2015 to just under $6 billion last quarter.
While Sprint is attracting more customers, it's not able to hold onto them. Its postpaid subscriber churn rate climbed from 1.54% in the second quarter of 2015 to 1.72% last quarter. That churn rate is significantly higher than all three of its main competitors. That may be due to customers falling off Sprint's promotional pricing.
All this is to say: Sprint is attracting more and more gross additions thanks to its pricing promotion. But those gross customers are largely coming from competitors. If Sprint offers fewer price promotions, it should see churn rate continue to climb for several quarters while gross additions decline. That means net additions at competitors should climb in aggregate.
Who stands to benefit most?
If Sprint is forced to reduce its promotional offers, it seems like Verizon and T-Mobile are likely to benefit the most. AT&T is weighed down by its pay-TV business and loads of debt, while Verizon's wireline business is considerably smaller, and T-Mobile is purely a wireless service provider. Moffett offers a similar conclusion.
All three offer slightly differentiated services. Verizon's differentiation strategy of maintaining its premium network quality and its strong brand provide it one of the better competitive advantages in the industry. AT&T is leveraging its wireline assets to bundle high-value customers, and T-Mobile is working to provide a more customer-friendly service.
T-Mobile has managed to win most net additions in recent years, but Verizon is starting to show signs of life after introducing its unlimited plan at the beginning of the year. AT&T, meanwhile, continues to struggle to attract new customers. Look for that trend to continue, and the gap between AT&T and its competitors could grow even wider if Sprint slows on the promotions.
Sprint isn't planning to give up competing on price. But its recent vow to beat any competitor's price on new devices like the iPhone X is much less aggressive than in years past when it was more active in slashing prices. Sprint's new policy allows competitors to be less aggressive in their promotions, a factor we've already seen play out this year. As Sprint refocuses on the bottom line, it's good news for everyone in the industry, but especially T-Mobile and Verizon.