The rumors are true. After Amazon (AMZN 3.43%) earlier dismissed talk of a new wireless package for Prime members, it turns out the tech giant is indeed teaming up with Dish Network (DISH) to offer a new wireless service plan.
According to a Wednesday press release, Dish will make its Boost Infinite -- the first postpaid mobile service from the company -- available later this week on Amazon at $25/month for Prime subscribers, with the purchase of a $20 Boost Infinite Unlimited SIM kit. Prime members will also get an exclusive offer of a 20% discount on the SIM kit and a $25 credit on their first month of service. Even better, the $25/month price lasts as long as the customer stays active on the same plan.
Dish shares initially popped on the news before sliding in Wednesday's trading session, a sign investors may think the deal will be a money-loser for Dish. Meanwhile, Amazon was down modestly on Wednesday, though that may be related to disappointing cloud growth reported by Microsoft. The financial arrangement between Dish and Amazon was undisclosed.
AT&T (T 1.02%) and Verizon (VZ 1.17%) were both up less than 1% on Wednesday, shrugging off the news, though the two telecom giants fell when rumors of the deal were first reported in early June.
Why Amazon wants to be your phone company
Amazon has long seen its Prime membership program as a central component of its e-commerce business. The company has over 200 million paid subscribers worldwide who enjoy benefits like free shipping and returns on selected items, free streaming on Prime Video, and more.
Founder Jeff Bezos believes that stuffing Prime with member benefits is the best way to encourage customers to shop on Amazon, saying once about its video strategy, "When we win a Golden Globe, it helps us sell more shoes."
In that line of thinking, it makes sense for Amazon to offer discounted wireless as an incentive to join Prime and stick with it. After all, almost every adult in the U.S. has a mobile phone, making it a benefit nearly all its American Prime members can take advantage of.
What it means for the telecom industry
The implications for AT&T, Verizon, and T-Mobile (TMUS -0.06%) could be more immediate if Amazon and Dish grab significant market share from the move. The telecom industry is already struggling with sluggish growth, declining equipment revenue, heavy debt burdens, and a weak consumer. As the chart below shows, all three of these stocks have significantly underperformed the S&P 500 this year, with AT&T and Verizon down double digits.
Despite the sluggish growth in the industry, there's one reason Amazon likely sees an opportunity in telecom. AT&T and Verizon generate sky-high operating margins, and T-Mobile is strong as well. Over the last four quarters, Verizon posted an operating margin of 22%, while AT&T was at 19%, and T-Mobile came in at 12%.
Those high margins seem to indicate there's room for a lower-priced competitor in the industry. Regarding competition, Bezos also once famously said, "your margin is my opportunity," and the size of the margins at AT&T and Verizon signal an opportunity for Amazon to take market share.
Historically, the e-commerce giant has focused on gaining market share rather than generating a profit, and it wouldn't be surprising to see it employ that strategy in the wireless market.
Should AT&T and Verizon investors be worried?
In the past, Amazon's entry into new businesses, like supermarkets and pharmacies, has sent rival stocks plunging, only for investors to later realize Amazon wasn't as great of a threat as it seemed. That could be the case this time as well, and it helps that AT&T and Verizon stocks already trade at low valuations.
Verizon already offers a $25/month unlimited plan, while AT&T's unlimited plan starts at $35/month, though it's difficult to make apples-to-apples comparisons between plans without discussing more of the details.
The sell-off in Dish stock may indicate investors don't see this as a slam dunk for Dish or Amazon, but the tie-up is likely to attract some subscribers. The most likely consequence is that the move will squeeze prices in the industry, which would pressure industry profits and bring more bad news to Verizon and AT&T.
