There's no denying it: we're living in a 4G world. Wireless networks are getting faster and spreading like wildfire, and nearly every new device is coming with the latest and greatest 4G technology. This means a lot of people are renewing contracts with mobile carriers or deciding to make the switch to a new carrier. So who is winning the wireless battle, and what does it mean for investors? Let's take a look at the recent trends.
4G matters
The top three carriers are Verizon Wireless, which is owned by Verizon (VZ 0.85%) and Vodafone (VOD 0.96%), and has the largest 4G network; AT&T (T +0.86%), which has the fastest network; and Sprint (S +0.00%), which has the lowest prices. There's no single best option for everyone, but recent connections information tells us where consumers are headed.
| Carrier |
Postpaid Churn Q3 2012 |
Q3 Retail Net Adds |
Total Subscribers Q3 2012 |
Wireless EBITDA Margin |
|---|---|---|---|---|
|
Verizon Wireless |
0.91% |
1.76 million |
95.9 million |
50% |
|
AT&T |
1.08% |
678,000 |
105.9 million |
40.8% |
|
Sprint |
1.88% |
883,000 |
52.9 million |
16%* |
Sources: Company earnings presentations. *Sprint uses OIBDA, or operating income before depreciation and amortization, instead of EBITDA.
The table above shows that during the third quarter, more customers added lines at Verizon Wireless than AT&T and Sprint combined, and Verizon generates a higher margin than either of its competitors. Since this quarter witnessed the launch of Apple's (AAPL 1.45%) iPhone 5, this is a telling number. At Sprint, there were 1.5 million customers who bought the iPhone, 40% of which were new, accounting for nearly all of the company's growth during the quarter.
The network and plans are driving this trend because, at this point, there's little device differentiation for the three carriers. All carry Apple's popular iPhone as well as the Samsung S III, so the real differentiator is the network.
Reinforcing loop
The challenge for carriers like Sprint or fourth-place T-Mobile is that the network becomes a reinforcing loop for carriers. The more customers you have, the more money you have to upgrade your system, which attracts more customers, which provides more money, and so on. This makes it difficult to play catch-up without a major acquisition.
Sprint tried to do this with its Nextel acquisition, which it is slowly unwinding, and AT&T tried to buy T-Mobile. For now, it appears that the U.S. market will have four wireless carriers with little room to acquire rivals, leaving a significant advantage to the best networks.
How to play the trend
As investors, we're looking for the trends in mobile as well as the best way to play them. It's clear to me that Verizon Wireless is the winner right now; it's adding customers and has a higher margin than rivals. But investing in the company isn't as straightforward as you might think.
Verizon, the parent company that owns 55% of Verizon Wireless, also owns wireline services that are a drag on profitability versus wireless. Vodafone, the owner of the other 45%, owns networks in Europe that are struggling through the economic crisis there. Both have burdens attached to the Verizon Wireless asset.
The good news is that both pay strong dividends that are supported by cash spit out by Verizon Wireless. Vodafone currently has a 3.9% yield, and Verizon sports a 4.6% yield at the moment. It's really a question of whether you want exposure to European or American wireline between the two. I've chosen Vodafone personally, because I like the international exposure, but it's really a matter of preference. One stock I wouldn't buy is Sprint, which faces challenges catching up with Verizon or AT&T's network.
