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AT&T and Verizon Drag On the Dow; Can Sprint and T-Mobile Really Win?

By Dan Caplinger – Mar 11, 2014 at 12:30PM

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Early gains turned into modest losses for the Dow at midday as telecom stocks weighed on the average. Find out what's happening in the industry here.

The stock market kept investors on their toes Tuesday, with the Dow Jones Industrials (^DJI 0.43%) and other major-market averages staying close to yesterday's closing levels as market participants waited for more news to help them decide the future course of the global economy and the sustainability of the 5-year-old bull market. By 12:30 p.m. EDT, the Dow was down 46 points; among its worst performers were AT&T (T 0.42%) and Verizon (VZ 0.47%), which fell between 1% and 1.25%. For the Dow's two telecom giants, competition from reinvigorated rivals T-Mobile (TMUS 0.53%) and Sprint (S) has become a bigger threat lately, but do the smaller companies really have a chance to eat into Verizon's and AT&T's dominance of the industry?

Fighting the good fight
Recently, there's been a huge escalation in the war among the four major telecom providers in the U.S., with smaller companies raising the volume level on the ongoing debate. One of the most vocal opponents of AT&T and Verizon is Masayoshi Son, president of SoftBank, which took a roughly 80% stake in Sprint last year. Son said recently that he would start a "massive price war" in the wireless industry if SoftBank is allowed to buy T-Mobile and merge it into Sprint, creating a carrier whose size would rival that of AT&T and Verizon. With his international perspective, Son recently noted how bad wireless service is in the U.S. compared to the rest of the world, even though fees here are among the highest.

T-Mobile hasn't waited for a merger to happen before taking aggressive steps of its own. Last week, the company announced another pricing change, with CEO John Legere comparing Verizon and AT&T to loan sharks because of their low-data-limit plans. T-Mobile has a lot more to show from its efforts, gaining 4.4 million subscribers during 2013 compared to just modest gains for Sprint last year. Moreover, T-Mobile has inspired change from AT&T, with moves to de-emphasize subsidized plans becoming more common. Verizon seems resistant to that trend, but it's unclear how long it can hold out if customers get used to newer financing plans and other nonsubsidy methods of getting them to buy new phones.

Wireless networks keep growing, even as cell-phone towers become more hidden than ever. Image source: Bill Selak, Flickr.

Can the big telecoms stay big?
For AT&T and Verizon, the good news is that most people never switch carriers even when superior plan options become available. According to consumer data from Parks Associates, almost half of mobile customers have stayed with their original provider for at least a decade, and only about one in eight have switched three or more times. That behavior effectively creates a competitive moat around Verizon and AT&T and their superior market share, but it doesn't mean that their leadership status is impregnable.

Still, size presents its own challenges. Verizon recently tapped the bond market again with a $4.5 billion offering, and the huge amount of debt it incurred to take full control of Verizon Wireless could present it with substantial financing obstacles if interest rates rise by the time the debt comes due. With so many people looking to AT&T and Verizon for their dividends, any threat to those payouts could cause big problems down the road.

The telecom industry looks like it might be poised to underperform in the intermediate term, at least until industry players figure out how to position themselves for greater competition. In the long run, AT&T and Verizon could end up being a longer-term drag on the Dow's performance, despite their attractive dividends.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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