The Dow Jones Industrials (DJINDICES:^DJI) looked poised for a possible second all-time high at the open this morning, as favorable employment data encouraged confidence in the strength of the U.S. economy. But nervousness crept into the market, and by 12:30 p.m. EDT the Dow was down 13 points. Although AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) aren't contributing to the day's losses, news from T-Mobile (NASDAQ:TMUS) yesterday has long-term investors in the two Dow telecom giants concerned about whether rising competition will endanger the supremacy they have enjoyed for years.
T-Mobile fights back; can AT&T and Verizon answer?
Yesterday, T-Mobile announced that it had added 2.4 million new subscribers in the first quarter, sending its shares up 8%. That brought the total number of subscribers for the wireless provider to more than 49 million, and it marked the fourth-straight quarter in which T-Mobile managed to top the 1 million subscriber mark in net additions. T-Mobile said the results make it the fastest-growing wireless company.
However, one thing that's clear from T-Mobile's strategy is that the carrier is not at all interested in immediate profitability. Almost half of the new subscribers T-Mobile signed up during the quarter didn't register up for a monthly plan, making it difficult for the company to rely on those customers' loyalty going forward. Moreover, with average revenue per user falling 8% and losses widening dramatically from year-ago levels, T-Mobile looks like it's aiming for maximum customer-count growth with the intention of figuring out how to monetize its user base better in the future.
Still, even when you only consider the 1.3 million postpaid customers that T-Mobile signed up, it still dwarfed figures from AT&T and Verizon. AT&T only added 625,000 net postpaid customers, and that was its biggest quarterly gain in five years. Verizon weighed in with just 539,000 net retail postpaid connections. That shows how successful T-Mobile has been in breaking the market stranglehold that Verizon and AT&T have traditionally possessed, at least for now.
Should you worry?
Verizon and AT&T still have several advantages over their smaller competitor. The two companies have a dominant position in high-quality low-band spectrum, which gives their networks greater range and more efficient management attributes. By contrast, with higher frequency spectrum, T-Mobile will have to spend more in order to set up comparable networks.
Yet those advantages might not last forever. Some believe that the Federal Communications Commission would prefer to level the playing field, establishing rules for spectrum auctions that will favor T-Mobile and other smaller competitors over Verizon and AT&T. If the FCC puts those rules put in place, then auctions in mid-2015 could lead to fairer competition within the industry.
At this point, it's too early to conclude that AT&T and Verizon will inevitably lose the edges that have helped them become dominant dividend payers in the Dow and solid long-term businesses. But if T-Mobile keeps succeeding with its strategy, it could eventually pose a larger threat to the two companies.
Dan Caplinger has no position in any stocks mentioned. 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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