Competition in the Telecommunications Services Industry is fierce, as firms remain under constant pressure to invest heavily to upgrade their networks. Furthermore, the major players in the domestic wireless communications business, which include AT&T (T - Free AT&T Stock Report), Deutsche Telekom’s (DTEGY) T-Mobile USA, Sprint Nextel (S), and Verizon Wireless (a joint venture between Verizon (VZ - Free Verizon Stock Report) and Vodafone (VOD)) compete on handset availability, price, and customer service.
With about 106 million wireless customers at the end of the second quarter, Verizon is the current leader based on subscribership. AT&T, a close second at 99 million, recently agreed to acquire T-Mobile USA, the fourth largest wireless operator, for approximately $39 billion in cash and stock. If the deal is approved, it will probably increase the combined company’s customer base to roughly 130 million. That said, a number of regulatory headwinds limit the proposed takeover’s viability. Indeed, the opposition has intensified lately, as Sprint, the nation’s third-largest wireless carrier with about 52 million customers, has filed an antitrust lawsuit. All told, the pending deal between AT&T and T-Mobile USA appears to be at risk.
In addition, Sprint announced another game changer in late August; the company will begin selling the newest version of Apple’s (AAPL) iPhone, which is rumored to hit shelves in mid-October. Originally, AT&T was the only service provider for the smartphone. After years of prosperous exclusivity, Verizon finally started to sell the device earlier this year. Now, all three wireless carriers will offer the latest version of Apple’s vaunted gadget.
Although the iPhone is wildly popular, it only represents about 20% of new smartphone sales, while handsets featuring Google’s (GOOG) Android operating system account for nearly half of new smartphone sales. The comparison is a bit misleading though, because the spectrum of available phones running the Android system greatly exceeds number of iPhone models on the market. By winning distribution of the iPhone, Sprint secured one of the most popular handsets, which should bolster its position as a formidable contender in the wireless space.
The addition of Apple’s latest smartphone to Sprint’s lineup is certainly a positive for customers, but its benefits for shareholders may prove to be mixed. The iPhone should help add subscribers and retain current customers. Moreover, Sprint’s flat-rate unlimited data plan, which is already available for Research In Motion’s (RIMM) BlackBerry devices, seems likely to be offered for the iPhone as well. Unlimited data plans for the iPhone have been discontinued for new subscribers at both AT&T and Verizon, so Sprint appears to have a distinct competitive advantage in signing new customers. What’s more, smartphones require more expensive data plans compared to traditional handsets that lack Internet capabilities, so average revenue per user (ARPU) will probably increase.
On the other hand, Sprint’s network may not be able to accommodate increased usage from unlimited data plans, resulting in higher capital spending, or a pay-per-usage plan. Furthermore, as customers upgrade to the iPhone, Sprint’s margins will probably suffer because the device is heavily subsidized by the wireless service provider. The phone, which sells for $199 or $299 depending on the model, typically costs wireless carriers about $650. Subsidies cover the difference. To qualify for the subsidy, customers must sign a service contract, which usually spans two years. Wireless providers hope to recoup the subsidy over the life of the contract.
Shares of Sprint have struggled to gain momentum since the company’s disappointing merger with Nextel in mid-2005. Likewise, a slew of unprofitable years has weighed on the stock’s price. The addition of Apple’s iPhone may well be the catalyst Sprint needs to get things moving in the right direction. All told, speculative investors might find these shares attractive.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.