Tags: Promotions | Squeeze | Margins | Wireless

Price Promotions Squeeze Margins for Wireless Carriers

Tuesday, 09 Dec 2014 05:29 PM

The flurry of promotions in the wireless industry are taking a toll on America’s biggest phone companies — AT&T Inc. and Verizon Communications Inc.

Verizon said Monday that fourth-quarter wireless margins will be hurt as phone discounts and price promotions led to a surge in new monthly subscribers. Tuesday, AT&T Chief Financial Officer John Stephens said that rival promotions are luring away some customers and squeezing margins this quarter.

Price competition took a toll on all four of the top U.S. wireless carriers last quarter, highlighting concerns that aggressive smaller rivals are setting the industry on a path toward further margin erosion. To help fend off promotions like Sprint Corp.’s introduction last week of its “half-price” offer, Verizon and AT&T have touted network quality and bigger data allotments for shared plans.

“We continue to expect the competitive environment to worsen before improving,” Colby Synesael, an analyst at Cowen & Co., wrote in a research note Tuesday morning. “The market is clearly bifurcating with ‘value oriented’ subs shifting to T- Mobile/Sprint while Verizon/AT&T focus on maintaining their highest value subs.”

Verizon fell 4 percent to $46.92 Tuesday in New York, the biggest drop since August 2011. AT&T declined 2.9 percent to $32.89, the lowest price since March. Meanwhile, T-Mobile US Inc. tumbled 8.3 percent and Sprint was down 3.8 percent.

The impact of Sprint’s “half-price” promotion, which started last week, hasn’t yet been felt, Stephens said. Still, price cuts and promotional offers have increased over the course of the year, largely led by T-Mobile. That’s put pressure on AT&T’s wireless margins and increased customer defections in the fourth quarter compared with a year ago, Stephens said.

Holiday Promotions

While margins are typically squeezed during the competitive fourth quarter with holiday offers, quality of service and customer care matter more over the long haul, Stephens said. He still expects AT&T’s margins for the full year to be about the same as last year and churn for all of 2014 to be the best of any year.

The second-largest wireless provider has been active in responding to industry moves with installment payments for phones and bigger data allotments for family group plans, he said.

By offering new phones at below-cost prices, Verizon has lured customers into two-year contracts. With a surge in subscribers opting for the heavy discounted phones, the immediate effect is a narrowing of Verizon’s wireless margins.

Network Quality

Verizon didn’t give a specific forecast Monday for the fourth-quarter margin. The New York-based company’s margin for wireless earnings before interest, tax, depreciation and amortization was 49.5 percent in the third quarter, and 47 percent in 2013’s fourth quarter.

To help defends against smaller rivals’ aggressive promotions, Verizon has been relying on ads touting network quality and AT&T has been focusing on customer service. Both companies also offer reduced rates on service plans for customers that pay full price for their phones, either upfront or through installments.

Verizon plans to release its fourth-quarter earnings report on Jan. 22 and AT&T on Jan. 27.

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The flurry of promotions in the wireless industry are taking a toll on America's biggest phone companies — AT&T Inc. and Verizon Communications.
Promotions, Squeeze, Margins, Wireless
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2014-29-09
Tuesday, 09 Dec 2014 05:29 PM
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