November 7, 2013 7:17 pm

US telecoms: downwardly mobile

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Is the threat of a destructive fight for share reflected in the stocks?

What happens if there is price war in US wireless? The question is not idle, in spite of the fact that the industry has a cushy, consolidated structure. There are two dominant players (AT&T, Verizon) and two smaller ones (Sprint, T-Mobile), which have settled for the less profitable customers, and fewer of them.

But one of the junior oligopolists is no longer content with its subordinate status. In the third quarter, T-Mobile added 648,000 contract customers, its second big gain in a row and nearly twice as many as AT&T. Yes, Verizon managed to add a third more than T-Mobile, but its customer base is four times larger. T-Mobile managed to add so many customers, to simplify only slightly, by cutting prices. Average revenue per customer took a big step down. T-Mobile, of course, emphasises its plans’ structural differences from those of its peers (easier phone upgrades, unlimited data plans, free data on tablets, free international roaming), not the economic ones. But the results tell a clear story.

There is another potential source of instability. Sprint, which is holding prices, is bleeding customers badly, even though the shutdown of its obsolete Nextel network finished last quarter. So they have reason to follow T-Mobile, and their new controlling shareholder, Softbank’s Masayoshi Son, is fearless. It is hard to see what, besides price, the little guys could compete with. It will be tough for them to win on service quality while spending half as much, or less, on their networks as the big boys. Their spending per customer does stack up well – but there are big economies of scale in network construction.

Is the threat of a destructive fight for share reflected in the stocks? Verizon and AT&T have both underperformed the wider market by 10 per cent during the past six months, but their valuations, relative to profits, are not especially low by historical standards. Further, Wall Street estimates do not call for a slowdown in revenue growth in the next few years. This is too complacent.

Email the Lex team in confidence at lex@ft.com

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