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Wireless Wars Will Get Bloodier
By ERIC J. SAVITZ, Barrons, MONDAY, SEPTEMBER 21, 2009
SPRINT NEXTEL LAST MONTH QUIETLY AND clearly signaled just how ugly things have become in the wireless market.
In an SEC filing, it disclosed two changes in the formula for payouts under its short-term incentive plan for company officers and others. Sprint cut the percentage of the plan tied to adjusted Oibda -- operating income before depreciation and amortization -- to 30%, from 50%. And it raised the weighting of post-paid net subscriber additions to 40%, from 20%. ("Post-paid subscribers" are customers who get a monthly bill.)
Do you see what Sprint is doing? It's reaching for market share at the expense of profitability. That seems to be an admission that we are headed into a period when it will be more important to grab customers -- regardless of cost -- than to preserve margins. That kind of behavior nearly destroyed the Asian memory-chip companies in the tech downturn, and the same thinking is now taking a toll on the solar-cell industry, where Chinese producers are ramping up new factories despite a glut of supply.
Everywhere there are signs telco competition is rising. Sprint just launched a plan that provides unlimited calling to mobile phones on any network, plus unlimited data, for $69.99 a month. And other pre-paid plans with unlimited calling can be found for as little as $45 a month. With revenue growth in mobile down to the low single digits in the U.S., the players are fighting for market share with a weapon that hurts the entire industry: low price.
There are simply too many players. In the U.S., there are four national carriers- AT&T; Sprint Nextel ; Verizon Wireless (owned by Verizon and Britain's Vodafone) and T-Mobile, part of Germany's Deutsche Telekom. And there are regional players with a focus on the pre-paid market, including MetroPCS, Leap Wireless and the Tracfone unit of Mexico's American Movil. That's a crowd in a market where growth has stalled. And more competition is coming, with Clearwire just starting to ramp up service in some cities.
The crowd needs thinning, and there's rampant speculation that a deal or two is in the works. One theory has MetroPCS hooking up with Leap. That makes sense, although a previous flirtation several years ago didn't go very far. More intriguingly, there were reports last week that Deutsche Telekom might bid for Sprint. The concept has appeal; combining No. 3 Sprint and No. 4 T-Mobile might ease the competition. But I doubt it will happen.
For one thing, the two companies use incompatible technologies. T-Mobile uses the GSM standard, while Sprint Nextel runs on two others, iDen for the old Nextel network, and CDMA. Sprint's takeover of Nextel is widely regarded as a debacle. Would it make sense to compound the problem with a third standard? Then you have the likely pushback a deal would get from the FCC and the Justice Department, both leery of reducing competition. Not least, Deutsche Telekom is too heavily leveraged to easily finance such a deal; an offer for another U.S. carrier could spark a shareholder revolt.
So, no deal is likely -- and that's really too bad, because from a competitive standpoint, things are going to get worse. Execs at both Verizon Wireless and AT&T last week indicated they aren't seeing signs of recovery. In short, I'd stay away from the telcos. It's a shooting war, and there will be heavy casualties. |
