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US wireless industry: voice is dead, long live data

Home / Spectrum / US wireless industry: voice is dead, long live data

Mitch Reznick, CFA, Co-Head of Credit and Head of Credit Research
20 August 2014

The ice-cold water that Softbank’s Masayoshi Son dumped over himself for charitable purposes is not dissimilar to the cold water that Softbank’s Sprint dumped onto the US wireless market yesterday when it introduced new, aggressive pricing plans. The launch of Sprint’s “Family Share Pack” plans are a kind of Ice Bucket Challenge to the market, one might say.

We, along with the much of the market, expected Sprint to announce new price plans following its retreat from an attempted merger with T-Mobile US and test these plans in the market ahead of the launch of the new iPhones. Since it launched its “rip-and-replace” mobile network rebuild several months ago, Sprint has lost valuable prepaid subscribers to its competitors. This was made worse when T-Mobile US “pulled an Iliad” by launching its suite of so-called “unCarrier Plans”. This took the market lower in pricing and instigated the introduction of more flexible plans for consumers across the industry. In that context, Sprint looked like an outlier. It had to do something to retain and win back customers, and the move yesterday was a big one –doubling the market “norm” of 10 megabytes of data per family plan to 20 megabytes and, on a promotional basis, offering the lowest family plan base price.

But what are the implications? For one, the move drives a final nail in the coffin of voice andSMS as the battleground to win over consumers. Voice is dead, long live data. The contest for the hearts and wallets of consumers will be played out on the data battlefield.

For the industry as whole, we think it is slightly negative in the near-term as it will put more pressure on the market-clearing price of wireless service and increase costs to carriers as they seek to differentiate themselves – be it by service plan or content. But it also confirms that a kind of bifurcation of the US wireless market is taking hold among the national carriers: value (Sprint and T-Mobile) vs premium (AT&T and Verizon). Whereas Sprint and T-Mobile are competing principally on price, which is affecting the entire market, we believe that many subscribers will be willing to forgo the lowest price to take a broader suite of services and content in the coming months. For sure, Sprint’s offer will appeal to the data-hoarding consumer who digs audio and video media, but we think that Sprint (and T-Mobile, to some degree) will have to overcome perceptions of poor network quality.

Meantime, even if these new price plans succeed in winning subscribers back, they will likely have a negative effect on near-term operating cash flow since taking on new subscribers has front-end costs. This will be compounded by the up-to-$350 incentive to switch to Sprint that they are offering. From an industry perspective, the risk is that this spreads across the whole industry. In addition, we expect spend on network capacity, or spectrum, and capex to continue to rise as data consumption increases.  All of that said, the question remains: will the other national carriers – T-Mobile USA, Verizon and AT&T – take Sprint’s ice bucket challenge?

Read more in the latest edition of Spectrum.

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Mitch Reznick, CFA Co-Head of Credit and Head of Credit Research Mitch joined Hermes in February 2010 as head of research on the Hermes Credit team. Prior to this he was co-head of credit research for the global credit and hybrids team at Fortis Investments. Other roles at Fortis included portfolio manager of European high yield funds, based in London, and senior credit analyst, based in Paris. Before this he worked as an associate analyst in the leveraged finance group at Moody’s Investors Service in New York. Mitch earned a master’s degree in International Affairs at Columbia University in New York City and a Bachelor’s degree in History at Pitzer College, one of the Claremont Colleges in California. He is a CFA® charterholder and a member of the Capital Markets Advisory Committee of the IFRS Foundation and the High Yield Buyside Forum of AFME.
Read all articles by Mitch Reznick, CFA

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