In any industry, the only way to avoid price wars is to offer
a superior product or service.
Customers will pay full price only if they think your offering
is top-notch. And you'll find no clearer example to that approach
than Verizon Wireless, a subsidiary of
. In most consumer surveys, Verizon repeatedly comes out on top
in terms of customer satisfaction, even as its service is often
the most expensive choice.
On the flip side, Verizon's key rivals --
-- are learning what happens when you skimp on network
investments. Both of these firms garner inferior consumer
ratings, and despite billions being spent to upgrade their
networks now, they still can't close the perception gap against
Yet even as Sprint and AT&T evaluate how to catch up to
Verizon, behind-the-scenes discussions may upend the entire
wireless service industry. That may help explain why short
sellers are now targeting both Sprint and AT&T in a big
Rising Short Interest (in millions)
Delivering wireless services is quite lucrative. Though it
takes billions to build out a national network, the profit
margins on those monthly bills are quite robust (once network
amortization costs are backed out). Verizon Wireless' margins on
earnings before interest, taxes, depreciation and amortization
(EBITDA), for example, now exceed 50%.
If a company could tap into that lucrative market without the
need to spend billions on a new network, it would. In fact, that
may be just what is happening.
, for example, is actively developing wireless networks in
according to TheWall Street Journal
If the company's low-cost balloon-based approach succeeds in
those markets, look for a similar effort to play out here in the
U.S. in coming years. The Wall Street Journal also notes Google's
plans to roll out super-strong Wi-Fi in U.S. cities where it
offers its fiber-based telecom and cable service, an effort that
is likely being closely watched by the wireless incumbents.
Yet even as Google's efforts are a long-term threat, a
near-term threat is rapidly emerging.
is pushing to offer its "Terrestrial Low-Powered Service" in the
which would deliver voice and data
from a series of low Earth orbit (
The Federal Communications Commission is reviewing
You can bet
is tracking the FCC's moves.
According to a recent report
, Amazon would like to use GlobalStar's network to offer its own
wireless service. Amazon ostensibly wants users to connect to its
site without the need of the major wireless carrier networks. But
that's just a Trojan horse. Google and Amazon have repeatedly
talked about their interest in creating real competition for the
wireless service providers.
The key takeaway: Both Google and Amazon are less interested
in wireless service profits and more interested in creating
deeper ties into their ecosystems. That means they are likely to
undercut the incumbents on price -- if they choose to enter these
Does the rising level of short interest in Sprint and AT&T
have anything to do with possible imminent announcements from
Google, GlobalStar, the FCC, Amazon, or others? That's possible.
But short sellers may also be looking at other issues.
For example, Sprint's impressive multi-year rally has pushed
the stock above fair value, according to Merrill Lynch, noting
that valuations for companies are now quite rich "given the risks
and challenges facing them as they try to grow market share and
margins simultaneously to meet consensus expectations."
Merrill Lynch also explains why short sellers are leaving
Verizon alone, even as they go after the company's biggest rival,
AT&T. "We believe the absolute and comparatively larger
increase in T shorts is likely driven by a perception that of the
big two it is relatively more vulnerable to rising wireless
For a number of years, investors have accepted a secular
decline in AT&T's landline business for offsetting growth in
its wireless unit. Yet that trade-off is increasingly being
In the second quarter, AT&T's EBITDA margins fell 4.9%
from a year ago as "profit margins (in the company's wireless
division) took a quarter-over-quarter hit for the first time
since 2010," note analysts at Goldman Sachs. The key culprit
according to Goldman: "Wireless peers have ramped (and will
continue increasing) competitive activity, driving AT&T
towards potentially more promotional activity." That's a sure
sign of a mature low-growth market.
AT&T and Sprint are starting to feel the heat of a more
price-competitive market, even before the potential entrance of
Google, Amazon or others. With those kinds of headwinds in place,
it's no wonder short sellers are targeting these firms and
anticipating a move down in their share prices.
Risks to Consider:
As an upside risk, AT&T and Sprint could look to ease
near-term investor concerns by pumping up cash flow through
restrained capital spending, though that would put them at a
further long-term disadvantage to Verizon.
Action to Take-->
Neither AT&T nor Sprint is headed for deep trouble, nor are
their stocks poised to plunge. But the headwinds are mounting,
and they are running harder just to stay in place. Over the long
haul, investors should brace for more intense price wars for
wireless services, which is bound to erode cash flow. AT&T,
in particular, with its still considerable exposure to a
declining landline business, looks set for steady declines in
revenues in coming years as the wireless end of the business