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U.S. Telecom: Price Competition to Intensify

Zacks Equity Research

The U.S. telecom market continues to witness intense pricing competition. Competition has intensified as success depends largely on technical superiority, quality of services and scalability. In addition, Donald Trump’s presidential victory may negatively impact the U.S. telecom industry owing to his unpredictable nature and proposed anti-trade policies.

Unlimited Data Plan War

Stiff pricing competition in the industry is a genuine concern. To stand out in this landscape, we recently saw the four major wireless telecommunications companies – AT&T Inc. (T), Verizon Communications Inc. (VZ), Sprint Corp. (S) and T-Mobile US Inc. (TMUS) – participating in the unlimited postpaid data plan war.Each of these four stocks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

T-Mobile US’ unlimited plan starts at $70 per month for a single line, and two lines are available for $100 a month. Verizon offers a single line of unlimited data for $80 a month with a second line for $60 a month. AT&T's unlimited plan starts at $100 a month, but it notably doesn’t include monthly taxes and fees, which raises the final cost. Verizon and AT&T do not include those fees in their advertised rates, either, but T-Mobile does.

Sprint offers its unlimited plan for $50 a month for a single line, and from two to five lines for $90 a month. Any extra line will cost $40 each. These rates will remain effective till Mar 31, 2018. After that, Sprint will raise the prices back to the normal rates, per which one line costs $60 a month, two lines cost $100 a month, and every line beyond that costs an additional $30 a month.

Stiff Competition

Rapid technological invention and innovation have resulted in significant competition within the telecommunications industry. Product life-cycle and upgrade-cycle have gone down drastically with several firms coming up with new versions of products and services within a short span of time. To combat competition, the players are thus increasingly looking at consolidation. This has resulted in several mergers and acquisitions in the telecom space.

On the video services front, the pay-TV industry is facing severe competitive threats from low-cost online video streaming service providers. Cord-cutting is pretty regular in the country with over-the-top video operators offering smaller packages of channels, designed according to a customer’s need, at dirt cheap prices. Established pay-TV operators are now opting for the more customer-friendly Internet TV service in order to counter the threat.

Will Geographical Expansion Stop?

Cutting across barriers has become common for telecom players. The objective is to offer better service and customer convenience. However, President Trump already threatened to terminate the previous Obama administration's efforts to normalize US-Cuba relations. All the four leading U.S, wireless operators namely, AT&T, Sprint, Verizon and T-Mobile US established business links with Cuba's Empresa de Telecomunicaciones de Cuba SA.

Moreover, Trump’s win might deal a major blow to Mexico as he believes that the nation has taken away jobs from Americans. He also plans a wall along the U.S.-Mexico border to curb illegal immigration. AT&T has strong business interest in Mexico.

Weaknesses

In general, the beleaguered telecommunications companies have high debt levels and large financial leverage ratios. Moreover, they are often unable to cope with recent market trends. Other risks that pose threats are as follows:

    •    Potential Business Slowdown: Sales fluctuations of carriers are expected to continue to weigh on capital spending decisions -- a major problem faced by equipment vendors. The companies are expected to retain focus on improving balance sheets, financial discipline and free cash-flow generation.
     •    Product Overlapping: We may see more product sharing deals between telecom, cable TV and satellite TV operators as each of these players are vying to grab a sizeable share in each other’s territory. Even pay-TV services, offerings to business enterprises, mobile backhaul and metro-Ethernet segments may observe more convergence. Mobile phone makers are now progressively offering tablets and chipset manufacturers are providing chips for personal computers as well as mobile devices – thus frequently interchanging their areas of operations.
    •    Intensified Competition: Technological upgrades and breakthroughs have resulted in cutthroat price competition. Product life-cycle and upgrade-cycle have been reduced drastically as several firms are coming up with new products and services within a short span of time. Increasing competition is compelling players to offer heterogeneous and bundled services to retain their position in the space.

 
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Verizon Communications Inc. (VZ): Free Stock Analysis Report
 
T-Mobile US, Inc. (TMUS): Free Stock Analysis Report
 
AT&T Inc. (T): Free Stock Analysis Report
 
Sprint Corporation (S): Free Stock Analysis Report
 
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