Verizon Communications Inc. (NYSE: VZ) and
AT&T Inc.
(NYSE: T) shares moved sharply lower after the two telecom providers
announced new flat-rate plans. The move marks a shift from high margin
services to lower margin staples that could put pressure on margins and
may spark further reduction in prices aimed at increasing users. The
commoditization of the wireless voice service industry is a move that
many investors expected but dreaded as it could end up curbing growth
rates and reducing valuations for many telecom providers. So, what does
all of this mean for shareholders of VZ and T?
Currently, both plans are priced at $99 per month, which means that
it will only affect so-called power-users that would like their
services consolidated into one predictable price. Moreover, the moves
are also designed to increase customer loyalty by locking them down for
longer contracts. The two companies are hoping to attract a number of
new users from other service providers that offer more expensive
services. Indeed, this could help boost revenues over the short-term as
an increased number of users sign up but may put pressure on margins as
the average revenue per user would likely decline while expenses would
remain consistent or higher (in the event of a new marketing spend).
The downside is that this is a familiar path for the telecom
providers that initially had contracts for their original services
before being forced to take them down thanks to increased competition.
The unlimited services are expected to meet the same fate eventually as
prices continue to be lowered and contracts eliminated. Once these
wireless services have switched to more of a staples service, they will
likely meet the fate of phone companies now that operate on razor-thin
margins and are forced to come up with new features in order to compete.
Investors may be better off looking at handset makers if they wish
to benefit from this industry. Unlike services, handsets must be
replaced every few years while rapid growth in emerging markets is
maintaining and accelerating growth in many companies. Additionally,
companies like Motorola are being targeted by activist investors bent
on unlocking value for shareholders and converting them to more
pure-plays in order to benefit directly. In the end, the industry as a
whole is commoditizing and that means slower growth, smaller margins,
and increased competition… it may be time for some investors to move on…
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