Your browser is not supported. Please update it.

13 November 2019

Markets grow nervous about impact of price wars on US operators’ 5G profits

The USA has traditionally been one of the least price-competitive mobile markets in the world, but that may be set to change. In many markets, the signs of a 5G price war are already clear – Vodafone’s aggressive pricing in its UK launch, for instance, and the generous discounts provided by operators in South Korea to drive 5G uptake.

Now, several factors will bring price wars to the USA too. So far, these have mainly raged in the lower end of the market, driven by T-Mobile’s Uncarrier propositions. In 5G, if TMO’s acquisition of Sprint is approved, it will have greater capacity and scale with which to extend its disruptive pricing to high end and 5G services, while prospective new entrant Dish is already promising a new approach to tariffs.

Even AT&T has introduced price reductions, and analysts are looking for an imminent response from TMO, and the start of a head-to-head battle between two operators which have often avoided direct conflict, focusing on different sets of users. If that market segmentation is about to end, it will have a major effect on the 5G business case for all MNOs.

Analysts at Wall Street research firm Nomura Instinet wrote in a recent client note that they had upgraded Verizon’s stock two years ago, “”on the premise that service revenue growth would return to healthy growth. We now fear progress should ebb”. As a result, they have downgraded the stock rating to ‘neutral’, claiming that price cuts by AT&T have reduced the visibility of Verizon’s short term growth opportunity, “lowering our confidence into its long term ability to lift pricing for 5G”.

Fellow analysts at New Street wrote in a recent research note: “Wireless competitive intensity is set to increase, and we think Verizon is likely to lose share as a result … we remain cautious of Verizon going forward”. One of the telco’s key disadvantages is its poor spectrum position. Unlike a combined Sprint/TMO, which will have leadership positions in 600 MHz and 2.5 GHz bands – an ideal combination for a balance of wide coverage and high capacity – Verizon has leadership only in millimeter wave, which have underpinned its fixed wireless-oriented 5G launch, but have severe challenges in supporting wide area coverage or high mobility.

Until Verizon is ready to refarm LTE spectrum, it has a shortage of midband and low band spectrum compared to rivals, so will face higher costs to expand services to large numbers of users, and difficult in defending its market position. A price war would make this situation far worse.

There is an overall downturn in US wireless service revenues, driven by price cuts – the opposite of what operators and their investors hoped for at the start of 5G. In the third quarter, service revenues were up only 0.8% year-on-year, after four consecutive quarters of growth of over 2%. Verizon has already reduced the cost of its monthly plans to encourage postpaid, and particularly 5G, uptake – it did win more new postpaid customers in Q3 than expected, with a net total of 440,000, against expectations of 368,000.

AT&T reduced its own prices last week and was quickly followed by fifth MNO, US Cellular, which announced new unlimited data plans starting at $55 a month for one line or $120 for four lines.