Investors are nervous when it comes to pricing competition in the mobile industry.
Just look at the effects of a Wall Street Journal article in April that described the competitive Jacksonville, Fla., mobile phone market. That article, in addition to AT&T Wireless Services Inc.’s introduction of its Digital One Rate plan in May-which eliminated roaming and long-distance charges for high-end users-caused some carriers’ stock to decline significantly.
Now, as carriers aggressively begin to target mid-level and high-end subscribers and match offers like AT&T’s, Wall Street may not be kind.
“The wireless market currently is a market that is fluid. Right now we have four or five operators competing for the same subscriber and even more so for the high-end subscriber,” said Larry Swasey, analyst with Allied Business Intelligence in Oyster Bay, N.Y. “The next few years are going to be like the gas wars of the ’70s. For many, this may seem like a tenuous time, but it has to be expected. Investors with any knowledge of emerging technologies and supply and demand are very aware that the wireless industry will go through this period of trying to lower the price per gallon by one penny.”
But to many investors, say financial analysts, a decrease in price translates into a decrease in revenue.
Investors “have become very centric,” explained Christopher Larsen, financial analyst with Prudential Securities in New York. “If competition is heating up and prices are coming down, theoretically, everything else is the same. You would make less money.”
The mobile phone industry is a different animal from most industries, say analysts. Lower per-minute prices mean subscribers will use their phones more. And though average revenue per unit has come down significantly since the early 1990s, cost per subscriber is going down, too, and penetration is going up.
“The price of cell phone service is a lot less than in 1990 when ARPU was about $81, yet penetration was 2.1 percent,” said Larsen. “Now we’re at 21 percent, and ARPU is half that number. ARPU has come down, but more subscribers are using phones and minutes. Wireless companies aren’t any more profitable than they were in 1990. We’re talking about 40-percent plus operating cash flow margins that a few years ago were a lot lower.”
Lower per-minute airtime rates also mean investors should not look within the confines of the wireless industry. Lower prices will allow the eventual migration of minutes of use from wireline to wireless networks, say analysts.
“The wireless mobile industry will become one and the same with the wired industry,” said Timothy O’Neil, financial analyst with SoundView Financial Group in Stamford, Conn. “You have AT&T and now BAM (with its new SingleRate plans) pushing that fine demarcation line. There are boundaries in most industries that are a finite pie. In the wireless industry, the pie is not a wireless pie, but a telecommunications pie. You are moving away from a smaller pie by decreasing prices into a pie 10 times as big … As you reduce your rates to compete with the wireline business, you have the potential to take a bigger slice of a much bigger pie.”
Analysts also argue that churn can be reduced by lowering prices, as wireless service becomes affordable enough for people to value the service. Andersen Consulting in previous churn studies has noted that reducing the rate of churn by 1 percentage point can boost company valuation of an average wireless operator by millions.
“With so many systems available, carriers must lock consumers into their infrastructure for at least a year at a time,” said Swasey.
“If that means giving customers great prices to get them to use the phone and features of the system, then that is what has to be done. And if investors get nervous about this, then they need to go to an economics class.”
