Headline of the year: Price war in US mobile market raises fear of profit hemorrhage. Or perhaps you prefer: How T-Mobile just nuked the US mobile industry.
As if that would be a bad thing. For those not familiar with the US profit machines, AT&T made $3.8 billion in Q3 while Verizon’s earnings hit $2.2 billion during the period. Margins were at 42% and 51% respectively. Together they control over 65% of mobile subs in the US – some 215 million users.
The warning was sparked by AT&T announcing early in the year it would copy T-Mobile’s offer to pay rival customers to switch. Sprint joined the fray by offering big discounts on family and friend plans.
T-Mobile CEO John Legere announced at CES in Las Vegas that it would cover the cost of early termination for customers who switched as well as offer cash for trading in their phones. Such fees can run as high as $650.
Ma Bell retaliated with its own ads offering T-Mobile customers who switch $450 when they trade in their smartphones.
AT&T is obviously concerned by the fact T-Mobile added 4.4 million new subscribers last year.
This is likely just the first wave of discounts that will boost churn and force the carriers to spend more on marketing, which no doubt will impact margins. It won’t be long until Verizon and Sprint, with a stronger network backed by Softbank, join in with their own special incentives.
And analysts expect AT&T to continue to apply the pressure until its market share stabilizes – not likely anytime soon with T-Mobile and Sprint/Softbank hungry to expand their shares.
This is all great news for consumers in the US, where mobile plans are typically at least double those in Hong Kong and Singapore. The US wireless market is long overdue for some much needed price competition, which Legere is more than happy to provide.
Analyst Chetan Sharma reported early last year that US cellcos generate just 2% of their overall sales from new subscribers compared to more than 20% in 2000. BGR.com’s Tero Kuittinen succinctly summarized what that means: “there is no sales growth to be had from chasing new customers; all the upside is now in squeezing more money from existing subscribers.”
T-Mobile is out to change that. Legere isn’t looking to “nuke” the fat and happy industry – just bring margins down to a more reasonable level of 34-36% and move the industry away from locking customers into long contracts and family plans.
Wall Street might not be ecstatic, but mobile users certainly will be once rates drop.