AT&T and Verizon Wireless will continue to dominate the U.S. wireless industry as other carriers struggle with such challenges as low margins and increasing competition, financial analysts wrote Monday in a daily letter to investors.
Overall subscriber growth is slowing down in a country where most people have at least one mobile phone, and “being able to best manage one’s underlying cost structure at a time when data services have become much more important than traditional voice will dictate which companies harbor the greatest earnings growth potential,” Canaccord Genuity analysts Greg Miller and Eric Chu wrote.
The analysts said Verizon Wireless is less dependent on the iPhone than AT&T and is in a position to potentially improve its margins in the coming quarters. U.S. carriers subsidize the iPhone in order to garner lucrative contracts but the subsidies have been pressuring their margins. Verizon, the nation’s biggest wireless carrier, is said to be heavily marketing other devices besides the iPhone. With new smartphones like the popular Nokia Lumia 900 in its lineup, AT&T also may soon find itself less reliant on the iPhone. Canaccord Genuity raised its price targets on AT&T and Verizon Wireless.
Meanwhile, money-losing Sprint is facing increasing challenges to its already low margins because of expenditures on its aging 3G-iDEN networks, Canaccord Genuity analysts said. Another dilemma: Sprint’s introduction of the iPhone 4S last year further pressured its margins.
Miller and Chu also anticipate increasing competition in the lower end of the wireless market, fueled by T-Mobile USA’s attempted comeback following its failed merger with AT&T. T-Mobile USA has a reputation for providing a more affordable alternative to its bigger rivals.
However, AT&T and Verizon Wireless also have consistently revised their value-based offerings in what the analysts declare will make it “increasingly difficult for either MetroPCS or Leap Wireless to continue producing profitable subscriber growth.”
Several media reports have surfaced that MetroPCS and Leap Wireless could be acquired by larger U.S. carriers, although the analysts believe the prepaid carriers MetroPCS and Leap are more likely to merge with each other.
MetroPCS and Leap have both reported increases in the number of smartphone customers, though the effects haven’t been entirely positive. Average revenues per users have increased but so have costs, said Canaccord Genuity, which lowered its price targets on the stocks of both companies.
“In order to maintain margins and shareholder returns, we believe LEAP and PCS will each likely have to adjust its operating strategy to one that relies less on growing new subscribers and more on retaining the existing subscriber base,” Miller and Chu wrote.