AT&T and Verizon investors are a calm bunch. The two companies' shares have underperformed the market by 9 and 5 per cent since October, respectively, but have performed in line with the market for 2012 and have outperformed over two years. The shares trade at a slight premium to the market. Yet these pseudo-duopolists, which sit atop the U.S. wireless telecom market, are facing a radically different competitive environment than they did a year ago. Softbank's purchase of Sprint and the latter's subsequent acquisition of Clearwire create a better-funded number three with the spectrum to launch low-priced wireless data products.
Nor is Sprint the only problem: the T-Mobile/MetroPCS merger (if it is not interrupted by a counter-bid) creates a fourth player just strong enough to grasp for market share, adding to the price pressure Sprint is all but certain to create. Meanwhile, Dish Network has a nice chunk of wireless spectrum it could add to one of the smaller competitors' war chests. The next few years are going to be fun to watch – from a distance.
Owners of AT&T and Verizon shares may be complacent because of high dividend yields (both about 5 per cent) and because operating performances at both companies have held up. A couple of percentage points of subscriber growth and a couple more of revenue per subscriber growth (thanks to data sales), helped by a little operating leverage, keep wireless operating earnings ticking up slowly – sometimes even enough to offset declining landline profits.
Mergers and network upgrades take a while. So the big boys have months or even years before the pressure really hits. But hit it will. AT&T's announcement in November that it would ramp up its capital spending can only be interpreted as an acknowledgment of this. The time to worry is now.