The Telecom Price Wars: Murder For Telcos, Magic For Consumers (T)(VZ)(CMCSA)(S)

Industry-wide price wars are like the old Western range wars. They don’t happen often but when they do they are violent and have sudden onsets. A new home-phone program from T-Mobile is about to bring telco competition to a bloody head.

Just a few months ago Verizon (NYSE: VZ) and AT&T (NYSE: T) were in fantastic positions. Both had fast-growing cellular operations. But had shrinking landline business under siege by VoIP products from cable companies like Comcast (NASDAQ: CMCSA). The landline businesses were still profitable and the fall-off in revenue was moderate. Phone companies were also building out fiber to compete with cable in the TV and broadband sectors.

The only real losers on the scene were Sprint (NYSE: S) and T-Mobile, the US cellular operation of Deutsche Telekom. Both were smaller than their rivals and Sprint’s merger with Nextel had ruined its customer service and subscriber retention.

It has taken about a week for all of that to change. AT&T and Verizon Wireless have introduced flat-rate unlimited calling plans at $99.99 a month. Both stocks hit 52-week lows on concerns about how much revenue this would take from the companies. At least the damage was restricted to their wireless operations.

Now T-Mobile has made a potentially wider-ranging move. It will offer its subscribers VoIP service in their homes to replace their landline service from the big telcos. According to The Wall Street Journal "to sign up, [customers] must buy a $50 Internet router from T-Mobile and pay $10 a month for unlimited local and long-distance domestic calling. Consumers can connect any home phone into the router via a traditional phone cord."

For the time being only T-Mobile cell phone customers can get the service, but, if it is a way to get new customers for its wireless operation, that is likely to spread. That probably means AT&T and Verizon will be forced to field their own competing products. These will cannibalize their own landline products. Better to cut prices for landline service than to lose the customer completely.

All of this is leading to the largest tectonic shift in the industry since the break-up of the old AT&T in 1974.

The new pricing structure and the ability for telcos to enter one another’s markets with ease is based to a large extent on technology which did not exist 10 years ago especially VoIP and 3G. It is enabling modest competitors like T-Mobile to disrupt the business of the largest companies in the industry.

The rapid changes in the telco market are likely to cut consumer phone costs considerably. It is also likely to cost shareholders in the big telcos tens of billions of dollars. In just the last year, AT&T has lost $75 billion in market cap, and, it will lose more All of that because of $10 home phone service

Douglas A. McIntyre