Verizon Communications Inc. (NYSE: VZ) became the first major wireless provider to announce that price wars have damaged its financial results. Its rivals will follow. The war waged for market share has begun to cause bleeding in the industry, which is likely to continue into the foreseeable future.
Verizon management tried to make the bottom line erosion appear positive:
Verizon Communications Inc. announced today that it continues to see strong momentum for wireless customer growth in the fourth-quarter 2014.
Also:
Approximately three out of four upgrades were strategic or high-quality — meaning they were from a basic phone or a 3G smartphone or a high-value customer. The percentage of customers choosing the Verizon Edge equipment-installment plan option so far in fourth-quarter 2014 is tracking to 24 percent, or double the rate of third-quarter 2014, which was approximately 12 percent of total phone activations.
A little further on in the press release, Verizon disclosed the effects:
The company expects that the fourth-quarter impacts of its promotional offers, together with the strong customer volumes this quarter, will put short-term pressure on its wireless segment EBITDA and EBITDA service margin (non-GAAP, based on earnings before interest, taxes, depreciation and amortization) as well as its consolidated EBITDA margin (non-GAAP) and earnings per share.
Buying customers, mostly from rivals, has become very expensive.
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The results will hit AT&T Inc. (NYSE: T), which has as rock solid a balance sheet as Verizon does. The same cannot be said for Sprint Corp. (NYSE: S) and T-Mobile US Inc. (NASDAQ: TMUS). They have thrown desperate Hail Marys to grab business, with remarkable discount packages of their own. Sprint has even gone so far as to offer to halve wireless bills if people move from AT&T or Verizon.
Sprint CEO Marcelo Claure announced:
I hope by now that you’ve heard of Sprint’s new Cut Your Bill in Half Event. It’s a great deal and demonstrates our commitment to offering consumers the best value in wireless.
Starting today you can bring us your Verizon or AT&T bill, and we’ll cut your rate plan in half. This is an unprecedented offer and our boldest move yet.
The “bold move” is bound to undermine the company’s weak P&L results and modest balance sheet.
Losses were bound to be a result from customer offers that cut prices so deeply that they may have no precedent. Some companies in the industry can survive the period of these cuts much better than others.
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