The American consumer is reasonably savvy when it comes to shopping for discounts, and that often forces large corporations into price or service wars to gain customers. Nowhere is it more omnipresent than with the four big companies that dominate the wireless and data business, as they are constantly battling each other for new customers and to hold on to existing ones.
While gaining new customers is always a bright spot, it can sometimes be painful to earnings. A new Jefferies research report features some interesting data that could feasibly in turn affect the potential merger between Sprint Corp. (NYSE: S) and T-Mobile US Inc. (NASDAQ: TMUS) because of the low pricing that Sprint has been offering to gain new customers.
In fact, the pricing at Sprint is so low, that it may be dilutive to the average revenue per user (ARPU), which is a measure used primarily by consumer communications and networking companies, defined as the total revenue divided by the number of subscribers. This is a metric that is very closely followed by Wall Street, and it may be a key point in any merger or buyout.
In the report, the Jefferies team point out that all the major companies offer unlimited data plans, and with good reason: people are constantly on their phones doing everything from watching and streaming video to playing games, and following social media. In addition, the firm conducted a wireless consumer survey, and they believe unlimited data plans are here to stay.
The wireless survey showed that 34% of the respondents were currently on unlimited data plans, and 47% of those who responded who were not on a plan were very interested in moving to one. With pricing often the deciding factor, especially for younger customers, Sprint could see a deluge of new customers, especially given the current aggressive marketing campaign, which features the former Verizon Communications Inc. (NYSE: VZ) “Can you hear me now?” pitchman in new commercials.
With Sprint and T-Mobile having the highest percentage of customers surveyed in their respective unlimited data plans at 62% and 57%, it would make sense that customers looking to move to a new plan would target one of these carriers if price was the leading factor in the decision. But if adding hordes of new customers threatens to ultimately be dilutive to the ARPU, that could in turn be a factor in merger or buyout talks.
The reason that low pricing could be an issue is both AT&T Inc, (NYSE: T) and Verizon use far more rational pricing for their unlimited packages, as both of the telecommunication giants offer additional products to their customers and have ancillary ways of generating revenue. Sprint and T-Mobile don’t have that luxury, so they constantly look for ways to low-ball the big players with pricing and family group packages.
Some on Wall Street yawn at the thought and chatter over a Sprint-T-Mobile merger or buyout, as those rumors have made the proverbial rounds countless times over the years. Plus, as usual, there is a plethora of reasons while they merger may be a difficult one, not the least of which is the two companies are on different networks. Sprint uses CDMA technology to power its network, while T-Mobile is on GSM. The two technologies are not compatible, and CDMA would likely have to be phased out (along with some customer devices) before the two networks could truly unify.
One thing is for sure, with Sprint continuing to offer rock bottom pricing, while getting people in the door, it may drive down a metric that is the most closely followed. That in turn becomes a bargaining chip for T-Mobile in the overall deal it would seem — a bargaining chip that could drive a stock offer lower and may make Sprint more reluctant to do a deal.
Lastly, there is problem of regulators. For years, it has been speculated that a Sprint-T-Mobile deal may have a very hard time being approved, as it chops the total of national carriers available to consumers from four to three. While it may prove better overall for the current customers of both companies, it could ultimately raise prices and lower choice as competition is diminished. That is a scenario frowned upon by government regulators.