Worst Quarter Ever for Wireless Industry Has CEOs Seeking Deals

  • Seasonally weak first quarter is worse than any before it
  • Sprint CEO seeing interest in kicking off deal talks

The U.S. wireless industry suffered its worst quarter of subscriber growth in history, adding urgency for transformative mergers in a potentially more deal-friendly period under the Donald Trump administration.

Verizon Communications Inc., AT&T Inc. and Sprint Corp. all lost customers in the period, even with the introduction of new unlimited data plans to give consumers the ability to stream video without worrying about exceeding a cap. Only T-Mobile US Inc., the industry disruptor led by self-styled rebel Chief Executive Officer John Legere, added to its subscriber rolls in the quarter. Those gains brought the sector’s total additions to 298,000, a sector-wide low.

The new low in customer gains highlights the pressure the carriers face in diversifying beyond the mobile-phone business. Verizon has started ventures in mobile media and advertising, while AT&T has agreed to acquire Time Warner Inc. to expand into entertainment.

“The market has been tapped out. Mission accomplished. Move on,” said Roger Entner, an analyst with Recon Analytics LLC.

Almost everyone in the U.S. who wants a mobile phone already has one. Some people have two. Wireless penetration -- a figure representing the number of phones divided by the total U.S. population -- exceeded 100 percent four years ago, according to the industry trade group CTIA.

Even with the seasonal ups and downs of the business, the industry is growing only at about 3 percent a year, roughly tracking population growth, said Entner.

Bumping up against that ceiling has made it even more troubling for carriers trying to hold on to customers. And they will have more competition from cable operators Comcast Corp. and Charter Communications Inc., which are testing the market with new wireless services.

Despite those troubling signs, the industry has remained stable, said Walt Piecyk, an analyst at BTIG LLC. Churn, or the monthly customer defection rate, has been low and margins have been wide -- Verizon’s gross margin was 61 percent and AT&T’s was 55 percent in the first quarter. But that may be a trap, Piecyk said.

“The dominant players are more interested in preserving their free cash flow than using their record margins to stem the market share losses to T-Mobile,” Piecyk said.

Though dreary first quarters are also typical, coming on the heels of the Christmas holiday shopping season when consumers rush out to buy loved ones new phones and plans, this one was especially bad. Taken together, Verizon, AT&T and Sprint fell short of Wall Street’s expectations for new-customer additions by an average margin of 376,486, according to Bloomberg data.

A yearlong moratorium on wireless deals lifted last week with the conclusion of a federal airwave auction. Verizon Chief Executive Officer Lowell McAdam said he be willing to take calls from Walt Disney Co., CBS Corp. and Comcast Corp., and the company has been conserving cash by not bidding on airwaves and racking up smaller deals for AOL and Yahoo -- possibly building up for something bigger. But based on comments from Sprint CEO Marcelo Claure and Dish Network Corp.’s Chairman Charlie Ergen, who is looking for a network partner to capitalize on his trove of airwaves, it’s still early in the process.

Read more: Gadfly on Verizon feeling lonely after AT&T’s megadeal

“We’ve seen lots of interest from different parties to engage in talks,” Claure said on an earnings call Wednesday. Sprint, Dish and T-Mobile are all considered to be key pieces of a new round of deals and industry consolidation.

Sprint and SoftBank Group Corp. Chairman Masayoshi Son have remained interested in combining Sprint and T-Mobile to form a stronger competitor to Verizon and AT&T. His idea was shot down by regulators in 2014, who preferred a four-player wireless market.

The change in government with the arrival of Trump could give Son one more shot at a T-Mobile deal.

Son, who declined to comment on any specific talks during the Sprint earnings call, said: “I’m just hoping that the government is much more open to any kind of possibilities.”

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