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Margins Falling For Verizon And AT&T But Investors Should Not Worry

December 11, 2014 - Written By Cory McNutt

The perfect doom and gloom story – Verizon and AT&T are both warning Wall Street financial analysts that their earnings for the fourth quarter are going to be “sluggish” – I just love that word. Lower margins and higher churn rates seem to make an analyst or investor crawl up in a ball and hide in a corner somewhere, as though an apocalyptic tragedy is about to incur and the end is near. T-Mobile and Sprint are putting on the pressure with very competitive packages to get Verizon and AT&T subscribers to jump ship and come over to their networks…the churn rate we spoke of earlier.

While this may not be so good for investors, it is certainly good for the consumer and it is called competition. It is what our entire principal in the U.S. of free enterprise is based on – give the people what they want and they will come. So what if Verizon and AT&T lose a few customers and profits this year and T-Mobile and Sprint gain a few – no harm, no foul.  The problem however, is that investors do not care what happens to the consumers – aren’t they consumers as well – or what happens to companies in which they do not invest…they only worry about their dividend check at the end of the year.

Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote that they believe that “short-term lower pricing for consumers will likely end poorly for all”. They also point out that the Average Revenue Per User (ARPU) is 2.5 times important than the EBITDA and “The bottom line is the industry needs to stop obsessing about subscribers when ARPU is so much more important.  In our opinion, going negative on subscriber growth may be just what the doctor ordered”.  They also point out that while T-Mobile and Sprint may be showing a growth in new subscribers, they are also not generating positive cash flows – you cannot give away the farm and expect to make a profit, especially at first.

Analysts also argue, and this makes sense, that what Verizon and AT&T need to do is concentrate and focus on “…creating a sustained network performance advantage over Sprint and T-Mobile”. If they truly have the dominate networks, then people will be willing to pay more, or at least not jump to an inferior network.  Carriers should spend their money on improving their networks, not on temporary promotions and price cuts. This is where consumers and investors part ways – the more competition on pricing, value plans and giving us a transparent wireless experience is great for the customers, but not the investors. A compromise of sorts has to occur to where the carriers have enough profit to invest in their networks.

Please hit us up on our Google+ Page and let us know how you feel about the carriers and pricing – are you will to pay more for a superior network…as always, we would love to hear from you.