Big U.S. Mobile Price War Could Damage Equity Values
A marketing battle in the U.S. mobile business has broken out, and some will begin to wonder whether a possibly financially-ruinous price war now is possible.
T-Mobile US is offering to pay early termination fees for customers who cancel their service plans with any of the other major national carriers, up to about $650 per account, in some circumstances.
AT&T has quickly responded with its own ETF refund plan, up to about $4500 per customer.
Sprint meanwhile has loosened rules about family plans to make it easier for customers to form “framily plans” that include up to 10 lines on a single account.
Verizon Wireless hasn’t announced any response so far, but some wonder whether it will be able to stand pat for too long, if it starts to see defections to any of the other service providers.
The business problem is simple enough: a price war will hit gross revenues, raise marketing costs, and hit profit margins, even if a carrier is lucky enough to avoid losing any appreciable number of customers.
Of course, it also is possible to ask whether carriers can win a price war. A rational mobile service provider would rather avoid having to fight such a war. But it might also be said that if a firm cannot avoid a price war, it probably has to try and win that war, despite the likelihood that “winning” means “losing.”
Price wars often lower market revenue and profit margins for all contestants, no matter which carrier believes it has won the war.
Ignoring for the moment the likelihood that such a price war bleeds cash that might have been deployed more usefully elsewhere in the business, customer churn virtually always increases.
Beyond that, consumers learn to expect better and better price deals, and the downward pricing spiral then can gain momentum.
But there arguably is an important difference between “losing less” and “losing more,” in a price war. An attacking carrier often does gain significant market share, and that share gain can be relatively long lasting.
In a market with four contending providers, even the defending carriers will care which of them loses least, and which loses most market share, despite the likelihood that the overall market opportunity will decline, and that equity values could take a hit as well.
In fact, a decline in average revenue per user probably will have a bigger financial impact on a mobile carrier than losing hundreds of thousands to a million customers.
And Sprint has yet to launch its expected assault, likely also to include price elements.
It has been some time since a serious price war broke out in the U.S. market, and the impact might not be pretty, at least for mobile service providers.