(Price) War and Peace

Is a price war coming to our mobile phone networks? Photo: Linzy. Source: Morguefile

Verizon recently followed its rivals in offering an unlimited data plan. They’ve long had the broadest network, but they’ve been losing revenues by 1% per year for the past several years. By rolling out unlimited data priced right around what AT&T and T-Mobil offer, Verizon hopes to recapture some of the market share that they recently lost.

I remember gas price wars in the mid-‘70s. There would be gas stations on all four corners of an intersection, and when one dropped its price, the others would follow suite, eventually pushing prices down to the wholesaler’s level. The stations tried to distinguish themselves from one another, but they weren’t successful. People saw gasoline as a generic product whose principal feature was its price. 

Eventually, marginal gas stations dropped out. We didn’t need so many vendors. The losers tended to be independent stations who couldn’t get price breaks from their distributors. But consumers won; despite many fears, prices didn’t jump right back after the marginal players dropped out.

We’ll see what happens with our mobile phones. Verizon and AT&T are the dominant providers, and people see cell-phone service as a generic product. The main feature to the consumer is price; the main feature for the investor is the dividend. These aren’t growth stocks in a growth industry anymore. With AT&T running a 15% operating margin and Verizon at 22%, there’s room for both to cut prices a little more.

 

Photo: Victor Hanacek. Source: Picjumbo

With their stronger network and higher margins, Verizon looks like it could win this war. But the real challenge for the victor won’t be winning the war. It will be winning the peace. Anyone can cut prices. It takes a lot more to satisfy customers.

Douglas R. Tengdin, CFA

Leave a Reply

Your email address will not be published. Required fields are marked *