Earlier this year, the rate of wireless customers switching carriers hit a historical low. At the same time, profit margins in the industry were at all-time highs. AT&T and Verizon were among the top performing stocks in the S&P 500 for 2016 with gains of over 20% each.
A few analysts warned that the good times wouldn’t last. With growth harder and harder to come by in the saturated wireless market, competition was sure to increase. And with the new iPhone 7 about to hit, defections were likely to increase as customers sought the best deals on Apple’s (AAPL) latest.
With third quarter results now in from Sprint and Verizon, it’s looking more and more like the pessimists were correct. T-Mobile (TMUS) and Sprint (S), the two smaller carriers, cut prices on their unlimited data plans and cooked up “free” iPhone 7 offers for customers willing to trade in an older model. AT&T (T) and Verizon (VZ) quickly aped the free iPhone offers but didn’t copy the cut-rate unlimited plans. In fact, revamped wireless plans that Verizon introduced in July raised prices.
The bottom line was evident in Verizon’s top line, as it reported disappointing third quarter results on Thursday. Revenue in Verizon’s wireless unit dropped 4% to $22.1 billion as the carrier lost a net 36,000 regular monthly phone subscribers, also known as postpaid subscribers. It was Verizon’s first-ever drop in postpaid phone subscribers in a third quarter period, traditionally a strong quarter for adding customers. Wall Street analysts had expected a net addition of over 200,000.
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CFO Fran Shammo, who is leaving the company at the end of the month, offered a host of excuses, saying his competitors’ cheap unlimited plans, the recall of Samsung’s Galaxy Note 7, and a supply backlog on the iPhone 7 all hurt Verizon disproportionally. And he defended the company’s decision not to respond to the new, cheap unlimited plans with a Verizon unlimited plan.
“We will continue to be very rational in our competitive response,” Shammo said on a call with analysts. “We will respond when we need to, obviously we responded on the equipment side of the equation. But as we continue here, unlimited is still not something we’re going to move to.”
Including decreasing sales at Verizon’s other units as well as last year’s divestiture of FiOS operations in three states, the company’s total revenue shrunk 7% to $30.9 billion, below Wall Street’s expectations.
Verizon shares had already come off their high. After peaking at $56.95 during trading on July 5, the shares had lost 12% to close at $50.38 on Wednesday. After Thursday’s third quarter report, the shares dropped another 2%.
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The damaged outlook spilled over into the telecom sector at large, with AT&T shares also down 2%, and T-Mobile and Sprint down 1%.
It seems the telecom industry finds itself “growth challenged,” as longtime industry analyst Craig Moffett put it in a report on Thursday. Verizon has tried to diversify by buying AOL and Yahoo (YHOO) as well as several companies in the Internet of things sector, but revenue and profits from those segments remain tiny. Meanwhile, challengers Sprint and T-Mobile are increasing the pressure with price-cutting strategies.
