Economics and Technology, Inc. -- Views and News, July 2011

July 2011

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The wireless gap: The biggest get bigger while the small struggle for survival

For the four major wireless carriers, July 28, 2011 was a day of good news and bad news. First, the bad news. Sprint Nextel announced its earnings: After having increased its spending on marketing to stem market share losses and after continued subscriber attrition, Sprint lost nearly $850-million in the second quarter of 2011. Sprint hasn’t turned a profit since before 2007, and its inability to grow its base of lucrative post-paid subscribers (despite success in the less profitable pre-paid segment) does not bode well for the company’s future. Sprint has not yet released an official statement of cash flows for the quarter, but if the first quarter is any indication, Sprint has entered a dangerous zone of incurring both accounting losses and hemorrhaging cash. Investors did not take this news lightly: Sprint stock closed down nearly 16% on the news.

After the markets closed on July 28, Verizon Wireless announced its good news. For the first time since 2005, the company is paying a dividend to its owners. Cellco Partnership, the joint venture of Verizon and Vodafone, has been continually profitable for the last decade, but has not turned over any of those profits as cash dividends to its parent companies. Instead, VZW has been reinvesting that cash to grow its business and paying off debt. Those efforts have propelled Verizon Wireless to the top spot in the US wireless industry, with AT&T running a close second. Sprint's position as No. 3 is eroding (as discussed above), and T-Mobile is in the process of being absorbed into AT&T (pending regulatory approval). Verizon's dividend payment is noteworthy not just because it is the first in many years, but because of its magnitude: $10-billion. To put that number in perspective, the entirety of AT&T Inc. (both wireless and wireline) paid just under $10-billion in dividends to its shareholders last year.

So what does all of this mean? If the AT&T/T-Mobile merger is allowed and Sprint is unable to reverse its downward spiral, the US wireless market will necessarily devolve into a two-firm duopoly with a small number of regional or specialized providers at the fringe, none of which will be capable of offering a serious competitive challenge to either of the two dominant carriers.

For more information, contact Colin B. Weir at cweir@econtech.com

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