Brutal price competition is rippling through profits, inflation and antitrust
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the US print edition of The Wall Street Journal (June 24, 2017).
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Customers are used to cellphone bill shock, but not like this.
The cost of U.S. cellular service is rapidly plunging, reversing years of increases that have squeezed consumers' budgets and generated huge profits for wireless companies.
Americans are using their smartphones more than ever to stream videos, surf the web and browse Facebook. But telecommunications companies are losing their power to raise prices for using their networks, in part because the U.S. cellphone market is nearing saturation. That has kicked off a vicious price war among the four national wireless carriers.
The consumer-price index for wireless phone service, an indicator of current offers from cellphone service providers, dropped 12.5% in May from a year ago, according to the Labor Department. The index earlier fell 13% in April, the largest decline in the history of the category, prompting Federal Reserve Chairwoman Janet Yellen to say earlier this month it was a factor in the country's low inflation.
Beyond the consumer impact, the rapid collapse in the industry's pricing power will ripple through its profit margins, federal regulations and antitrust law.
T-Mobile US Inc. and Sprint Corp., the third and fourth largest carriers, recently rekindled talks about a merger, according to people familiar with the matter. The two previously discussed combining in 2014 but backed down in the face of regulatory opposition.
The rout could continue when the many consumers who haven't felt the effects of price drops, unaware they can lower their monthly bills, call their carriers to demand better deals.
Selina Sosa, who runs a nonprofit near Dallas, cut her monthly bill by about a third in less than six months. Last December, she switched carriers from AT&T Inc. to Verizon Communications Inc., reducing her payment for three phones from $330 to $279.
In April, Ms. Sosa called Verizon with a billing question and an agent offered to switch her into an unlimited-data plan and lower her monthly bill by another $57. "I didn't even ask to reduce my payment," she said, adding she was relieved to save the extra cash.
Six years ago, the number of active cellphones surpassed the U.S. population. About 80% of Americans currently own a smartphone, according to CTIA, an industry trade group. Many have multiple devices. Consumers are also keeping their smartphones for longer periods, which means fewer customers are up for grabs.
Offers from wireless providers are becoming increasingly extreme. Sprint this month launched a short-term promotion to give away a free year of wireless service to new customers who supply their own mobile phones. The move comes months before Apple Inc. is expected to introduce its newest iPhone, which is when carriers typically roll out discounts.
The competition grew so intense during the first three months of this year that Verizon, the largest national carrier, suffered its first-ever quarterly subscriber loss. AT&T Inc. and Sprint also lost customers, and the industry's total revenue growth slowed to 1% from a year ago, its lowest-ever rate, according to research from investment bank UBS. The quarter's big winner was T-Mobile, which has been offering plans with favorable features.
A major reason for the steep decline in the wireless consumer-price index is companies' return to unlimited-data plans. Back in 2010 and 2011, AT&T and Verizon ended their all-you-can-eat plans for smartphone customers and imposed monthly caps on usage. Executives for years said unlimited plans made little economic sense.
In February, Verizon brought back unlimited plans to counter a wave of customer defections to T-Mobile and Sprint, which had both rolled out aggressive unlimited offers. Days later, AT&T responded with a new unlimited plan of its own. With the new plans, making calls and texting are essentially free. Expensive overage fees that carriers impose when users exceed their monthly usage limit are also going away.
Verizon now charges $80 a month for an unlimited talk, text and data plan for a single line. Sprint charges $50 for a similar plan in the first year. In 2011, an unlimited Verizon plan cost $120 and one from Sprint cost $110.
Verizon Chief Executive Lowell McAdam said at a conference in May that adopters of its current unlimited plan are mostly people who used to have pricier subscriptions. He also predicts many customers with lower-price, capped-data plans will soon start paying more for unlimited service to avoid having to keep track of their monthly data usage.
"There are ebbs and flows for sure," said Jeffrey Moore, head of Wave7 Research, which tracks wireless competition, "but I think that the past year has been the most aggressive time in wireless history."
Cellphones are a major expense for many families. The average American household spent $1,074 for cellular service in the year to June 2016, up 77% from a decade earlier. Total household expenditures rose just 13% over that same period, according to Labor Department data.
If many people wind up paying less for their cellphone bills, it could free up consumer spending in other areas, similar to how a decline in gasoline prices can boost other parts of the economy.
For much of the past year, Niya Case, a human-resources specialist who lives near Tampa, Fla., was paying about $400 a month for four smartphones and two tablets, which belonged to her and family members.
"Oh my God, people pay less than that for a brand-new car," the 38-year-old said she used to think when she looked at her bill from Sprint.
Ms. Case said she asked friends about less expensive offers and decided to switch providers a few weeks ago. She is now paying about $155 a month for four phone lines at T-Mobile and plans to put the savings toward school clothes for her children and a family cruise in the fall.
The changes have been punishing for wireless companies. After rising every quarter for 17 years, revenue from wireless data plans fell 0.33% in the first quarter of this year, according to industry consultant Chetan Sharma.
The slowdown is making companies look outside the industry for growth. AT&T plans to buy Time Warner Inc. for $85 billion, while Verizon has scooped up Yahoo and AOL to build a digital media business.
Some economists believe consolidation among the four national carriers could end the price war, because three competitors with roughly equal market share would behave less aggressively to maintain the status quo.
During a call with analysts last month, Sprint Chairman Masayoshi Son said he was looking to merge Sprint with another company and that T-Mobile was "the first priority."
Sprint CEO Marcelo Claure said consolidation will make the industry even more competitive. "Sprint has been working hard to invest in its network and bring increased value to consumers, but as we look to the future, scale will be critical to sustaining competition," he said in a written statement to The Wall Street Journal.
T-Mobile CEO John Legere spoke about consolidation in an April call with analysts. "I'm very comfortable that we could make a case that it is in the best interest of customers, of the country, of the industry versus the alternatives of the status quo," Mr. Legere said.
If a deal does materialize, regulators recently appointed by President Donald Trump will need to revisit the state of competition in the market. The U.S. wireless market is already one of the nation's most concentrated industries.
The big wireless carriers have acquired a host of national and regional cellular providers since 2000. In recent years, regulators have twice prevented the remaining four national players from consolidating to three. The government in 2011 blocked a proposed merger between AT&T and T-Mobile and signaled three years later it would do the same for a Sprint and T-Mobile combination.
"This is one of the best examples of the benefits of antitrust," said Gene Kimmelman, president of the consumer-focused group Public Knowledge and a former Justice Department antitrust official under President Barack Obama.
Berin Szoka, president of TechFreedom, a libertarian policy group, said nationwide high-speed networks that benefit many consumers couldn't have been built without the economies of scale that large companies have.
"The market is supposed to drive that balancing act," Mr. Szoka said. "The more that we have the government making those decisions instead and second guessing the market, the greater risk that we get that wrong."
Former FCC Chairman Tom Wheeler didn't buy that argument when Mr. Son, Sprint's chairman, was laying the groundwork for a deal with T-Mobile less than a year after Japan's SoftBank Group Corp. acquired Sprint.
During a 2014 meeting at Mr. Wheeler's office in Washington, the Japanese billionaire said he could help the U.S. fix what he called its terrible wireless networks if he was allowed to get bigger, according to a person familiar with the meeting.
"We have two big guys punching back with two hands, and two smaller guys fighting with one hand each," Mr. Son said, according to the person's recollection. "We want to unite the two hands so we can punch back."
Mr. Wheeler said Mr. Son should first try competing as a stand-alone company. "The merger made no sense before, and it makes no sense today," Mr. Wheeler wrote in an op-ed on CNBC's website last month.
Since 2014, Sprint has gone from hemorrhaging monthly subscribers to adding nearly one million last year, while T-Mobile added more than four million last year. Verizon alone still has far more customers than Sprint and T-Mobile combined, and Sprint hasn't had a profitable year since 2006.
Describing his approach to merger reviews, Ajit Pai, a Republican who took over as chair of the Federal Communications Commission earlier this year, said the agency will examine the marketplace to see if prices are coming down and innovation is increasing.
"I don't claim to know in a vacuum what the optimal market structure of any particular marketplace is, what the 'right' number of competitors should be," Mr. Pai said last month at the American Enterprise Institute in Washington.
Write to Ryan Knutson at email@example.com
(END) Dow Jones Newswires
June 24, 2017 02:47 ET (06:47 GMT)