Wireless Industry Turns Into Promotional Arms Race

AT&T, Verizon Feel the Pressure as T-Mobile Launches Another Big Promotion

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The wireless carriers are locked in a promotional arms race. For investors, the flurry of holiday promotions has turned into a nightmare before Christmas. For ad agencies, it could be the gift that keeps on giving.

This week the two largest national carriers, long considered immune to shocks in the industry, forecast weaker holiday quarters, warning that heated competition is eating into margins. Verizon released its statement on Monday. On Tuesday, John Stephens, AT&T's CFO, told an analyst conference the carrier's turnover on postpaid customers, or churn, would trend higher. Each said their device business was growing, but not fast enough to offset the cost of heavy promotions.

The unnamed culprits? Sprint and T-Mobile, which have unleashed a flurry of discounts to undercut the giants and poach subscribers. Sprint launched a deal to trim customers' service bills in half. And on Tuesday, fresh off Verizon's statement, T-Mobile announced yet another steep data promotion. Both deals were accompanied by national television campaigns that went after after the bigger carriers by name.

Analysts were distraught. In research notes this week, several analysts cautioned telecom shareholders to lower profit expectations for the larger carriers now that they're stuck in a promotional battle. This holiday season, the first with all four major carriers selling the iPhone, is producing a surge in aggressive advertising from the wireless companies.

For marketers who rely on checks from the carriers, that's good news. "The competitive intensity in the U.S. wireless industry," analysts at Morgan Stanley wrote, "shows no signs of flagging."

Still, executives at the carriers downplayed the arms race. "Quite honestly, social media and press have really built this up as a price war," said Fran Shammo, Verizon's CFO, speaking at the UBS Global Media and Communications Conference on Tuesday. He called the recent offerings from competitors "short-term tactics," which were losing money. "This is just temporary, promotion-type stuff to just stimulate growth," he added.

His counterpart at AT&T, John Stephens, concurred, telling analysts the carrier is equipped with a balance sheet that can withstand the assault. "Once you start peeling it back, it can offset some of the noise around the promotional plans," he said, throwing his hands into quotation marks with the word "noise."

Wall Street disagreed. Kevin Smithen, a Macquarie Capital analyst, dubbed Verizon's cautionary statement about weaker earnings "a fitting end to an anemic year for U.S. telecom." The firm cut its forecast on Verizon for the fourth quarter and for 2015. Analysts at Jefferies lowered price targets for AT&T, noting that its discounted Next plan would not ease margin pressure.

In many ways, the industry is splitting in two. With their aggressive deals, Sprint and T-Mobile are going after customers hunting for value. While Verizon and AT&T focus on higher-value subscribers, who they can upsell to other platforms -- an over-the-top service for Verizon, and DirecTV for AT&T, once its acquisition closes.

But the bigger players have been forced to respond to their smaller rivals. On Tuesday, Mr. Shammo admitted Verizon has had to shift its advertising strategy from its network and phone plans to services, particularly its discounted Edge plan, which the carrier said would double to 24% of subscribers by next quarter.

"The public was focused in on the service pricing," he said. In other words, T-Mobile and Sprint drew their attention to it.

For the past two years, Verizon and AT&T have had to contend with T-Mobile, whose brash marketing and flagrant disregard for industry plan standards has attracted subscribers. On Wednesday, at the UBS Conference, Braxton Carter, T-Mobile's CFO, said the promotional blip was mostly seasonal and would dissipate when the heavy phone upgrade period ended. Still, he added: "'Uncarrier' works. We're going to continue to innovate. Stayed tuned."

And now, the large carriers must fight off two combative opponents.

Sprint's new CEO Marcelo Claure has sworn more aggressive advertising. Despite an unsteady marketing division, the company is willing to deliver assertive offers and pitch them with heavy media spending. "We believe that Sprint's aggressive plans began to take their toll on [Verizon] even before last week's 'half-off' promo," wrote Mr. Smithen from Macquarie Capital.

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