A new analysis suggests that Verizon’s ability to command premium pricing will decline as smaller rivals in the cellular market make efforts to catch the market’s leader.
Morningstar analyst Brian Collelo wrote in a note Wednesday that Verizon’s efforts to capitalize on its network quality advantage — and increased data traffic —will be hurt by T-Mobile and Sprint, which began offering unlimited data plans.
Although Verizon continues to enjoy a cost advantage and will remain profitable, the erosion of its pricing advantage could “constrain expansion of its future returns.”
Collelo also wrote that AT&T’s acquisition of DirecTV delivered “minimal benefits to the core telecom business” and could prevent its returns from “meaningfully” eclipsing its capital costs.
Overall, the analysis indicated that T-Mobile and Sprint are undermining the longstanding duopoly at Verizon and AT&T at the margin and that the trend should continue — and make the economics of the U.S. telecom sector less attractive.
The note came on the heels of an FCC report showing that the wireless market in the U.S. was “effectively” competitive.
Collelo wrote that T-Mobile is the only large U.S. carrier to increase its wireless revenue and remains attractive to potential partners amid merger talks with Sprint.
The analysis added that Verizon, AT&T and T-Mobile are trading near “fair value estimates,” but that Sprint “remains significantly overvalued.”