The 5G pricing war shifts into high gear

Just days after AT&T and Verizon pulled back slightly on their own 5G smartphone promotions, T-Mobile launched a new, $1,000 offer designed to encourage customers to switch over to its 5G network.

"AT&T and Verizon customers with brand-new 5G phones often find themselves without 5G coverage," boasted T-Mobile's Jon Freier in a release. "Now, those customers can switch to T-Mobile, and we'll pay off what they owe the carriers for their smartphone up to $1,000 – and they'll save up to 20% on their family plan and get way more 5G coverage."

To be clear, there are plenty of caveats to T-Mobile's latest offer (it assumes customers will bring their own phones to the carrier, and it only offers access to the operator's cheaper Essentials unlimited plan). But, broadly, the new promotion helps to underscore the fact that all of the big 5G providers in the US are in a heated battle to capture as many new 5G customers as they possibly can in the early days of the rollout of the technology.

And, based on developments during recent weeks, that battle is entering a new and intense phase. For example, T-Mobile released its new offer at the exact same time AT&T officials were boasting of their own company's dramatic quarterly customer gains, driven in large part by AT&T's own ongoing smartphone promotions.

A year of one-upmanship

"T-Mobile feeling the heat from AT&T monster subscriber add quarter. DURING the AT&T earnings call T-Mobile rolls out promo with up to $1,000 incentive if you switch to them... competition is alive and well in wireless," tweeted analyst Roger Entner with Recon Analytics.

And Walter Piecyk, with the financial analysts at LightShed Partners, pointed out on Twitter that T-Mobile appears to have somewhat reversed its stance on competitive promotions, considering executives in the past have spoken out against free iPhones and other such offerings.

This latest promotional back-and-forth among the nation's big 5G providers traces its origins back to last year's iPhone launch, when AT&T began offering the gadget for free with a device trade-in. Most of AT&T's rivals subsequently launched their own competing promotions in response.

But that competitive situation has taken on a new, more intense tone in recent weeks following Charter's offer of family plans that undercut all other providers, including Charter's own MVNO partner Verizon.

Just days after Charter's new offer, all of the big 5G providers rolled out new promotions around Google's new Pixel 6 and 6 Pro smartphones.

"The industry looks poised to get more competitive," argued the financial analysts at MoffettNathanson in a report issued this week.

But will there be enough phones?

Although US operators continue to push 5G smartphone discounts and promotions, there are indications that they may not be able to actually supply those phones to customers in a timely manner.

Importantly, a new report from Blomberg shows delays of a month or more on virtually all of Apple's newest products, including the iPhone 13, iPad mini, iPad, Apple Watch Series 7 and MacBook Pro. "One month after going on sale, the iPhone 13 Pro is hard to find in every color, configuration, and size. That's not usually the case, according to Apple store employees, some of whom say they're increasingly dealing with frustrated customers," according to the publication.

Apple isn't alone. For example, T-Mobile's CFO recently called out Samsung specifically in discussing how the operator's vendors have so far weathered the shortage of electronics components. "Samsung has really fallen behind the eight ball," said T-Mobile CFO Peter Osvaldik.

Separately, America Movil reported that it lost 185,000 US customers in the third quarter, suggesting the losses were due in part to "the limited supply of handsets, especially in the range of mid and low-prices."

Analyst firm CCS Insight acknowledged that "supply constraints in low- to mid-tier segments, paired with weak demand in emerging markets, have dampened sales." However, the firm said that the situation ought to right itself next year.

"The global mobile phone market is projected to recover in 2022, and prices of 5G handsets continue to fall steadily. Our forecast for 3.6 billion 5G connections worldwide by 2025 is still firmly on track," CCS analyst Marina Koytcheva said in a release.

And AT&T, at least, continues to argue that its own smartphone promotions – which remain among the most aggressive in the US maret – are both sustainable and profitable.

An 'inarguably very impressive' quarter

AT&T on Thursday reported postpaid phone net customer additions of 928,000 in its third quarter, well above most analyst forecasts of around 600,000. The company also posted a gain of 244,000 prepaid customers – figures that appear to refute the theory that US operator customer gains are coming partly from the migration of prepaid customers to postpaid plans.

AT&T's results "indicates to us that the company's aggressive acquisition and retention efforts continue to bear fruit, even in an environment where Verizon is being at least as aggressive," wrote the financial analysts at Evercore in a note to investors following the release of AT&T's results.

Overall, AT&T's revenues in its mobility business were up 7% year-over-year to $19.1 billion. The operator's mobility service revenues were up 4.6% year-over-year.

"Our strategy is working here at AT&T," Jeff McElfresh, the head of AT&T's connectivity business, said Thursday during the operator's quarterly conference call. "It's not just that we are adding more customers. We know, based on these metrics that we see, that we're adding high-value customers. We don't think this is driven uniquely by any kind of subsidy or extra cash flow that happens to be in the marketplace."

He continued: "To post this kind of growth in a quarter in this competitive market, and drive this kind of solid performance and subscriber revenue – accounting for any cost of the promotions – gives us confidence that we are accreting value. I would take this kind of quarter all day long in a competitive market. And I'm certain that our shareholders are going to be happy with it."

But some analysts remained cautious. "The subscriber results are inarguably very impressive, and are the strongest part of AT&T's quarterly report," wrote the analysts at MoffettNathanson. "Unfortunately, AT&T's strong unit growth, even with flatter ARPU [average revenue per user], isn't (yet) translating into meaningful EBITDA [earnings before interest, taxes, depreciation, and amortization] growth."

A pipeline to growth

However, AT&T officials argue that the company continues to see plenty of vectors to growth.

"We expect to grow both top line and bottom line," argued AT&T CFO Pascal Desroches during the company's call. "These are very profitable lifetime value subscribers."

And AT&T's McElfresh said one of those vectors will involve encouraging AT&T's new customers to move to more expensive unlimited plans. "There still remains a large opportunity within our base of customers to work them through the more higher-value end of our rate plan," he said. "We're working our base and our customers up the ARPU stack."

That's exactly the same strategy Verizon said this week that it's employing. For example, Verizon CFO Matthew Ellis said that 30% of Verizon's wireless customer accounts are now signed up to the operator's premium unlimited plans, and he said that the operator is working to get more customers to do so.

Overall, AT&T said it expects the good times to continue. Specifically, the operator said it now expects to hit the high end of its previous guidance for full-year adjusted earnings per share in "the low- to mid-single digit growth range."

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Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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