Cooler Heads Should Prevail as Amazon Seeks to Enter Wireless

Amazon’s AMZN potential entrance into the wireless resale business, as Bloomberg News has reported, reflects a risk to our view of the wireless industry. However, we expect the carriers will remain rational, and our fair value estimates on Verizon VZ, AT&T T, T-Mobile TMUS, and Dish Network DISH are unchanged.

We believe the industry is positioned for competitive rationality thanks to the parity that has emerged among the three national carriers, which limits the incentives to chase market share.

Amazon’s Entry Could Present Challenge in Wholesale Wireless Market

The wholesale market, however, presents a challenge, as it provides an opportunity for one of the major carriers to do something ill-advised, with the thinking, in this case, along the lines of, “if Amazon is going to disrupt the market, I may as well get some benefit.”

The wholesale market isn’t new. The cable companies are the clearest example, capturing about 4% retail wireless market share over the past several years by bundling wireless and broadband. Verizon, which provides wireless capacity to Comcast CMCSA and Charter CHTR, has repeatedly assured us that it knows how to structure wholesale agreements that don’t undermine its core retail customer base. Based on current pricing across the industry, we believe that is true.

Avoiding a Race to the Bottom

We expect any wholesale agreement with Amazon would be structured to ensure that the winning carrier is economically indifferent between adding a retail customer or an Amazon customer, with Amazon taking on customer acquisition and service costs. Anything less favorable only promises a race to the bottom as carriers then compete for an agreement with Walmart WMT, etc.

Dish Network, as always, is a wildcard. We expect chairman Charlie Ergen will remain focused on maximizing the long-term value of Dish’s spectrum hoard, which requires a healthy wireless industry overall. That focus has made Ergen notoriously difficult to work with, but Dish could strike a poor deal with Amazon out of desperation, both for capital and a strong partner to help it truly challenge the big three carriers.