NEW YORK (CNN/Money) -
Wireless companies seem to be following the airline industry's business model. And based on all the bankruptcies in that sector, that's probably not a great idea.
Price wars are continuing and the companies are doing everything in their power just to win new customers, regardless of the costs. Witness the incessant TV ads featuring the likes of Catherine Zeta-Jones, Dennis Franz and the ultra-annoying "Can you hear me now?" guy.
And while the lower rates are great news for consumers, it's not for the carriers or their investors.
The wireless companies seem to be caught in the old make it up on volume game. Although the companies have been adding subscribers, the price wars have cut into sales and profits. Sprint PCS reported a 199,000 increase in subscribers from a year ago. But it posted a quarterly loss and sales growth of 3.5 percent was below analysts' expectations.
Cingular, co-owned by BellSouth and SBC Communications, added 189,000 new customers in the first quarter after losing customers the prior two quarters. Shares of BellSouth (BLS: Research, Estimates) and SBC (SBC: Research, Estimates) rose 9.5 percent and 7.4 percent respectively Wednesday as a result. But Cingular's revenue increased only 1.4 percent. (BellSouth reported results for Cingular in its earnings release Wednesday morning. SBC reports Thursday.)
Verizon Wireless's revenue increased 14.8 percent from a year ago while Nextel, which is unique in the industry due to its push-to-talk walkie-talkie feature, posted a 21 percent increase in sales. And AT&T Wireless, which will report its results after the bell Wednesday, is expected to report an 11.6 percent increase in sales for the first quarter.
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Even though those three did better than Cingular and Sprint PCS, there still are some big concerns. One service the carriers are promoting is prepaid wireless plans, targeted toward teens and consumers with poor credit. These customers can buy a phone and a finite amount of minutes as opposed to having a monthly subscription.
An increase in prepaid subscribers seems to be the main reason Cingular was able to reverse the trend of subscriber losses, said Todd Rosenbluth, an equity analyst with Standard & Poor's. He does not own any of the stocks he follows and S&P does not do investment banking.
And the rising popularity of prepaid plans is having an adverse impact on the carriers. Sprint PCS, Cingular, Nextel and Verizon all reported declining average revenue per user, or ARPU, from the fourth quarter. ARPU is a key metric for the wireless carriers. Increasing ARPU would be a sign that the carriers are able to raise prices effectively and get more from their customers.
"ARPU is consistently coming down in the industry and it's partially because there's more and more focus on pre-paid customers, which pay less," said Greg Gorbatenko, an analyst with Loop Capital Markets, an independent research firm. He doesn't own any of the stocks he follows and his firm has not performed investment banking for them.
Prepaid customers aren't as profitable, but without these services subscriber growth would slow. So companies are aggressively going after market share.
Drake Johnstone, an analyst with Davenport & Co., said he has a "sell" rating on Nextel because of concerns about declining ARPU. "If it continues to drop, it will impact revenue growth," he said. Johnstone doesn't own the stock and his firm has no investment banking relationship with it.
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And Verizon, despite its strong revenue gains, is still generating a relatively low ARPU, Rosenbluth said. Verizon's ARPU per month in the first quarter was $47, compared with $59 for Sprint PCS and $67 for Nextel.
Still, the market did not seem to mind Wednesday. In addition to BellSouth and SBC, shares of AT&T Wireless (AWE: Research, Estimates), Verizon (VZ: Research, Estimates), Nextel (NXTL: Research, Estimates) and Sprint PCS (PCS: Research, Estimates) were trading higher.
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