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While major wireless carriers have denied it, e-commerce and cloud computing giant Amazon (AMZN -1.04%) is reportedly considering adding a free or inexpensive wireless service plan onto its prime membership. Shares of AT&T (T -0.13%) have dropped since the news broke, although the stock has been weak for months. Since peaking in early April, AT&T stock has shed nearly 25% of its value.
First things first: If Amazon offers a wireless plan with Prime, it will be acting as a mobile virtual network operator, or MNVO. MNVOs buy capacity from wireless providers at wholesale prices and then resell them to customers.
MNVOs are a dime a dozen, and some are even owned and operated by the big wireless providers themselves. Prices are low, but you get what you pay for. There are usually more limits, and during periods of heavy usage, MNVOs can be deprioritized. They’re a good deal for some, but not for all.
Any wireless offering from Amazon is going to be similar to what’s available right now, but perhaps at a lower price. Amazon is in cost-cutting mode as it reels from slowing demand in both its e-commerce and cloud businesses. If Amazon comes out with a $10-per-month wireless plan for Prime members, it could certainly induce some to switch. But there’s no chance it’s going to be much better than any of the myriad MNVO options already available.
If price was what mattered most to wireless service subscribers, the whole industry would be in a constant price war. That’s not what happens. Instead, churn is incredibly low. AT&T reported postpaid phone churn of just 0.81% in the first quarter of 2023. AT&T postpaid unlimited plans aren’t cheap – a single line on the most expensive tier costs $85 per month. Meanwhile, MNVO plans for around $25 per month is commonplace. Yet switching providers just doesn’t happen at a large scale.
There are probably multiple reasons for this behavior. First, switching wireless providers can be a pain, or is at least perceived to be. Second, people seem to be willing to pay a premium for truly unlimited data and are unwilling to accept limitations. And third, switching providers may mean buying a new phone, and new phones are expensive.
Having a company like Amazon behind a new MNVO service could change the calculation for some, but such a move from the e-commerce giant doesn’t seem likely to put much of a dent in AT&T’s business.
With shares of AT&T flirting with $15, it’s hard to ignore how cheap this telecom stock has become. AT&T expects to generate free cash flow of $16 billion this year, which puts the price-to-free-cash flow ratio below 7.
AT&T also pays a dividend that yields about 7%. To be fair, the company has a lot of debt on its balance sheet left over from its failed foray into the media business. This debt shouldn’t be ignored, especially in a rising-interest-rate environment, but the core wireless business throws off enough cash for the company to make progress paying down this debt over time.
An Amazon Prime wireless plan may be appealing to some, but it’s unlikely to change much about the wireless industry.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Timothy Green has positions in AT&T. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.
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