(Bloomberg) -- AT&T Inc. and Verizon Communications Inc. shocked investors with their second-quarter results last week -- the former warning about the high cost of phone giveaways and the latter failing to meet growth targets.
The news sparked a sell-off that erased some $40 billion in market value from the three industry leaders. Now T-Mobile US Inc. is cast as the potential Goldilocks in this drama -- if its second-quarter results are just right.
T-Mobile reports financial results Wednesday morning before markets open. Investors will be eager to see if the wireless industry is starting to see a slowdown in consumer spending due to decade-high inflation, or if some of the troubles might be more self-inflicted.
Take AT&T. Its surprisingly big customer gain of 1.06 million was fueled in part by phone giveaways. The promotions, worth $800 or more per buyer, make for big upfront costs for the carriers. They are designed to pay off over time, as the customer sticks around.
But those promotions and other costs add up, cutting into free cash flow. Which is why AT&T lowered its full-year forecast again last week. The stock dropped 7.6%. And in an alarming note to to those watching the overall economy, AT&T said some customers were feeling the pinch of higher costs and delaying their bill payments by two days on average.
Verizon, the largest US carrier, tried to stay away from the free phone battle at least until the middle of the quarter, when the company then shifted into gear in an effort to spend its way back to growth.
The company ended up with a different problem: It added only 12,000 monthly wireless phone subscribers in the second quarter, well below analysts’ predictions for 167,200 new phone customers.
In a saturated mobile market, where everyone already has a phone, new monthly customers are usually found by moving people with poor credit history off cheaper prepaid services and on to regular monthly plans. It’s possible AT&T may have attracted too many customers who now have overdue bills.
Verizon is more selective about that movement, according to Chief Financial Officer Matt Ellis.
“We’re very comfortable with the quality of our customers,” Ellis said in an interview Friday.
While Verizon said it wasn’t seeing any increase in delinquent customers, Chief Executive Officer Hans Vestberg said on an earnings call that the company was being affected by an “inflationary environment.” He didn’t offer specifics.
Higher prices might be cooling off some consumer spending, but mobile is a different expense all together, said Maribel Lopez, an analyst with Lopez Research.
“Wireless spending remains strong, as most consumers consider this an essential,” she said.
Looking ahead to Wednesday, Wall Street expects T-Mobile, the second-largest US wireless carrier, to report nearly 1.2 million new monthly subscribers, which would top AT&T’s gain and put it well above Verizon.
If T-Mobile can post industry-leading subscriber growth without a dramatic dent in free cash flow, which is expected to be $1.4 billion, then the industry might not be looking at a widespread economic challenge.