TMUS - Amazon Wireless Service: The Living Dead

2023-06-04 03:31:59 ET

Summary

• The rumor that Amazon could offer free or ultra-cheap wireless service to Prime customers is many years old and has actually been denied by almost all involved.
• Nevertheless, the market reaction was a full-blown panic, presumably based on nebulous fears re-emerging just like a living dead from his grave.
• Here is what the rumors are likely based on and what an ultimate foray into wireless by Amazon could look like.

The living dead rumor about Amazon Prime wireless service

There has never been shortage of rumors regarding Amazon ( AMZN ) and Dish ( DISH ), yet they always move the heavily shorted stock. So it must really be fun to get them circulating. The current rumor has actually started its eerie life already six (!) years ago:

Bezos and Ergen have floated the idea of an add-on, metered data plan for Prime, Amazon’s premium subscription service, The Wall Street Journal reports, and always-on connectivity for devices like thermostats, connected bulbs, and smart kitchen appliances.

Back in 2017, analysts at Citi ( C ) believed

that the retailer could become a “preferred customer” on the new wireless network and commit to spending a certain amount on connectivity in exchange for a below-market rate, or invest cash upfront in Dish’s network to help pay for the build-out.

Nothing of all that has materialized, of course.

However, in 2021, the living dead came back haunting the incumbents again with the nightmarish alliance of the diabolic Ergen's brainchild and omnipotent Jeff Bezos' baby.

Again, nothing happened.

? But the rumor is not dead yet. Quite the opposite: Effectively, it has been resuscitated one week ago . On that day, after a double-digit pre-market short squeeze, Dish stock ended the trading day up modestly and after another few trading days was effectively down compared to its pre-rumor level.

? So what is this all about? Is it more than just a repeated head fake? Does the living dead have any sort of future?

We shall see.

On Friday, 6/2/23, the same rumor was enriched with a few more details and brought back to life once again:

Amazon is in discussions with wireless carriers about offering low-cost or potentially free nationwide mobile phone service to Prime members, Bloomberg News reported, citing people with knowledge of the matter.

The online-retail giant has held talks with Verizon Communications ( VZ ), T-Mobile US ( TMUS ) and Dish Network to get the lowest possible wholesale prices, according to the report. That would let Amazon offer Prime members wireless plans for $10 per month or possibly for free.

The discussions have been going on for six to eight weeks and have also included AT&T ( T ) at times, however the potential plan may take several months to be introduced, or could be scrapped, the report noted .

Why mobile stocks except Dish all traded down

Again, Dish was the only stock market winner, likely because of its huge short interest and dire financial situation. If Amazon provided a robust cash infusion to Dish, Charlie Ergen would clearly win the battle against the shorts.

In contrast, if Amazon threw its scale behind a competitor and dramatically lowered wireless prices to consumers, it would be very bad for the incumbents AT&T, Verizon and T-Mobile. Especially, the debt-heavy balance sheets of AT&T and Verizon urgently need free cash flow to unlever. It is not the time for wholesale discounts ? the incumbents rather need price increases.

This is why T-Mobile, AT&T and Verizon were all down heavily. T-Mobile was even down twice as much compared to its two competitors, which was presumably due to its premium valuation. Since the Amazon story might create a headwind for its growth story, its valuation has to fall more than that of its competitors, which are already priced for a zero or negative growth scenario.

Why the story about Amazon becoming an MVNO is just a head fake

First of all, the entire rumor has been denied in pretty clear terms by Amazon itself. T-Mobile has also issued a clear-cut denial: "We are not in discussions about inclusion of our wireless in Prime service, and Amazon has told us they have no plans to add wireless service."

Second, why would Amazon talk to all operators if it really aims for a deep MVNO partnership with Dish only? ? Don't tell me that Amazon is just trying to spy on its future competitors. After many years of rumors, the incumbents should know that a Dish partnership is the ultimate goal. Personally, I don't believe it is: If the rumor about the inclusion of all incumbents in the talks means anything, it is that Amazon is not looking anymore for an exclusive partnership with Dish. On his old days, the living dead is evidently becoming promiscuous.

Third, why would Amazon offer all Prime customers a free or cheap wireless plan (and somehow pay for it), when all Prime customers already have contracts in place, with many of them probably also having a subsidized phone which they can only use with their contract partner's wireless service? As the former AT&T mobility CEO Glenn Lurie put it , the math just doesn't work.

Fourth, with quite cheap MVNO plans already out there ( starting at $5/month ), is there a need to offer yet another one and force it into the Prime perk bundle ? considering that almost no Prime customer currently needs another wireless plan?

Fifth, are we really sure that Amazon is trying to become just another MVNO? Mighty Google ( GOOG ) ( GOOGL ) has already tried this , but have you heard of it? Yet, Google can even bundle its plans with it own phones.

Sixth, are we sure the incumbents would be so suicidal to undercut their own pricing by renting out their networks on the cheap, thus creating a mighty competitor ? which is the last thing they need?

Seventh, are we sure that Amazon would rely on a wireless "rookie" ( as media mogul Tom Rogers put it ) for such an all-important service to its most valuable customers? Wouldn't that be a bit foolhardy?

? Well, you might say, I understand those doubts, but there must be something underneath that rumor. This long-lived ghost must have some real life in it. It can't just be a nothing-burger!

? I happen to agree: Amazon knows that its scale can be valuable for the MNOs, and they know, too. The likely reason why this living dead can't rest in peace forever probably lies in the details of any potential agreement. So everybody has been just talking about it forever, without ever concluding anything.

What a potential solution could look like

At the end of last year, I wrote up an investment thesis on a small German wireless service provider called freenet (FRTAF) ( FRTAY ) ? which, by the way, after winning an award in a Seeking Alpha competition , also played out nicely. Freenet has a unique business model and, importantly, despite not owning any network, is no MVNO:

A MVNO pays wholesale prices for its telco partner's network capacity and resells this capacity to its own customers. In contrast, freenet resells the "real" telcos' own tariffs and also creates its own tariffs which use all networks. Importantly, freenet keeps all customer relationships in-house, services these clients through its own customer service and is seen as a marketing and servicing partner by the telcos themselves.

If Amazon was actually trying to become some sort of freenet, it would explain why it has discussions with all companies. By emulating the freenet model, Amazon could simply offer all the incumbents' and probably even Dish's phone plans with a discount. Prime members could get even larger discounts. And the more subscriber volume Amazon would be able to generate, the larger the discount would become.

By providing high subscriber volumes to the incumbents, while saving them substantial subscriber acquisition and customer service costs, even the wireless operators could profit from the scheme.

In Germany, freenet is actually partnering on an exclusive basis with Europe’s number one consumer electronics retailer. When a customer buys a new phone, it can get a new plan for it at a discount. Vice versa, when shopping for a new plan, the customer can get a subsidized phone on top. Amazon could do the same and thus boost its currently not satisfactory phone sales volumes, while also making its Prime scheme more attractive.

Ultimately, this rumor will end up either in nothing or in a situation which will likely be beneficial to all participants. It strikes me as pretty ridiculous to believe that the infrastructure owners would give away the keys to their empires on the cheap.

The living dead that drives the stock market into panic mode is not frightening at all for the incumbents.

How to profit from the head fake

If you like AT&T, Verizon or T-Mobile at the current prices, just buy more. This panic won't last long. As far as Dish is concerned, I have no opinion. Anything can happen with that stock. From a fundamental point of view, it is clearly undervalued (just think about the spectrum it owns), but there are too many variables and extreme risks in play.

Personally, I like Deutsche Telekom (DTEGY) ( DTEGF ): Although, besides the 51% stake in T-Mobile, it also owns huge ex-U.S. assets which generate very stable free cash flows, it sold off even more than T-Mobile. I fully expect this irrationality to revert and lead to a quick short-term gain.

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