Why Telecom Isn’t Sweating the Amazon Threat

In fact, some companies are poised to profit from its efforts.

Back in May, the Wall Street Journal reported a development that many telecom investors had been dreading for years: Internet marketing colossus Amazon.com Inc (NSDQ: AMZN) was entering the wireless communications business.

Roughly two months later, rumor became fact. DISH Network (NSDQ: DISH) announced it would offer its “Boost Infinite” wireless service over Amazon’s Prime marketing channel—unlimited postpaid wireless service at $25 a month, with a 20 percent discount to Prime members and $25 bill credit for the first month of service

For DISH, the deal is a lifeline. Selling through Amazon won’t be good for margins. But it should boost revenue to help offset the ongoing implosion of its core satellite television business.

For Amazon, the deal is a very low risk way to test wireless service as another potentially profitable offering on Prime. It also puts the company in the pole position to eventually acquire DISH’s wireless spectrum.

That could be buying all of DISH, which would likely cost $5 billion, plus $21.25 billion in assumed debt as well as tens of billions more to complete a viable competing 5G network. Or it just be buying the spectrum should that company decide to sell to avoid debt restructuring.

Either way, investors have initially assumed the worst: An eventually full-scale Amazon entry to the US wireless business, poaching customers and undermining industry margins using the power of Prime. And even Wall Street favorite T-Mobile US (NSDQ: TMUS) and its parent/51.44 percent owner Deutsche Telekom (Germany: DTE, OTC: DTEGY) have been caught up in a selloff this summer, from which they’ve yet to fully recover.

We’re sure to hear more about a future Amazon Wireless when DISH holds its Q2 earnings and guidance call later this month. But in the meantime, something else has happened most investors haven’t yet noticed.

Mainly, the topic never came up in any of the Big US wireless companies’ earnings calls, not T-Mobile, Verizon or even AT&T. In fact, impending competition from Amazon/DISH didn’t even make the list of analysts’ questions.

The lead cabling issue brought up by the WSJ last month got some air time, with management teams generally affirming they didn’t expect meaningful liabilities and expanding on details released previously. Trends affecting wireless customer growth and average revenue per user received even more.

But the competition from a major technology company with even deeper pockets than the Big 3 didn’t even merit a mention. One reason: Wireless companies already face fierce competition, mainly from each other but also from low price services such as what DISH is offering. And each of the Big 3 added customers over the last 12 months.

Investment media has noted that large cable television companies Charter Communications (NSDQ: CHTR) and Comcast Corp (NSDQ: CMCSA) are rapidly building wireless businesses. In fact, Charter increased its customer base by 54.8 percent over the last 12 months, while Comcast grew 30 percent

Neither cable giant, however, owns its own network. Rather, they have MVNO agreements to market service using Verizon’s network. And they’re loving the arrangement.

During Charter’s Q2 earnings call, CEO Jessica Fischer stated her company is “not feeling the need to buy wireless airwaves.” Rather, she noted the “capital light (wireless) model really works well for us, and I think it’s a model that as you can see has worked very well for Verizon our partner as well.”

Verizon CEO Hans Vestberg confirmed that sentiment during his company’s Q2 earnings call: “Verizon is making money on this…and we think this is an important business. These are important customers to us…We build the network once. The more connections and more usage and more revenue we have on it, the better return on capital is.”

With Verizon’s network again rated best in class by J.D. Power, it’s small wonder Comcast and Charter are happy to grow together. That’s not likely to be the experience Amazon would have using DISH’s network, which is far from complete.

And buying DISH outright would be a huge investment even for Amazon. The likely initial price tag of likely around $5 billion comes with $21.25 billion in assumed debt, not to mention the tens of billions more to complete a viable competing 5G network.

Telephone & Data Systems (NYSE: TDS) last week announced a “strategic review” of its 72.29 percent ownership stake in US Cellular (NYSE: USM)—now the country’s fourth largest physical wireless network. The deal got immediate attention, triggering big moves in both stocks. But it was also a tacit admission that the company is simply no longer large enough to compete in the wireless business.

That’s a strength only AT&T, T-Mobile US and Verizon can currently claim. Amazon certainly has the financial resources to try to join them, with or without DISH. But it won’t be easy or cheap to build necessary scale to compete.

The alternative is to essentially compete with Comcast and Charter by adopting an asset light model or MVNO. And that may be the real end game here: Verizon has in fact partnered with Amazon’s cloud computing arm as well as IBM to develop 5G applications for web-connected industrial devices.