In any industry, the only way to avoid price wars is to offer a superior product or service.
Customers will pay full price only if they think your offering is top-notch. And you'll find no clearer example to that approach than Verizon Wireless, a subsidiary of Verizon (NYSE: VZ). In most consumer surveys, Verizon repeatedly comes out on top in terms of customer satisfaction, even as its service is often the most expensive choice.
On the flip side, Verizon's key rivals -- Sprint (NYSE: S) and AT&T (NYSE: T) -- are learning what happens when you skimp on network investments. Both of these firms garner inferior consumer ratings, and despite billions being spent to upgrade their networks now, they still can't close the perception gap against Verizon.
Yet even as Sprint and AT&T evaluate how to catch up to Verizon, behind-the-scenes discussions may upend the entire wireless service industry. That may help explain why short sellers are now targeting both Sprint and AT&T in a big way.
Rising Short Interest (in millions)
Delivering wireless services is quite lucrative. Though it takes billions to build out a national network, the profit margins on those monthly bills are quite robust (once network amortization costs are backed out). Verizon Wireless' margins on earnings before interest, taxes, depreciation and amortization (EBITDA), for example, now exceed 50%.
If a company could tap into that lucrative market without the need to spend billions on a new network, it would. In fact, that may be just what is happening. Google (Nasdaq: GOOG), for example, is actively developing wireless networks in emerging markets, according to The Wall Street Journal.
If the company's low-cost balloon-based approach succeeds in those markets, look for a similar effort to play out here in the U.S. in coming years. The Wall Street Journal also notes Google's plans to roll out super-strong Wi-Fi in U.S. cities where it offers its fiber-based telecom and cable service, an effort that is likely being closely watched by the wireless incumbents.