Skip to main content

The Department of Justice investigation into eSIM cards provides an awkward backdrop for first-quarter 2018 wireless earnings season.

Verizon Communications Inc. (VZ) - Get Verizon Communications Inc. Report and AT&T Inc. (T) - Get AT&T Inc. Report , both of which have said that they are cooperating with the government's inquiry, report earnings Tuesday and Wednesday, respectively. The government query will provide fodder for earnings calls, as investors also look for detail on AT&T's purchase of Time Warner Inc. (TWX) and reported merger talks between Sprint Corp. (S) - Get SentinelOne Inc. Class A Report and T-Mobile US Inc. (TMUS) - Get T-Mobile US Inc. Report

Justice is looking into the evolving standards for eSIM cards, an innovation to the subscriber identity modules in mobile devices that should allow consumers to move between carriers more easily. The New York Times reported that the government is looking into complaints that wireless carriers and the trade group GSM Association are pursuing an option that would allow carriers to lock devices, preventing subscribers from moving them to a different carrier. 

It is difficult to tell how much risk the investigation holds for Verizon and AT&T, Edward Jones analyst Dave Heger said. "There is no guarantee that the DOJ will find enough to say that there is some wrongdoing," Heger said. 

Verizon spokesman Rich Young said the buzz is "much ado about nothing," in an emailed statement on Monday. Young and others noted Justice had a similar review in 2016 that did not find any wrongdoing. 

"We are striving to provide a better experience for the consumer," Young said. "The reality is that we have a difference of opinion with a couple of phone equipment manufacturers regarding the development of e-SIM standards. Nothing more."

Verizon reports first-quarter earnings before the bell on Tuesday. Wall Street expects the telecom to earn $1.11 per share on a non-Gaap basis, and to report $31.2 billion in sales. Expect questions about the sale of Flickr, a photo-sharing site in Verizon's Oath digital media group, to rival photo site SmugMug Inc. The companies did not disclose terms on Friday when they announced the deal. Yahoo! Inc. acquired Flickr in 2005.

Telecom group GSMA, which produces the annual Mobile World Congress in Barcelona among other events, acknowledged that the eSIM standard includes an "option" for locking devices. Consumers would have to consent, however, which they might do if mobile carrier were subsidizing a device, GSMA noted in a statement. 

AT&T also acknowledged the investigation. "Along with other GSMA members, we have provided information to the government in response to their requests and will continue to work proactively within GSMA, including with those who might disagree with the proposed standards, to move this issue forward," AT&T said.

For AT&T, of course, the investigation comes ahead of closing arguments in the Justice Department's antitrust suit to block its acquisition of Time Warner. The government argues that DirecTV parent AT&T will abuse its leverage in content negotiations with rival pay-TV companies--and could even collude with Comcast Corp. (CMCSA) - Get Comcast Corporation Class A Common Stock Report to withhold content from upstart online network bundles such as Alphabet Inc.'s (GOOGL) - Get Alphabet Inc. Report YouTube TV and Dish Network Corp.'s (DISH) - Get DISH Network Corporation Report Sling TV.

Scroll to Continue

TheStreet Recommends

Analysts expect AT&T to post earnings of 87 cents per share, on a non-Gaap basis, with $39.4 billion in sales when it reports results after the close on Wednesday.

"Expectations are pretty low though it should look better than a year ago first quarter when both Verizon and AT&T lost post-paid subscribers," Edward Jones's Heger said. Promotional activity was light in the first quarter, as buy-one-get-one-free offers that appeared in the fourth quarter dissipated. "The first quarter is always a more muted quarter," Heger said. Investors will look for signs that revenues from wireless services might begin to grow in the second half of the year, the analyst added. 

Justice has focused on wireless collusion recently, Wells Fargo Securities LLC analyst Jennifer Fritzsche noted in a Monday report. "The DoJ has not confirmed the investigation but interestingly DOJ Antitrust head Makan Delrahim noted in a speech just this month the DoJ is concerned about 'collusive conduct' in standard setting processes and last year noted in a speech his concern that carriers working together could raise the risk of 'naked cartel-like behavior,'" Fritzshe wrote.

Collusion may be difficult to prove, the anlayst suggested, noting that a similar inquiry in 2016 "concluded in no wrongdoing."

Public Knowledge Senior Counsel John Bergmayer said that the technological advances of eSIMs should make it easier--not harder--for consumers to move between wireless carriers, in a statement on Friday.  "The two major wireless carriers -- AT&T and Verizon -- stand to benefit if device portability becomes more difficult," Bergmayer said. "No one else does."

Sprint, which has not set an earnings date, declined to comment on the Justice review, while T-Mobile did not respond to a query.  

Shareholders are more interested in color on whether the telecoms will merge. The fact that neither telecom has said an earnings date gives them time to see if they can reach a deal before holding investor calls.

Analysts call for Sprint to lose 7 cents per share and for T-Mobile to earn 71 cents per share, both on a Gaap basis.

Jim Cramer and the AAP team hold positions in Comcast and Alphabet for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells CMCSA or GOOGL? Learn more now.

Editor's note: This article was first published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.