AT&T’s aggressive phone promotions raised eyebrows across the industry, but the company is adamant that its promotions are the right way to grow in wireless.
AT&T, the No. 3 wireless provider by subscribers, recently was asked about those handset promotions during a June 16 Bank of America investor event. The big question for investors being: Are they good for AT&T’s bottom line?
AT&T added more than 3 million postpaid net adds over the last three quarters, of which 2 million were “very important postpaid phone additions,” said Thaddeus Arroyo, CEO of AT&T Consumer. “We know our position in the market… Our goal is to continue to improve that position, to do it through growth and to do it the right way.”
It’s similar to questions directed to AT&T management at other recent events. During a June 15 Credit Suisse conference, CFO Pascal Desroches said the economics of its offer are very attractive.
“That's why we introduced it. That's why we're doing it,” he said. “And interestingly, the same competitors that criticized, saying that the offer was unsustainable, are now replicating the offers because, I guess, they figured out that this is actually a good idea to give your best customers your best offer and keep them for a number of years on your devices. So I think it's a good business. It's something that I would say for the foreseeable future we’re going to keep it in place. It’s a good play for us.”
It's worth noting that the brouhaha started last fall, when AT&T announced an $800 credit to new and existing customers for older trade-in models. At the time, LightShed analysts said it was the largest promotion they’d seen on an iPhone launch day, topping the $650 offers by carriers back in 2016 and the $700 that Verizon offered to new subscribers the year prior.
Seemingly to answer AT&T’s offer, Verizon on June 1 of this year announced “the biggest Verizon 5G upgrade campaign ever” with offers on select unlimited plans. It’s offering up to $800 off select smartphones when customers add a new smartphone line “with a qualifying Verizon mobile Unlimited plan” and trade in a qualifying device.
So, a few qualifiers are attached, but it’s playing ball in the sense that it’s targeting existing customers as well as new. AT&T started its concerted effort to target existing customers more than a year ago, pointing to research about customer pain points.
Prior to that, most carrier offers were about wooing new customers rather than appealing to existing ones. What’s unknown about Verizon’s offer is how long it will last. By definition, promotions are temporary, but AT&T’s offers have extended into months or quarters versus weeks.
AT&T says it’s doing it all without the “gotchas” that typically come with any offer that looks too good to be true.
Customers “truly can tailor our unlimited portfolio of plans around each of their family members without a need to have a matrix to understand which ones you can actually select,” Arroyo explained. “We’re also giving our customers flexibility to move into the latest 5G devices with affordable installment plans that we’re making it easier on their wallets by exchanging value for trade-ins. One the device side of this, extending the installment period, and frankly, it’s extending the installment period to better match the true device lifespan.”
According to AT&T, customer response has been favorable. AT&T reported postpaid phone-only churn of 0.76% for the first quarter of 2021, and Arroyo said the cost per net addition from a promotional perspective is significantly down year-over-year.
“We're focused on growing the right way, and to do that, we have to drive efficiencies and effectiveness through the transformation that we're leading,” Arroyo said. “That allows us to grow both customer volumes while expanding profitability at the same time. And on the heels of launching nationwide 5G coverage last summer, we're also seeing really strong demand for 5G devices, and partly because we've extended our 5G services to all of our unlimited plans, and we've created a very effective go-to-market strategy behind that with an intent to grow share.”
All of the carriers are focusing more on their base as Sprint’s no longer around to offer enticing switcher deals, noted Wave7 Research in its most recent postpaid report. AT&T unveiled a 36-month equipment installment plan (EIP) earlier this month, extending the amount of time customers have to pay – thereby keeping customers on the hook longer.
“To the extent that carriers are increasingly subsidizing phones up front, it makes sense to require customers to stay on an unlimited plan for a long time,” Wave7 noted. “Also, upgrade cycles are lengthening, making it easier to have longer EIPs.”
All about 5G
The new form of promotions hits right at the 5G core, according to Bill Ho, principal analyst at 556 Ventures. Besides attracting 4G LTE subscribers to 5G plans, operators also need to move 3G customers off CDMA networks because those networks are sunsetting in the not-too-distant future.
“This is a way of getting people onto 5G phones, so that they don’t churn off,” he said. If you get a new phone at a low price, the likelihood of porting out is low. “I think that’s really what’s driving them. They know how many people they’ve got. They have a target and any new customers is gravy.”
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For customers, the promotions are almost like the return of the two-year contracts. “It’s kind of the same thing. The commitment is still there,” he said.
On the operator side, promotions are a function of how the carriers are doing and their internal net add or retention targets, although it can be difficult to analyze from the outside looking in.
“Those things are behind the curtain, but the mechanism is still there for everybody” to play the same game, he said. “It’s dual purpose” for both customer acquisition and retention.