After a solid second quarter, mobile operators to face tough headwinds in Q3

Verizon unlimited mic drop ad (Verizon)
Verizon has continued to advertise its unlimited data plans.

After a lackluster first quarter that saw the first-ever decline in U.S. mobile data services revenue, operators took back their own in the second quarter, returning to the black amid subscriber gains and slowing losses. However, as the third quarter looms, the predictions are that the good times may be slowing their roll.

According to Chetan Sharma Consulting’s U.S. Mobile Market update for Q2, domestic operators saw their net income improve 8% overall as they “tightened their belts and lowered their expenditures.”

A big part of this success was lower wireless churn—largely thanks to the fact that this “return to positive territory” comes in tandem with the rise of unlimited plans. In the past year, all Big 4 nationwide carriers have launched into unlimited—with Q2 representing the first time that all of them were on the market at the same time for the full period.

T-Mobile CEO John Legere, on his carrier's earnings call, pointed out Q2 was “competitive…[but] our traction with customers continued.” The No. 3 mobile operator added 1.3 million subscribers to its network to reach 69.6 million, with 786,000 of them in the high-margin postpaid segment.

Verizon and AT&T both had generally strong quarters, and even Sprint, which has struggled for many a quarter, posted its first quarterly profit in three years. It added 88,000 net postpaid subscribers and saw net income of $206 million.

But there are headwinds ahead. Driven by the unlimited furor, mobile data pricing already has dropped by 60% this year, according to the Cheta Sharma report. The firm added that the popularity of unlimited plans “seems have to caught some operators by surprise and unprepared when it was almost a given that this will happen….pressure to deliver unlimited will remain.”

At the same time, a follow-on effect to this is the fact that average data consumption for the U.S. is on track to reach 6 GB per month by the end of the year. To put that in perspective, the firm pointed out that monthly data consumption has gone from 5 GB to 6 GB in just four months—while it took almost 17 years to initially hit 1 GB per month.

So, with falling service revenues and increasing consumption, it puts subscriber additions out in front as the linchpin to maintaining the positive results. Amir Rozwadowski of Barclays noted back in Q1 that mobile service revenue declines aren’t a problem—as long as unlimited plans and device launches continue to lower or reverse churn.

Speaking about Verizon, he wrote, “Verizon’s [unlimited plans] should unsurprisingly drive steeper year-over-year declines in mobile service revenues. The company does, however, expect to deliver positive postpaid net adds for the duration of ’17.”

He added that “Verizon sees an iPhone super-cycle as an opportunity to showcase its network quality and seems less concerned about the industry’s pursuit of un-economic and non-differentiated (i.e. subsidy ‘light’) promotions.”

But another firm, Deutsche Bank (DB) Market Research, said that the impending launch of the iPhone 8 (or iPhone X) will actually be part of the problem for Q3, along with potential launches of cable MVNOs and possible M&A activity.

“While 2Q did have some clear positives, our estimates are largely unchanged,” the firm said in a research note. “Seasonality, competition…[and] most M&A scenarios being discussed would increase, not decrease market competition.”

As for the iPhone refresh, DB predicts that a frenzy around promotional pricing could spell trouble for margins.

“The meaningful number of subs up for grabs and a potentially higher ASP for the new iPhone [rumored to be more than $1,000] may drive the industry towards more aggressive retention offers (both on service pricing and handsets),” analysts at DB said. It added that the issue may not hit all carriers proportionally.

“With a larger-scale iPhone refresh looming, and the largest installed base of iOS users, we believe AT&T may have the greatest number of customers at risk in this year's iPhone free agency season (assuming the expected disruptive offers from peers),” it said.