According to a new report from BTIG analyst Walter Piecyk, Verizon Wireless (NYSE: VZ) is in a better position than AT&T Mobility (NYSE: T) to maintain ARPU since fewer Verizon subscribers currently subscribe to shared data plans above 10 GB.
Piecyk noted that after AT&T eliminated device leasing requirements for existing subscribers to sign up to the Mobile Share Value plans on Feb. 1, the adoption rates of shared plans jumped to 46 percent by the end of the first quarter of 2014. "We expect 60% of AT&T's Mobile Share accounts to be on 10 GB or higher rate plans by the end of 2014 and 75% by the end of 2015," he wrote. "We estimate that Verizon's lack of price cut and hurdles to enter the lease program have resulted in a lower mix of 10 GB customers."
And, Piecyk argued, since LTE enables more video consumption, it will drive more customers to upgrade to plans with more data. "We estimate that 75% of AT&T's postpaid subscribers will be on 10 GB rate plans exiting 2015 so they will need to find something to drive incremental growth that will move those customers to higher usage plans," he wrote.
AT&T said in early June that by the end of the second quarter, around one-half of the company's postpaid smartphone customer base will be on a no-device-subsidy Mobile Share Value pricing plan, and that figure will grow to around two-thirds by year-end. In the first quarter, AT&T said more than a quarter of its smartphone subscribers were on no-device-subsidy pricing plans.
Yet AT&T has also noted the financial downside to the trend. The carrier said that its Next handset upgrade plan and its Mobile Share Value plans lead to higher equipment revenues and lower service revenues and average revenue per user. AT&T said it expects to record no service revenue growth in the second quarter and also expects second-quarter wireless service EBITDA margins to come under pressure on a year-over-year basis due to the movement to the no-device-subsidy model.
In his research note, Piecyk honed in on that trend, and wrote that in the second half of the year BTIG expects the impact to be moderate as 13 million customers shift to AT&T's Mobile Share Value plans but ARPU drops only $1.50 over that six-month period. "In total, that would result in a 10% annual decline in ARPU in 2014 and set the stage for sub $60 ARPU in 2015. Our forecasts are based on a detailed breakdown of the shift in the subscriber base but admittedly work within the limitations of the information provided by the company," he wrote. "The primary factor that could deliver ARPU and revenue that is higher than our estimates is faster than expected movement to larger more expensive data plans as we detailed above."
In contrast, he wrote, the "barriers that Verizon has put up for its customers to adopt lower rate plans is likely to protect ARPU. While AT&T let anyone switch to lower pricing, Verizon forces you to turn in your existing phone (that they then sell) and lease a new one."
"Verizon expects only 30% of smartphones acquired by customers to be leased in Q2 compared to over 50% at AT&T," he wrote. "While we expect that mix to rise to 50% over time, the slower adoption at Verizon should help the company to limit ARPU declines and deliver service revenue growth in the low- to mid-single digits while AT&T suffers from a more than 5% contraction in service revenue later this year."
Meanwhile, Macquarie analyst Kevin Smithen wrote in a research note that "we are starting to see a divergence in strategies among the wireless carriers." The key question for investors, he wrote, "is how can carriers continue to grow service revenue?"
To answer this question, Macquarie looked at per-subscriber data usage trends for music and video as well as overall subscriber demographics for each carrier. "We conclude that VZ and T will use their superior low-band spectrum position and suburban and rural network coverage to drive high-usage video apps with their more profitable, suburban/rural family plan customers," he wrote. "Meanwhile, we believe that S and T-Mo will push lower-usage music apps in order to lower churn in urban centers where they have (or will have with S) spectrum and network advantages over T and VZ."
Smithen wrote that he does think Sprint and T-Mobile have the balance sheets to aggregate OTT video content he way Verizon and AT&T can. He wrote that the smaller carriers "cannot sustainably support high-end video subs (20+GB/month vs. 2.2 GB industry avg. usage) on current unlimited data plans."
- see this BTIG blog post (reg. req.)
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