U.S. carrier performances were up on many metrics and surprised many analysts by their solid performances. A few of the key ones are as follows:
All carriers saw net additions up year over year. Smartphone net adds were positive for all major carriers. Postpaid phone churn for AT&T, Verizon, and T-Mobile was under 1%. Sprint is improving at 1.5%.
Most importantly, service and equipment sales are on the rise. Since EIP’s have been implemented, service and equipment revenues have been declining. This seems to have bottomed out and total service revenues were positive for every major carrier except Sprint. All carriers expect wireless revenues to increase through 2018.
The same cannot be said for smartphone suppliers. Apple and Motorola are the exceptions here, both saw solid year-over-year growth. The rest, including Samsung, LG, Alcatel, Huawei, Kyocera, BLU and ZTE, saw declines between 20% and 92% year over year.
So, where is the disconnect between positive carrier results and declining smartphone sales? Many of the reasons are known and obvious. But the magnitude of these sales changes may be surprising.
Here are six insights into why this is going on:
1. Upgrade Cycles are Lower
Upgrade cycles have been falling since 2016. AT&T saw a record low postpaid upgrade percentage this quarter at just 3.8%. Carrier upgrades averaged 5.9% during the second quarter of 2017. In the second quarter of 2018, the upgrade percentage fell to 5%.
Even this seemingly moderate decline in upgrades equates to over 2 million smartphones not being sold during the quarter. The fourth quarter could be even more dramatic. The fourth-quarter 2017 upgrade cycle was down 1% from the fourth quarter of 2018 despite it being the Apple "super cycle." This year, the upgrade cycle will probably be small again, meaning fewer devices sold in the fourth quarter. These small percentage changes in upgrades have large effects on overall smartphone volumes.
2. Smartphones are Better and more Durable (and Expensive!)
Another obvious reason that converts into millions fewer devices sold per year. Today’s smartphones continue to evolve with better build qualities every generation. The refinements in casings, recessed display protection, as well as stronger displays (Gorilla Glass version six is on the market) have made longevity more attainable.
In addition, smartphones are more expensive and retain value better today than four years ago. In the second quarter of 2016, Counterpoint Research estimates 31% of U.S. smartphone volumes were of devices priced $500 and above. In the same quarter in 2018, it has increased to over 48%.
Furthermore, 8% are priced at $800 or above. With these higher prices and the fact that the majority of subscribers are on EIP (equipment installment plans), subscribers are not getting "free" upgrades every 24 months. Consumers are taking better care of their smartphones by insuring them, protecting them with accessories—and as a result, holding onto to them longer.
3. Innovation Stall
For many quarters there has been chatter about slowing innovation patterns. Consumers understand that displays are getting larger, deadbands smaller and camera modules are improving. Devices are improving, no doubt, but not enough for consumers to shell out more money. More and more wait to make the jump to a new device because devices work "good enough." Same story for many quarters.
However, while there are tremendous R&D feats being made within handsets, most of the major improvements benefit the carriers more than end consumers. Things such as vastly more complex RF front-ends, 2x, 3x and 4x carrier aggregation and "super SKU’s"—supporting all four of the major carriers are big feats that benefit carriers and point of sale retailers.
The consumer understands very little of this. This results in the bulk of consumers putting off upgrading for a longer period.
4. BYOD Cutting Into New Device Sales
This stable and significant figure has silently cut into new device sales. Carriers want subscribers on new devices that work seamlessly (fewer care calls), run more efficiently on the network and support the carriers’ latest services.
However, carriers do not make money selling hardware. When factoring in training, marketing, returns, and carrying costs selling smartphones is a break-even business. This is why carriers are tempting subscribers with promotions to simply light-up used devices on their networks.
All carriers have turned to offering these promos, but Sprint appears to be the most aggressive. This is quite ironic, as Sprint had the most aggressive leasing programs and had believed it could make some margin on leasing and still have residual value remaining.
Over 6% of AT&T’s smartphone activations were BYOD’s during the second quarter of 2018. During that year, AT&T alone will activate over 2 million used devices. These used devices take away from new device sales—especially mid-tier devices that have similar prices to used flagship devices.
5. Over 13 Million Refurbished Devices Will Be Activated 2018
In addition, all carriers are now purchasing refurbished devices and using them as replacement and/or insurance replacement devices. Carriers used to give customers new devices as replacements, but with the ability to get a quality device refurbished, offer a warranty, and save hundreds of dollars, refurbs have now taken over. The refurbished business has grown over time, aided by the U.S. market becoming concentrated in key flagship volumes. Service centers can specialize in individual models to help ROI as the market has evolved over the years.
Finally, there are not just certified service centers repairing devices today. Thousands of repair shops in the U.S. are making it quite easy for consumers to get a cracked display or digitizer repaired, or have a battery or a power housing replaced. Broken devices that used to be recycled or shipped overseas are getting repaired and resold in the U.S.—further cutting into new device sales.
6. Prepaid is no Longer Selling ‘Disposable’ Smartphones; Same Issues as Postpaid
Prepaid device sales have declined. Smartphone sales within prepaid is now above 80%. Only a few years ago, prepaid device ASPs were extremely low, where the high prepaid churners would activate, use, and discard within a year. Now device ASPs are growing.
Like postpaid, device holding periods have grown longer. In addition, government subsidized programs continue to be ramped down—meaning millions of devices, which would have been used for programs such as Lifeline, were not activated.
Wrap-up: Refubs, BYOD, Lower Upgrades Stealing Millions of Device Sales from OEMs
Smartphone sales have fallen almost 12% during the first half of 2018 as compared with 2017. However, carrier performance and activations have not been dramatically poor. Instead, the U.S. market is not consuming as many new devices due to the growing prevalence of refurbished devices and BYOD, as well as slower upgrade rates.
Jeff Fieldhack is a Research Director, Mobile & Smart Devices at Counterpoint Research. Follow him on Twitter: @JeffFieldhack
"Industry Voices" are opinion columns written by outside contributors--often industry experts or analysts--who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.