The shift to handset leasing and smartphone upgrade plans is dramatically altering the financial models of wireless operators and significantly lengthening the lifespan of the smartphone. It's also creating some confusion in the industry. During every third-quarter earnings call, analysts have peppered wireless executives with questions about their equipment installment plans (EIP) and, in the case of Sprint and Apple, their device leasing programs.
Clearly this trend toward EIP and leased devices is a big change for the industry. During Apple's (NASDAQ: AAPL) third quarter earnings call, CEO Tim Cook noted that the company is in the early stage of its device upgrade program -- which lets customers make 12 or more installment payments on the phone and then they can upgrade to a new iPhone. However, he noted that device leasing is a significant trend in the industry and one that Apple plans to take advantage of, particularly as a way to bring less-expensive iPhones to more customers.
One concern that investors have surrounds how much risk operators like Verizon (NYSE: VZ), AT&T (NYSE:T), Sprint (NYSE: S) and T-Mobile (NYSE:TMUS) are taking by financing these devices and what criteria they are using to evaluate customers. Operators certainly have a lot of money directed toward these programs. For example:
Verizon said in its 10Q filing with the SEC for the third quarter of 2015 that it had about $2.9 billion in net device installment plan receivables, which is the amount that consumers owe in installment plan payments.
T-Mobile reported in its third quarter 10Q filing that it had financed $1.1 billion of devices through its Jump! EIP program as of Sept. 30, which was down from $1.3 billion in the same period in 2014 primarily because some customers shifted to leasing via the Jump! On Demand (the company's leasing program) instead of EIP.
AT&T said in its second quarter 2015 10Q filing that it had $2.9 billion in receivables on its balance sheet from its Next EIP program. The company added that some customers can trade in their Next device for a new device before they have paid off the existing device. When that happens, the company said it recognizes the equipment revenue at the time of the sale.
- Sprint didn't provide many details on its handset leasing program during its third quarter 2015 call with investors. However, Evercore SI analysts in a research note said that they estimate Sprint added 2.15 million leasing subscribers, which is up from the first quarter's tally of 2.06 million.
Verizon has offered some details of its risk model, noting that it evaluates customers on a variety of variables including consumer credit scores, payment history and account status. Higher risk customers have to pay a bigger down payment and have lower limits on the amount of the device that is financed by the operator.
With the large number of consumers flocking to EIP programs and leasing, wireless operators must determine the residual value of the devices that consumers turn in regardless of whether they are leased or part of an installment plan. This is creating a potential opportunity for some vendors, particularly those with data on the value of smartphones as they move down the supply chain.
According to Scott Wagner, chief business development officer at Hyla Mobile, which distributes devices and provides operators with buyback and trade-in solutions, device residual value is becoming a critical metric to the EIP and leasing model.
For example, if a customer is on T-Mobile's Jump! On Demand program and they trade in their leased device for an upgrade, T-Mobile will forgive the consumer of their unpaid balance on that device. The question is, how does T-Mobile recoup that cost?
Wagner said that Hyla has developed a risk management solution based upon the company's data it has collected by buying and selling used smartphones around the globe. He also said the company has more than 30 million data records that it can leverage to help operators predict the current and future value of smartphones.
Of course, operators likely have some of the same data based upon their history of selling refurbished phones to prepaid customers and others. But based upon the questions from investors and analysts on earnings calls, there is concern about the amount of money that operators have riding on these programs and how they are going to recoup it. And it's likely that those numbers will only grow in the future as more customers migrate to leasing and installment plans. --Sue