Recon Analytics: U.S. handset sales slipped 15% in 2014 amid equipment installment plan boom

Despite growing smartphone sales, overall handset sales fell in 2014 due to a decline in feature phone sales and growing acceptance of equipment installment plans (EIP), according to a report from research firm Recon Analytics. Consumers' embrace of the EIP model could have negative consequences for carriers, handset makers and mobile networks, according to the report.

In 2014, around 143 million mobile phones were sold in the United States, and approximately 90 percent of them were smartphones, according to a report from Recon Analytics analyst (and FierceWireless contributor) Roger Entner. That figure was down by around 25 million phones from 2013 when approximately 168 million phones were sold in the U.S. market and only half of them were smartphones, the report notes.

Verizon Wireless (NYSE: VZ), AT&T Mobility (NYSE: T), Sprint (NYSE: S), T-Mobile US (NYSE:TMUS) and other carriers have embraced the EIP model as a way to cut down on costs they pay to OEMs to subsidize devices. If customers choose to pay off their devices in monthly installments, they can typically upgrade sooner and get reduced service pricing per month. Customers also get a permanent discount if they pay off their device in full since they no longer face monthly charges for their phone.

According to Recon, U.S. consumers who are purchasing replacement phones are mostly focusing on newer, higher-end devices. Even though device sales fell by 15 percent year-over-year in 2014, device revenues increased by about 5 percent, Recon noted.

"In the short term, this flight to higher priced devices increases revenues and profitability for mobile carriers, but longer-term the trend is negative, as it takes longer for new devices to permeate the network," Recon noted. "Device manufactures are cheering the higher revenues as the market has shifted heavily towards higher priced smartphones. Now that smartphones make up 90% of handsets sold, device manufactures can no longer cannibalize feature phones for significant revenue upside."

Recon expects U.S. handset sales to fall by 5 percent to 136 million units in 2015 and to fall again by 4 percent to 131 million in 2016. "With device sales and new subscriber additions declining, the impact on the handset replacement cycle has been significant," the report adds. "Handset replacement has abruptly slowed to the lowest rate since we began calculating the metric." In 2014, the average handset replacement cycle grew to 26.5 months, an increase of 4.1 months compared to 2013.

Carriers are increasingly using EIP and similar programs to boost EBITDA. In the fourth quarter, Verizon said around 25 percent of all of its phone activations were completed through its Edge program, up from 12 percent in the third quarter. That was low compared to Verizon's peers. By comparison, AT&T said 58 percent of its smartphone activations were on its Next equipment installment plan (EIP), and Sprint reported a comparable figure of 46 percent for the fourth quarter. T-Mobile's Simple Choice plans are all on the EIP model.

Recon noted that Americans have typically upgraded their phone at three points in time: roughly every year when a new generation device was launched; around every two years when their service contract expired, causing them to either switch carriers or become eligible for a subsidized phone; or whenever their phones became obsolescent or stopped working. "With the rise of EIP plans that incentivize both rapid upgrades every year and delayed phone upgrades through discounted service pricing, consumers have eschewed the traditional two-year service plan upgrade cycle," Recon notes.

The percentage of U.S. handsets being replaced every year increased from 45 percent in 2013 to 49 percent in 2014, while the percentage of devices that replaced obsolete devices jumped significantly from 15 percent in 2013 to 35 percent in 2014 according to Recon. The percentage of devices being replaced at the traditional two-year time interval dropped from 40 percent in 2013 to 16 percent in 2014. Such device replacements represented slightly more than 50 percent of replaced devices from 2010 to 2012, according to Recon.

The implications for this are several-fold, according to Recon. The firm thinks that developers may be forced to hold back on developing more advanced applications as consumers hold onto older devices longer. There might also be less competition from smaller handset providers. Most OEMs, which are already struggling to remain profitable, "will be under pressure to cut their research budgets as revenues decline, therefore reducing the amount of effort dedicated to making the next generation smartphones even better. Smaller handset providers are going to be disproportionally hit, making their devices less competitive compared to larger handset providers--leading to a shakeout."

Recon also thinks that as consumers hang onto older devices longer, they will be missing out on new devices with better and newer radios to take advantage of spectrum bands that carriers plan on deploying. That could lead to a spectrum crunch in major markets. To be fair, most carriers try to future-proof new phones by adding radios even if they are not fully deploying spectrum (such as T-Mobile's introduction of radios in its devices that can support 700 MHz A Block spectrum). Recon also thinks that consumers hanging onto older devices could delay the transition to new services like Voice over LTE.

"Consumers get $20 per month more in their pocket for waiting to upgrade their phone. In the longer term, consumers will have fewer choices and delayed mobile phone innovations and fewer new apps taking advantage of new hardware features than they would have in a higher volume scenario with more device manufacturers," Recon notes.

For more:
- see this Recon Analytics post

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