Recurring revenue on the upswing in wireless, New Street reports

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The wireless market is both stable and relatively healthy, according to New Street.

Recurring revenue per customer is growing for U.S. wireless operators, New Street Research reported this morning. But the nation’s two largest carriers still face serious challenges from both smaller operators and cable companies looking to enter the market.

New Street analysts said they’ve begun to use recurring service revenue per customer (RRPC) rather than the traditional ARPU metric in response to the industrywide move away from handsets subsidies toward installment and leasing plans. Information gleaned using the new methodology indicates the wireless market is both stable and relatively healthy, according to New Street.

“The data series shows that the industry’s repricing woes have largely passed; postpaid service revenue is growing amid relatively stable pricing and continued strong growth in data consumption,” New Street wrote in a research note to investors. “This bodes well for margins and asset values for the group in general; the challengers benefit most. TMUS in particular is capturing the lion’s share of growth.”

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T-Mobile killed device subsidies and two-year contracts late in 2012, forcing its rivals to follow suit. While the move was undeniably effective for T-Mobile, the emergence of equipment installment plans and lease programs resulted in declines in recurring revenue and recurring revenue per customer for all four major U.S. operators, New Street observed.

Now that the majority of U.S. consumers no longer use subsidized devices, the overall market is beginning to regain its footing.

“With close to 70% of subs on new plans, the worst of the repricing process is largely complete,” the analysts wrote. “The carriers all have stable or growing RRPC and growing recurring revenue. Growth from higher data consumption and tablet adoption is offsetting the impact of the residual repricing. RRPC and recurring revenue growth should accelerate.”

That growth is being driven primarily by increased demand for more data, and that trend accelerated in the third quarter, New Street said. But T-Mobile and Sprint continue to grow their share of the wireless market at the expense of Verizon and AT&T—and they haven’t been forced to continue lowering their prices to do so.

“To be clear, Sprint and T-Mobile price at a discount, but their share gains are accelerating and the discount hasn’t increased,” New Street said. “This probably indicates an enduring shift in the perception of relative value between carriers—incumbents can cut price or lose more share.”

But cable companies such as Comcast and Charter are positioned to disrupt the industry in a significant way starting next year. New Street said last week that Verizon and AT&T are likely to lose 9 million customers to cable operators by 2018, partly because cable players will enjoy a lower cost structure that may allow them to offer service at a 20% discount from incumbent wireless carriers.

“The pressure on incumbents will only increase when cable enters the wireless market next year,” the analysts wrote. “Challengers may see growth slow relative to our expectations, but perhaps not relative to consensus expectations, and the impact of slower growth is offset by M&A upside.”

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