Report: Carriers, facing pressure from smartphone costs, turn to prepaid and data

Under pressure from the rising costs of subsidizing smartphones as well as declining customer loyalty, wireless carriers are increasingly turning to prepaid as well as non-traditional ways to retain customers, according to a survey of North American wireless carriers conducted by PricewaterhouseCoopers.

Click here for the full report in PDF format.

The report, "No wires attached: 2011 North American wireless industry survey," found that as the wireless market continues to mature, carriers are being forced to make changes to their long-standing business models. As a result, prepaid wireless and an increasing reliance on mobile data will be where carriers turn as voice revenues fall off.

"The mobile industry has reached a point where the economics of the current subsidy model associated with acquiring new and upgrading existing customers to costly smartphones have become increasingly difficult to sustain," said Pierre-Alain Sur, PwC's global communications industry leader.

The firm found that customers are becoming less loyal. The average length of postpaid customer relationships has declined to 48 months in the 2011 survey, down from 59 months in the 2010 survey. To cope with that, PwC said the carriers surveyed are looking at changes to how they approach customer relationships, and are considering new ways to retain subscribers, such as device buyback initiatives, leasing programs and "bring your own device" programs.

As a corollary to that, the research found that prepaid plans are making up a growing chunk of carriers' revenues. Prepaid services now represent an average of 29.2 percent of total service revenues, up from 22.5 percent in the 2010 survey.

Additionally, the survey found that, for the first time, mobile voice usage is starting to decline, driven by cost-conscious customers and rising data usage. The average minutes of use per postpaid subscriber has dropped off significantly, shrinking from 720 MOU per month in 2010 to 638 MOU per month in the 2011 survey.

Carriers have been trying to convert as many customers as possible to smartphones, which generally require a data plan. And indeed, PwC found that smartphone sales represented 48 percent of total device sales, up 30 percent from the 2010 survey, and accounted for 51 percent of upgrades, up 36 percent from the 2010 survey. However, those sales come with a cost in the form of the subsidies carriers must pay.

Earlier this month, T-Mobile USA CMO Cole Brodman said at an industry conference that the way wireless carriers heavily subsidize the cost of devices for consumers is ultimately hurting the industry, but he conceded that the status quo is not likely to change any time soon.

"Purchasing phones at steep discount (subsidized by wireless carriers) devalues the incredible technology innovations coming to market," Brodman wrote in a follow-up blog post. "It distorts the cost of devices and creates an uneven playing field for OEMs, carriers and retailers alike." 

Brodman pointed to T-Mobile's Value plans, which allow customers to pay the full price for a device or set up payments in monthly installments. Customers can also bring their own device to T-Mobile's network and in return they get the company's most affordable rate plans.

The PwC survey is an annual publication that covers the financial and operational reporting policies and practices of wireless carriers. PwC said the 2011 survey includes responses from most of the major U.S. and Canadian operators--though they are kept confidential. The survey period covers calendar year 2010 as well as certain information as of June 30, 2011, so it may lag recent developments in the market.

For more:
- see this release
- full report (PDF)

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