Slower handset upgrade cycles will take a toll on U.S. carriers' device revenues during the first quarter, according to Wells Fargo Securities analysts. For the short term, at least, that will make it tougher for T-Mobile and Sprint to close the subscriber gap with their bigger rivals.
Consumers are holding on to their handsets longer as operators have moved away from two-year contracts and toward leasing programs and equipment installment plans (EIPs). Wells Fargo said both Verizon and AT&T are likely to see upgrade rates of less than 60 percent during the current quarter, down 8 percent from the fourth quarter of 2015 and down 6.6 percent from the same period a year prior.
Because users often switch carriers when they upgrade their phones, though, that isn't all bad news for the nation's two largest operators.
"Checks indicate that Q1 is shaping up to be a near record low in terms of upgrades," Senior Analyst Jennifer M. Fritzsche and colleagues wrote in a research note. "Is this a good thing or a bad thing? Somewhat of a double-edged sword in some ways. On the not-so-good side, (Wall) Street revenues for equipment sales may be too optimistic and need to come down. On the flip side, these revenues are margin-neutral based on the EIP model.
"Additionally, fewer industry-wide upgrades and gross adds mean a lower switching quarter – a clear positive for the two big gorillas, in our view," the analysts continued. "While total average revenue per user (including EIP billings) may be lower than the Street is currently forecasting, we believe this is a trade-off AT&T and Verizon likely are happy to see."
The extended handset replacement cycle is also leading to an increasing number of users switching carriers with devices they already own, Wells Fargo noted. Operators can't make money immediately from device sales to these BYOD users, but they also don't have to swallow the upfront costs required of phones purchased on EIPs or activated through a leasing program. And many of those users will eventually buy a new phone from the operator.
"This trend is also a margin-neutral event for the carriers (no revenue or associated expense), but does pressure headline equipment revenues," the analysts wrote. "In other cases, the carriers may 'forward price" to subscribers whose subsidy plans have expired but who have yet to upgrade. In these situations, the carrier will offer service price discounts to consumers who are not on installment plans for their devices with the hope that these consumers will eventually upgrade with a new device…. AT&T and Verizon have 13.3 million and 9.8 million connections, respectively, that meet these criteria Assuming that these customers eventually upgrade devices (assumed at $500/device) with an EIP-based plan, AT&T and Verizon could generate $6.6 billion and $4.9 billion, respectively, in incremental equipement revenue."
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