AT&T Can Lose Out from Hike in Upgrade Fees

AT&T (NYSE:T), which primarily competes with Verizon (NYSE:VZ) and Sprint (NYSE:S) in the wireless business, has recently increased its early smartphone upgrade fee from $75 to $200. Can this help AT&T in improving its mobile phone revenues or will it lead to further customer dissatisfaction? Below we discuss how this move may affect the company.

iPhone customers are special

AT&T has indicated that the current price hike will not impact the iPhone or basic and quick messaging phones. Although the company has charged as much as a $200 early upgrade fee to many of its customers who upgraded from the iPhone 3G to the iPhone 3GS, it has also made certain exceptions. For some of the users who were subscribing to expensive plans, the company extended the upgrade eligibility window for the iPhone 3GS ^[1]. Also, during the launch of the iPhone 4, AT&T allowed some customers to upgrade for free ^[2].

This clearly indicates that the company wants to keep the iPhone subscriber base satisfied as the iPhone has been one of the prime growth drivers for AT&T’s wireless business.

Even if 5% of AT&T subscribers upgrade early, stock upside due to increased fee is highly limited

Early smartphone upgrades are only limited to customers who are either lured by a new smartphone in the market and cannot wait till they are eligible for an upgrade or have their smartphone damaged after expiration of the warranty period. These customers are likely to constitute a small fraction of AT&T’s total subscriber base.  If we assume that 5% of AT&T’s subscriber base opts for early upgrades annually, this amounts to a little less than $600 million ^[3] in incremental mobile phone revenues as a result of the recent fee hike. This results in a negligible upside of 0.5% to the company’s stock price.

Stock downside possible if customer dissatisfaction increases

The above calculations inherently assume that AT&T’s subscribers will readily accept the fee hikes. However, this move by AT&T can trigger subscriber dissatisfaction, and those willing to go for a new device may prefer it from another carrier. Possible subscriber migration can further limit AT&T’s upside and may even mitigate positive revenue impacts of higher fee.  You can modify our forecast for AT&T’s mobile subscriber share below to see what the impact on AT&T might be.

You can see the complete $37.91 Trefis price estimate for AT&T here.

1. AT&T eases upgrade pricing for some early iPhone 3G adopters [↩]
2. iPhone 4 unveiled [↩]
3. Calculated based on an expected subscriber base of 92 million by the end of 2010 and a $125 fee increment ($200-$75) [↩]