The past week saw quite a few developments in the telecom sector. AT&T (NYSE:T) announced plans to phase out older 2G networks over the next four years, and re-farm the spectrum to support more advanced 3g/4G technologies. Sprint (NYSE:S) moved aggressively to increase the demand for iPhone 4S by offering an additional $50 discount over the subsidized price, as rumors of an imminent iPhone 5 launch is causing customers to postpone buying an iPhone. Verizon (NYSE:VZ), meanwhile, clarified that its shared data plans, just like AT&T’s, have additional options for higher-data tiers till 20GB but that it has only been offering them to interested subscribers through customer service to keep things “simple”.
In a bid to avoid a spectrum crunch, AT&T plans to gradually phase out its older 2G networks and free up space for newer 4G technologies. The second largest wireless carrier said last Friday that it will work over the next four years to transition its existing 2G base to more advanced 3G/4G devices and expects to shut down its 2G network completely by the start of 2017. The process seems to have been already set in motion with customers in New York reporting earlier this year that they had received cautionary letters from AT&T urging them to swap out their 2G-only phones for newer 3G devices, else risk not being “able to make or receive calls” or suffering from a “degradation” of wireless service in certain areas.
This move, coupled with its earlier announcement to acquire spectrum licenses from NextWave Wireless, Comcast and Horizon Wi-com, gives AT&T room to expand 3G capacity while building out a nationwide 4G LTE network. AT&T’s LTE network currently lags Verizon’s in coverage, with the latter covering about thrice as many Americans as AT&T. In order to bridge the gap and build a LTE network robust enough to compete with Verizon, AT&T needs all the spectrum it can get its hands on. At the same time, rising smartphone penetration and the burgeoning data needs of subscribers using mobile devices such as the iPhone are putting a lot of strain on its 3G network that needs additional spectrum for strengthening. (see AT&T Will Refarm 2G Spectrum For Future 3G/LTE Spectrum Needs)
As the launch of Apple’s fifth-generation iPhone nears and rumors about the phone’s specifications and launch date gain strength, it seems like more and more buyers are holding off on purchasing an iPhone in anticipation of the event. In order to clear out iPhone 4S inventory ahead of the imminent launch, Sprint has decided to offer an additional $50 discount on the current model. (see Sprint Discounts iPhone 4S To Goose Sales Ahead Of iPhone 5 Launch) This may take a toll on near-term profitability but having made a big bet on the iPhone last year, Sprint needs to meet its four-year $15.5 billion minimum commitment to Apple else it may have to add on more debt to its already highly leveraged balance sheet.
This may also be an attempt by Sprint to hedge the risk that the next-gen iPhone 5, which is likely to support high-speed 4G LTE, may not sell well at the carrier due to its limited LTE coverage in the U.S. While Verizon’s and AT&T’s LTE networks cover around 230 million and 80 million Americans respectively, Sprint launched its first LTE markets only last month. Sprint’s first three months with the iPhone have however shown the value that customers attach to unlimited plans and we see that supporting Sprint’s iPhone 5 sales going forward despite its near-term LTE disadvantage.
Verizon and AT&T have both announced data share plans of their own and the former has even launched it. While both plans share a basic tenet of offering a common bucket of data to be shared among multiple devices, Verizon’s seemed to lack higher data tiers beyond the 10GB data plan. This was surprising considering that a big reason why data share plans were introduced was to incentivize the adoption of multiple data-only connected devices. However, in a recent update, the company clarified that it has also been offering five additional data tiers till 20GB to interested subscribers through customer service.  These high-data plans have however not been mentioned on the website to keep things “simple” for a majority of subscribers that use less than 2GB a month.
The higher data tiers will however help Verizon appeal to a majority of the grandfathered unlimited plan users who we believe would prefer subscribing into a tiered data plan than paying the full price of an unsubsidized phone. As 4G LTE becomes the new standard and spectrum gets scarcer, Verizon will be looking to gradually kill the unlimited plans completely and monetize every last byte of data that is transferred on its network. It will also look to drive the adoption of other data-only connected devices such as tablets, telematics and M2M devices as we expect most of the future growth to come from these devices.Notes:
- Verizon reveals $150 20GB shared data plan, and four others, ComputerWorld, August 8th, 2012 [↩]