U.S. Wireless Price Wars Are Making A Big Impact

by Trefis Team
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While the U.S. wireless industry has witnessed a shake-up over the last three years, as carriers migrated away from the contract model to equipment installment plans, the real pricing benefits have really just started to be felt by customers over the last few quarters, as the industry re-embraced the unlimited data model amid significant competitive pressures. In this note, we take a look at how pricing has trended in the U.S. wireless industry, by using the Bureau of Labor Statistics consumer price index (CPI) for wireless services as a benchmark and examine the repercussions for the major U.S. wireless carriers.

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Biggest Decline In Wireless CPI Occurred As Unlimited Plans Went Mainstream

In 2013, T-Mobile (NASDAQ:TMUS) ushered in a new era in terms of how wireless plans were structured with its “Un-carrier” offering. This offering essentially did away with the industry-standard of two-year contracts and subsidized handsets, giving customers more flexibility with their wireless spending, while offering additional valued added features. The other major nationwide carriers adopted similar plans, making them their primary offering by 2015. However, wireless pricing declined at less than a 2% CAGR over 2014 and 2015, per data from the Bureau of Labor Statistics, as customers were largely paying the same amount for wireless services, with the only change being that the service and equipment portions of their bills were decoupled (related: Were The U.S. Wireless Price Wars Just A Mirage?). However, over the last two quarters, the real price impact has begun to be seen as carriers have re-embraced unlimited pricing plans. In August 2016, T-Mobile made its unlimited One plans its primary offering for new customers, while Sprint (NYSE:S) also unveiled new budget unlimited offerings. Over the subsequent six months, average wireless prices declined by roughly 4% in total. In February 2017, Verizon (NYSE:VZ) gave in to market pressure, reinstating its unlimited plans after a period of roughly six years, while AT&T (NYSE:T) also began offering unlimited to its mainstream subscribers (it previously reserved unlimited options for its video subscribers). This caused the consumer price index for wireless services in the U.S. to decline by close to 9% over March and April alone. According to Capital Economics, roughly half of the decline in core CPI inflation this year was due to the falling cost of wireless service.

Wireless_CPI_1

How Wireless Carriers Are Likely To Be Impacted

The shift to unlimited plans is likely to impact the financial performance of carriers for multiple reasons. While there are some benefits, such as getting lower-value customers to trade up to unlimited plans and potentially limiting customer service-related costs, the downsides are many. These plans effectively put a ceiling on ARPU for high-spending customers, who were on more expensive tiered plans previously. High-margin overage fees that are charged when customers exceed their monthly quotas will also be limited. Further, growth could also be capped. For instance, U.S. wireless users are projected to cross 6 GB in monthly data consumption by the end of 2017, up from an average of around 4 GB last year. Carriers may not be able to fully capitalize on the higher data usage with unlimited plans, while their networks will continue to see higher loads.

During Q1, Verizon witnessed its first year-over-year decline in service revenue, while the broader U.S. mobile data services market, which saw quarter-over-quarter growth for 17 years straight, witnessed its first quarter of negative growth, per wireless industry analyst Chetan Sharma. While we don’t expect to see declines of the magnitude seen over the last three months (average wireless spending down ~9%), the negative pressure is likely to continue. As wireless is a very high fixed cost business, with low marginal costs, the capping of ARPU could intensify competition, with carriers striving to maximize revenues by getting more subscribers on to their networks, as per-subscriber revenues are potentially capped. We have been seeing some related activity in recent months. For instance, AT&T is offering a free HBO subscription along with its unlimited offering, while Sprint upped the ante earlier this month, offering Verizon subscribers who switch to its network a free year of unlimited service, with no contractual obligations (related: Is Sprint Going Too Far To Win Over Subscribers With Free Service?).

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