With smartphones boosting the demand for mobile data to record levels, U.S. wireless carriers are now looking to gradually lessen the impact of smartphone subsidies on margins. Following in Verizon’s (NYSE:VZ) footsteps, AT&T (NYSE:T) recently announced the extension of its upgrade eligibility criteria for subsidized smartphone buyers from 20 months to a full two years of the contract period. The move will cause subscribers to push back their upgrades for a little longer, allowing AT&T to spend less on subsidies as fewer subscribers become eligible for upgrades each quarter. It is part of a broader push by carriers to improve margins as top-line growth stagnates in a wireless market that has reached saturation.
Margins In Focus In A Saturated Wireless Market
A saturated wireless market has hit AT&T hard with subscriber additions slowing down, and the company’s obvious lag in LTE coverage (as compared to Verizon) is accentuating the effect. Last quarter, AT&T added less than 300,000 postpaid subscribers, more than 55% fewer than the 680,000 that Verizon added during the same period. Last year as well, Verizon added over 5 million postpaid subscribers more than three and a half times that of AT&T. The slow subscriber growth is impacting AT&T’s top-line with revenues (adjusted for the divestiture of the Yellow Pages business last year) growing by less than 1% last quarter - a far cry from the 2% growth that AT&T expects for the full year.
In order to make up for the slowdown in subscriber additions, the carrier recently introduced a monthly administrative fee of 61 cents that will be added "below-the-line" to the subscribers’ monthly bills. While the additional charge could contribute to around 0.3% growth in revenues this year and help AT&T meet its year-end revenue target, it is not a sustainable ploy to add top-line growth in the longer term considering the public backlash or regulatory disapproval it might have to face if it were to increase such fees on a consistent basis.
Declining Importance of Subsidies
A more sustainable strategy for increasing ARPU levels would be to promote 4G LTE as well as shared data plans that encourage users to add more mobile devices. AT&T is doing both with its LTE network being promoted as being among the speediest 4G networks in the country and its Mobile Share plans seeing strong adoption. As of last quarter, AT&T had managed to convert almost 14% of its postpaid subscriber base to one of its shared data plans – almost a quarter of which subscribed to the highest data tiers (10 GB+). Both these ARPU growth drivers however require little incentive in terms of driving smartphone adoption.
With smartphone subsidies growing less in importance both as a means of driving subscriber growth as well as ARPU levels, it makes sense for AT&T to gradually lessen their impact on margins. However, decreasing subsidies altogether may be a drastic a step to be taken just yet, which is why AT&T is content with only increasing the smartphone upgrade cycle. The move may not however result in higher cash flows as the carrier looks to close the LTE gap with Verizon by executing on an accelerated LTE rollout plan that will help it have a majority of its LTE network ready by the end of the year.
Disclosure: No positions.