Mobile Phones' Growing Costs Begin to Impact Consumers - and Telecoms

Most mobile devices are not gold-plated and jewelry-encrusted, but the contracts that come with them are starting to feel that way to users.

And the result is that telecom providers' market value is starting to slide as investors wonder if the companies in question will be able to charge sufficient amounts to cover the revenues and profits that the capital markets have come to expect.

The problem became noticeable several years ago when telecoms gleefully revealed that newer and more powerful smartphones were causing users' bills to take off exponentially. For a time, people were so besotted that they sacrificed other needs to cover their telecom bills. But the growth was unsustainable - as the telecoms and those who funded them should have known.

Given that typical household incomes are largely stagnant but demand for newer and greater services is growing, there is increasing pressure on the providers to offer discounts to maintain market share. Meanwhile, Apple, Samsung and the other manufacturers are designing ever more powerful devices in order to stay ahead of their lower cost competitors in Asia.

As if all of that weren't worrisome enough, at some point, consumers' 'right' to phone service will attract politicians' attention, making cost recovery even more challenging. The result is that the untrammeled growth expected for the industry may begin to moderate - and for some time. JL

Thomas Gryta reports in the Wall Street Journal:

Something has shifted in a sector that could once be counted on for steady growth. The concern is that carriers will have to pay heavily to handle the soaring data traffic from their customers’ smartphones even as their ability to command premium prices for that traffic is eroding.
What difference does a month make? In telecom, the answer is about $45 billion.
That’s how much market value Verizon Communications Inc., AT&T Inc., Sprint Corp. and T-Mobile US Inc. have lost collectively since mid-November amid a fast-moving reassessment of the industry’s value by investors. The lost value is greater than the current market capitalization of Sprint and T-Mobile combined, and it reflects concern that cellphone service will be costlier to deliver and less lucrative to sell.
Two events sparked the change of heart. The first was the government’s ongoing sale of wireless licenses, which kicked off Nov. 13 and as of Friday had drawn more than $43.7 billion of bids. The other was a warning from Verizon last week that competitive pressure was forcing it to offer discounts that would hurt its profits.
Together, those messages led investors to conclude that something has fundamentally shifted in a sector that could once be counted on for steady growth. The concern is that carriers will have to pay heavily to handle the soaring data traffic from their customers’ smartphones even as their ability to command premium prices for that traffic is eroding.

“The growth trajectory of the industry is different,” said Jonathan Chaplin, an analyst at New Street Research. “The multiple that investors pay for these stocks is going down”

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That fundamental concern has been amplified by a broader decline in stocks and, in particular, dividend-paying stocks that could be less attractive if interest rates rise.
The costly spectrum purchases and price war are just getting started. The government is expected to auction high-quality airwaves now held by television broadcasters in 2016, a sale that UBS predicts could bring $47 billion in bids.
Meanwhile, carriers are offering more and more aggressive plans to win customers. AT&T has offered free additional data with its plans to make them more attractive, trading away some of its ability to cash in as wireless Internet traffic grows. Sprint said it would cut the bills of AT&T and Verizon subscribers in half. And on Wednesday, T-Mobile said it would offer family plans with unlimited data starting at $100 a month for two lines.
AT&T and Verizon have some advantages in resisting the assault. Their networks are more extensive, and large swaths of their subscriber bases are in family or business plans that make it more burdensome to switch.
Still, the moves and countermoves are having an effect. Verizon, the country’s largest wireless carrier, warned late last Monday that its profits are coming under pressure at the end of the year as it rolls out discounts in an effort to win customers. The carrier also said more of its customers were leaving for other carriers this quarter than in the previous quarter or last year amid heavy promotions from rivals. Its shares closed Friday at $45.58, down 1.7% on the day amid a broad selloff and down more than 10% since Nov. 12.
AT&T Chief Financial Officer John Stephens followed on Tuesday, telling an investor conference that the company’s fourth-quarter “churn,” which measures what percentage of subscribers leave every month, would be higher than it was a year earlier and that its margins would take a hit. AT&T’s shares fell 1.7% Friday, to $32.16, down more than 9% since Nov. 12.
The industry’s challengers are suffering, too. Sprint’s stock dropped 7.3% Friday to $4.08 a share, off more than 18% in the past month. T-Mobile’s stock fell 1.3% to $25.31 a share Friday and is down nearly 11% since Nov. 12.
Dave Carey, executive vice president of corporate services at T-Mobile, said the company’s stock was probably under some pressure from the $1 billion in convertible stock it sold last week.
The negative pressures come after years in which carriers successfully pushed their revenue per customer higher. AT&T and Verizon had set themselves up for further gains by moving their subscriber bases out of unlimited data deals and over to plans that require them to pay more as their data use rises.
At the end of the first quarter, the average monthly revenue per wireless customer in the U.S. was $49.72, and it was exceeded only by Canada among developed markets, according to data from Bank of America Merrill Lynch. Churn was among the lowest in the world at just 1.7%.
The question now is how long the pressure on those profitable metrics will last.
Fran Shammo, chief financial officer of Verizon, said Tuesday that rivals won’t be able to keep up the price war for long because they’ll need to generate cash to maintain their networks.
AT&T CFO John Stephens made a similar prediction, saying that the company’s rate of service cancellations would return to normal as year-end promotions expire.
Wall Street isn’t so sure. Analyst Craig Moffett of MoffettNathanson said price wars tend to last a long time in industries like telecom and airlines, which require heavy up-front investment but then face relatively low costs to add more customers.
The battle in the U.S. got its start nearly two years ago, when T-Mobile began aggressively trying to reverse years of subscriber losses by doing away with things that annoyed customers like contracts and by covering the early termination fees owed by subscribers who switched.
“Keep the throttle down and manage costs,” said Mr. Carey, the T-Mobile executive. “We have our game plan, and we are sticking to it.”
The next wave could be led by Sprint, which is the only major carrier still losing valuable postpaid customers. Sprint is owned by SoftBank Corp. , a fierce competitor in its native Japan. The carrier changed CEOs in August and is rolling out new plans and advertisements to win converts.
A Sprint spokesman acknowledged that the company has gotten more aggressive and said it won’t give up that approach when the holidays pass.
Macquarie analyst Kevin Smithen warned clients Wednesday that conditions are only going to get worse for AT&T and Verizon as they push their customers onto cheaper plans to stay competitive.The price war will likely end only if regulators allow more mergers or a carrier decides to preserve its profits by letting customers go, said UBS analyst John Hodulik. He doesn’t think either is likely.
Regulators who shot down AT&T’s $39 billion acquisition of T-Mobile in 2011 and successfully deterred Sprint from trying its own deal for T-Mobile this year are getting the more competitive environment they wanted.
Meanwhile, carriers continue to be judged largely on their ability to add new subscribers. That’s a tough job in the U.S., where there is already more than one device a person, so there is little choice but to chase new customers with price cuts and bigger allotments of data. The carriers are betting customers will stay around long enough to be worth the sacrifice.
New installment plans for phones will provide some help. As with service contracts, the installment plans mean big bills for customers who leave early.
Then again, once customers have paid off their phones, they have little reason to stay.
“It is risky,” said Shahid Ahmed, who leads Accenture ’s North American communications-industry consulting business. “But the industry structure has come to a point where you have to really fight for those customers.”