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February 13, 2014.

Lens Alert: Wireless Pricing: The Broader Context

By now, you've read the news and some analysis of the Verizon "More Everything" announcement. I'd like to look at all the recent wireless pricing activity from a broader context.

Let's get one thing straight: we are not in the middle of a "wireless price war" in the United States. Despite all the moves so far this year, average spending per household/account is holding up and operator margins have dipped only slightly. However, the broader context to all of this pricing activity is that we have entered an era of important structural change that will set the tone for the U.S. wireless industry for the next few years.


First, a few quick comments on the Verizon "More Everything" moves. The one word I'd use to describe it is "rightsizing". Verizon has held the "premium price for premium network" mantra for some time. But this story has started to look dated, as rival networks have started catching up (and in some cases exceed) and the "Verizon premium" has widened, given recent competitor pricing actions. Plus, if you look at porting ratios and churn rates, T-Mobile's moves, which had almost surgically targeted AT&T, were just starting to affect Verizon, so some action was needed.  


The "network strengthening" piece is also an important component of the announcement, since Verizon needed to boost capacity in certain markets before opening up the data spigot. Verizon has been pretty careful to protect its margins, however. I believe the vast majority of "Share Everything" subscribers will keep their existing plan rather than opt for a $10 discount, and will be a little less likely to shop around. The additional bennies of free international text and 25 GB of cloud storage look attractive to customers, but cost Verizon practically nothing to provide.


More broadly, the pricing moves we've seen of late reflect what I call the "new reality" of the wireless industry, centered around five themes:

  1. Changes in the Device Ownership Model are Having a Major Effect. A gradual weaning off the handset subsidy model means that there's less robbing Peter to pay Paul. If operators have a less onerous obligation on the equipment side, they can be more creative with respect to service pricing and other mechanisms to take share or increase retention. T-Mobile's ETF deal is a great example. Subscriber acquisition costs are just coming from a different "bucket".    

  2. Data is the new currency. There will not be a price war in wireless. Do not expect the average bill of a U.S. wireless subscriber or family to change markedly over the next several years. Users with LTE devices consume 30-50% more data than on 3G, and they are looking to connect more devices to the network. Price competition will revolve around how much data to give subscribers, rather than wholesale price reductions.        
  3. We are starting to see the economic benefits of LTE. As a higher percentage of devices and traffic moves to LTE, the operators are able to offer more data without significantly impacting margins. Just how much data, going forward, will be largely governed by spectrum position and level of investment in infrastructure. Despite all the "wireless duopoly" crowing at the FCC/DOJ, AT&T and Verizon still have less spectrum than the average European wireless operator.         
    4. It's Becoming Easier to Switch. Witness:   
  • the change in the equipment procurement/ownership model
  • operator's willingness to "buy customers"
  • relative parity on handset selection
  • the fact that more handsets work on multiple bands, and the slow erosion of the legacy CDMA/GSM divide, making it easier to switch operators
The result of this is that we are likely to see a much frothier market over time, with subscribers moving more easily and more frequently between operators. This will not happen overnight, since 60% of consumers are still locked into a traditional postpaid contract. But three years from now, I expect a greater diversity of subscriber-operator relationship "types", and a slow erosion of the traditional postpaid/prepaid structure. The "family plan" structure, which the operators so deftly managed the migration from voice to data buckets, will become less prevalent, and we'll see a more liberal and nimble ability to move around.


5.   Subscriber Retention Becomes Paramount
With 90%+ wireless penetration and 70% smartphone penetration, the only way Sprint and T-Mobile can grow is to take customers from AT&T and Verizon. Hence, T-Mobil's aggressive ETF moves and AT&T's buy back countermoves. A change of 200 or 300 basis points in churn rate for an operator the size of AT&T or Verizon will make or break their year, from a Street perspective, more than just about anything else, especially with the steady changes occurring in the equipment financing equation. Operators are going to focus very heavily on retaining their high value, postpaid subscribers. Since at the same time operators are trying to wean themselves and their subscribers from the equipment subsidy model, efforts at retention will become more service than device focused.
I expect we will see more moves that reward subscriber loyalty. For example, instead of equipment upgrades, why not offer family plan that gives subscribers an extra gig or two of data as an incentive to re-up for a contract?
It's not even been a year since a new era of U.S. wireless pricing structure was ushered in with T-Mobile's initial Un-Carrier announcement. I expect things will settle down for awhile, as we see the results and effects of this multi-layered new pricing structure for the U.S. wireless industry. 
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