The End of Subsidies in the US Wireless Market

on February 12, 2015

Almost a year ago, I wrote about the then-nascent move by the US wireless carriers away from smartphone subsidies. T-Mobile was the pioneer in ending subsidies and the other carriers took a while to get on board – especially Verizon – but we’re now quite a bit further along. I thought I’d share some numbers and some more thoughts about these trends.

Significant progress in getting the postpaid base off subsidies

The chart below shows the progress the major US carriers are making in getting their postpaid subscriber base off the subsidy model, with T-Mobile leading the way:

Carriers base off subsidy

As you can see, T-Mobile’s base is largely off the model and it should be done with the transition by the end of this year. AT&T has made rapid progress over the past year too, with over 50% of its base now off subsidies. Verizon was the slowest to get started and the most reluctant to move off the subsidy model, but even their numbers are starting to pick up. Sprint doesn’t report this number directly, but 46% of device sales in Q4 were on the non-subsidy model, so it is very much moving in the same direction.

So far, installment billing is helping, not hurting, sales

One of the big questions about the end of subsidies (and the accompanying move to installment billing for devices) was whether it would hurt or help smartphone sales. Well, Q4 2014 was easily the largest quarter for smartphone sales in the history of the US wireless market, which may help to answer that question. Three factors played into this:

  • all the carriers aggressively driving switching behavior
  • new iPhones launching late in Q3 and driving many sales in Q4
  • the move to installment billing

The result was dramatic (and we don’t even have T-Mobile’s results yet):

Smartphones soldThe four carriers who have reported so far had 30.1 million smartphone sales between them and T-Mobile may well have had another 8-10 million too. The move to installment billing certainly doesn’t seem to be hurting device sales so far.

A change in carrier finances

The shift away from subsidies and towards installment billing is also having a significant effect on carrier finances. One of the traditional carrier metrics – average revenue per user, or ARPU – has gone into rapid decline at most of these carriers, as they adjust their service pricing to account for the end of subsidies. But, at the same time, they’re billing an increasing proportion of customers every month for device payments which is pushing their total receipts from customers back up. Three of the four carriers have adopted a new metric – average billings per user (ABPU), which also accounts for installment payments, as shown in the chart below:ARPU and ABPU

The chart is a little busy, but hopefully you can see that, in every case, the ABPU figure is above the traditional ARPU figure and, for the most part, these numbers are increasing even as ARPU is falling. The one exception is Sprint, which is seeing an ever higher percentage of its total device base shift to tablets, which have a much lower spend level associated with them than phones and that’s dragging down overall ARPU.

The other major financial impact of this shift is the positive impact on margins in the longer-term. That’s much harder to tease out, so I won’t show it here, but all the carriers are also seeing an improvement in margins as a result of the decline in subsidies. That’s a good thing too, because their underlying margins have come under pressure from the increasingly aggressive competition in the market, which is pushing prices down even beyond the adjustment for removing subsidies.

A win/win – so far

At least so far, it looks like the end of subsidies is working out well for operators, device vendors, and consumers. Device sales are actually up, despite some worries they might decline, and consumers now get greater transparency over the true costs of both devices and services and greater freedom to switch between carriers. The only potential downside is the same risk I talked about in that earlier piece: once consumers get used to the idea of paying for devices this way, certain device vendors might decide to cut out the middleman entirely. I talked about Samsung and Apple as two of the most obvious vendors to do this, but of course we’ve been hearing rumors lately about Google launching some sort of mobile virtual network operator (MVNO), which could be particularly interesting if paired with Nexus device sales on installment plans. We’ve seen an iPhone for Life plan and other leasing options from Sprint, and all this leads me to believe that – if they wanted to – Apple or other vendors could still come in and take over the primary customer relationship, which might well have negative implications for the carriers over the long run.