Fitch: T-Mobile Alters Subsidy Model; Competitors Eye Response
CHICAGO & NEW YORK -- March 27, 2013
T-Mobile this week said it will eliminate typical two-year service contracts
while putting in place a new model to replace traditional subsidies as part of
a more simplified marketing approach. In addition, the company announced it
will begin selling Apple's iPhone, which Fitch views as critical attempts to
lure customers away from competition.
It is yet unclear what impact the elimination of T-Mobile's traditional plan
will have on the market, but we do believe T-Mobile needs a way to
differentiate itself. Historically, Verizon Wireless and AT&T have around 70%
of the post-paid share of the market, leaving the rest of the U.S. carriers to
fight over the remaining 30%. T-Mobile's new no-contract strategy may help the
company reduce its relatively high post-paid churn levels (monthly turnover)
by appealing to customers that may want to upgrade more frequently, as well as
those desiring to save money once the device is paid for through the lower
ongoing service cost.
Subsidies are onerous for all carriers but more so for those with higher
post-paid churn, including T-Mobile (at 2.5% in 4Q12 vs. 1.15% for AT&T, 0.95%
for Verizon, and 2.18% for Sprint). If offering the iPhone helps lower churn
and the elimination of subsidies are even moderately successful, the
combination may help lift T-Mobile's margins.
We note that the change in T-Mobile's service plans is not its first foray
into unsubsidized phones. Last year, the company offered a "value" plan for
subscribers that allowed them to bring their own device from another carrier
and discounted monthly plans by $20 to $30. That resulted in approximately two
million AT&T iPhones on T-Mobile's rate plans. We believe the new plans are
simply a continuation of those put in place last year, with some tweaking that
includes the elimination of subsidies.
Other national carriers will be watching closely. Operators typically adopt
successful changes, as there is nothing proprietary about these plans. If the
market moves in this direction, we believe the pricing of rate plans when
going the unsubsidized route is crucial when it comes to impacting margins for
wireless carriers. If operators price the plans too low, margins would be
pressured, and if the plans are priced too high, subscribers would not realize
value from unsubsidized plans relative to traditional rate plans.
That said, we do not believe AT&T or Verizon will scurry to replicate
T-Mobile's plan, as it would not be accretive to their margins. The scale and
lower churn of Verizon Wireless and AT&T allow them to accommodate a subsidy
model in their cost structure. Doing away with the subsidy model, while
supportive of the carriers' margins, does not appear to be something consumers
are rushing to get away from.
To be sure, Leap Wireless currently offers a lightly subsidized iPhone in the
prepaid market and has reportedly been experiencing lower sales than expected
given the steep up-front cost. Leap has cautioned it could owe Apple
significant payments as early as mid-2013 because its iPhone purchase levels
are running about half the amount of its minimum commitment to Apple.
Additionally, carriers are also taking a long-term view of the market and are
hopeful that competition among smartphone operating system platforms (Apple's
iOS, Google's Android, Microsoft's Windows, etc.) will bring that element of
smartphone costs down, thus lowering the dollar amount of subsidies.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include hyperlinks to
companies and current ratings, can be accessed at www.fitchratings.com. All
opinions expressed are those of Fitch Ratings.
Additional information is available on www.fitchratings.com.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
John Culver, CFA, +1 312-368-3216
Corporates, Telecom and Cable
Kellie Geressy-Nilsen, +1 212-908-9123
One State Street Plaza
New York, NY 10004
Brian Bertsch, New York, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.