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May, 2012

Smart Phone Subsidies, Prepaid Pose Key Issues for Mobile Service Providers

Posted by IVR Technologies, Inc. | Convergent Billing - VAS


Smart phones represent a bit of a conundrum for mobile service providers. On one hand, smart phones drive sales of mobile data plans that are the primary source of new revenue at the moment. On the other hand, most consumers do not want to pay full retail prices for the latest devices, preferring service contracts that amortize the cost of a device over time. But that raises service provider operating costs, since the subsidies typically are booked as a “cost of sales.” Such contracts also reduce customer churn. So many service providers continue to experiment with greater use of prepaid mechanisms to avoid the device subsidies, at the risk of earning lower average revenue per user, and raising the risk of customer churn.

But there are signs of coming change. Executives at AT&T, for example, actually plan to manage new smart phone sales in 2012, in large part to manage the cost of the subsidies such devices require. AT&T and other firms probably also will try to create incentives for users to buy less-costly devices (which require smaller subsidies by the service providers).

Service providers will move deliberately, to avoid any sudden moves that produce major changes in consumer behavior. Verizon Wireless, for example, will add a $30 upgrade fee for existing users buying new smart phones, a step that might add about $1 billion in incremental new annual revenue.

Some service providers are talking about ending all device subsidies, moves that will be dangerous in markets where most new accounts and devices are sold with the subsidies in place. The decisions will have to handled carefully, given the important role smart phone accounts now play, and the higher revenue those customers represent.

Smart phone sales to new postpaid subscribers represent 48 percent of device sales, up from just 30 percent in 2010, according to a new survey by PwC of eight U.S. and Canadian service providers. Existing customers upgrading to smart phones also represent 51 percent of total smart phone sales, up from 36 percent in the 2010 survey. The number of total postpaid subscribers using smart phones was reported by the service providers as representing 37 percent of customers, up from 23 percent in the 2010 survey. The percentage of prepaid subscribers using smart phones historically has lagged behind adoption rates of postpaid users (for a number of reasons) and was eight percent of prepaid users in the 2011 survey. The average postpaid customer revenue was $56 per user, per month, as compared to $55 in the 2010 survey. The average revenue per user for smart phone plans was reported as $83 per user, per month. The study also shows prepaid average revenue per user of $20.89, which is down from the 2010 survey response of $21.39. For companies with revenue less than $5 billion, prepaid ARPU averaged $27.23, which is also less than the $30.19 average in the 2010 survey. You immediately will see the problem: as prepaid customer counts grow, average revenue per user will drop significantly. The PwC analysts argue that the results “are representative of a significant, ongoing paradigm shift for the North American wireless industry.” Specifically, they argue, “as the industry continues to mature, prepaid and mobile broadband services represent increasingly-important revenue opportunities for operators.” But there are challenges. In addition to the significantly-lower average revenue, smart phone subsidies are a growing issue. The average subsidy cost per handset upgrade reported by the responding companies was $70 for feature phones and $280 for smart phones. As sales shift towards more costly smart phones, the financing of subsidies becomes a difficult and costly proposition. Also, the ongoing subsidy of smart phones reduces their perceived value to the end user and can cause sticker shock when devices need to be replaced following damage or failure, PwC argues. For this reason, some mobile operators have begun to experiment with higher price points, raising retail pricing from the popular $199 level to $249 or even $299 for some smart phones. Prepaid plans, including prepaid plans with data service components, represent a significant and growing portion of revenue as consumers continue to trend towards less expensive, no-commitment wireless plans. But there is a huge tension here. Postpaid service contracts continue to be a popular mechanism for attracting and retaining subscribers who do not wish to make large, up front investments in costly smartphones. Prepaid plans shift the full burden of device costs to the customer. But average revenue per user will fall. On average, 29.2 percent of total service revenue was generated by prepaid plans as compared to 22.5 percent in the prior year survey for all responding companies. While the percentage of total service revenue attributed to prepaid plans has been increasing, the average revenue per user slightly declined to $25 as compared to $26 in the 2010 survey. Similarly, prepaid revenues from SMS text data significantly decreased as a percentage of total prepaid data revenue to 36 percent from 54 percent in the 2010 survey.

At some point, service providers will want to create new mobile data plans as well, to create incentives for users to add tablet devices, for example, to their existing accounts. Family plans historically were important because they drove mobile services in the “teenager” market, the last remaining untapped demographic once adult adoption had nearly saturated. These days, family plans are a major contributor to retention. On average, 46 percent of subscribers are on family plans in 2011 and in the 2010 survey compared with 48 percent in 2009, according to a new survey conducted by PwC. While family plans can be a slight drag on average revenue per user, they are an effective means of deterring churn since they require the conversion of an entire set of devices and customers in order to effect a change. “We also believe that family plans may also yield significant secondary benefits, particularly in terms of lower rates of bad debt and reduced per-user customer care costs,” PwC says in its report. So far, fewer than 30 percent of responding companies include the use of wireless cards, wireless data dongles, or embedded devices such as tablets as part of postpaid family plans, but PwC thinks that will change. As carriers begin to offer more incentives for multi-device data plans that resemble the existing voice and messaging buckets of service, PwC expects the percentage of users on family plans to increase in 2012. About 44 percent of the survey respondents said average revenue per family plan subscriber ranged from $51 to $60. In the 2010 survey, 50 percent of respondents cited an average revenue range from $51 to $60 for family plan accounts. That suggests overall family plan revenue is declining. But it is possible, perhaps even likely, that family data plans will reverse the trend, even as more “lighter users” are added to such family plans. In general, family plans still appear to be an effective way to increase the length of subscriber relationships and reduce churn, as churn continues to trend down for family plan customers. The PwC survey results reflect the participation of eight US companies, including three of the four largest wireless operators by revenue and subscriber base, as well as four major Canadian wireless companies, including the three largest.

Source: Carrier Evolution


IVR Technologies, Inc.

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