How Revenues Can Grow Even in Midst of a Price War

A key caveat for all economic predictions is that something will happen, ceteris paribus (all other things being equal). 

In real life, almost nothing is ever equal. In fact, the act of change itself changes the environment, leading to changes in behavior and outcomes. 

Likewise, it is difficult to identify the specific act of one change, such as T-Mobile US launching a pricing and packaging assault, when multiple other changes also are occurring, such as fast-growing demand for mobile data services, addition of new classes of devices to connect and key changes in retail packaging of multi-user plans. 

And that is why there actually can be disagreement about whether any such mobile pricing war actually is occurring.

Some will look at the numbers and conclude there is no mobile price war under way in the United States, despite the many changes in retail packaging and pricing we have seen over the last year.

Average monthly revenue per postpaid customer across the industry rose 2.2% to $61.15 in the fourth quarter, according to New Street Research. That is up more than $5 per user from the first quarter of 2010, when the same measure was at $55.80.

But T-Mobile US fourth-quarter and full-year 2013 results might strongly suggest there is indeed a price war going on.

In the fourth quarter, T-Mobile US posted revenues of $6.83 billion, compared with revenues of $6.19 billion in third quarter of 2012.

Adjusted earnings, though,  fell from $1.36 billion to $1.24 billion. T-Mobile US average revenue per user also slipped.

Average revenue per user for T-Mobile US branded postpaid customers slipped sequentially from $52.20 to $50.70. In other words, as customers adopt T-Mobile’s lower cost plans, ARPU drops and that makes it harder to boost earnings.

For AT&T, one might note that fourth quarter 2013 results showed AT&T lagging substantially behind Verizon Wireless, while the pace of net new customer additions dipped, year over year.

So many would say those developments are signs that a price war has not broken out in the U.S. mobile market, and that the price war is an illusion.

Such sentiments might be scoffed at, among executives at the leading U.S. mobile service providers, who seem to be pouring lots of effort into recrafting offers and retail packaging to parry T-Mobile US attacks.

Equity analysts generally do believe a marketing war is underway, and will destabilize revenues for several of the providers, if not all.

As so often happens in the communications business, multiple trends operate at once. Retail promotions offered by the leading mobile service providers are changing formal price points, even if consumers are acting in ways that do not affect recurring revenue all that much.

But U.S. mobile revenues have been a bright spot, so a marketing price war and growing revenues are not strictly and necessarily mutually incompatible. A price war could weaken either gross revenue or profit margins, or both, but in the context of a still-growing market might not necessarily lead to lower overall revenues.

In other words, a price war can exist even in aggregate market revenue grows. But the growth arguably is less than might have been the case in the absence of the price competition.

To be sure, one might argue that some of the price war is illusory. One example is the separation of device purchases and creation of new device installment plans from recurring service fees. On a formal basis, monthly costs drop when device subsidies are removed.

But many consumers choose to finance their devices using installment plans which, in aggregate, are roughly revenue neutral for the carrier offering the plans.

On the other hand, revenue is but one part of the carrier bottom line. If marketing costs rise, or churn increases, then even growing gross revenues might result in less robust returns on the bottom line.

Also, there is a secular (structural or long term trends) change underway, in addition to cyclical developments, thus changing end user demand in contradictory ways.

Higher smartphone adoption leads to higher data plan purchases, growing average revenue per device and account even if cyclical promotions might cut prices for many consumers.

Sooner or later, in a saturated market, once a player decides to operate at a lower operating margin, it triggers the value destruction in the industry, which can be sometimes devastating to incumbents, argues mobile analyst Chetan Sharma.

Reliance in India in 2002 introduced “really low cost” voice plans that hit industry revenues overall.

In 2012, Free Mobile (owned by Illiad) in France decided that it doesn’t need to operate at 30 percent to 40 percent margins and could exist, long term, with 20 percent margins.

Perhaps the evidence for T-Mobile US damaging the other leading carriers is not clear cut. AT&T’s revenue increased five percent and the average revenue per user was stable.

Verizon saw a six percent increase in revenue in 2013. Sprint revenue was flat, but Sprint also was in the midst of a major network revamp that limited its marketing in significant ways.

Customers are switching to T-Mobile US based on T-Mobile US prices. If the other carriers respond, the T-Mobile US attack becomes increasingly more difficult.
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