U.S. Mobile Service Provider Revenue Temporarily is Distorted

It has been a little more challenging to characterize U.S. mobile revenue growth over the past couple of quarters, for reasons relating to a change of packaging strategy. A few years ago, most consumers purchased devices that were bundled with recurring service plans.

That had one implication for how revenues were booked. Now that the major U.S. carriers are moving to unbundle, selling devices separately from service plans, different accounting will come into play.

And that is going to temporarily distort revenue reporting, essentially boosting device revenue growth rates, temporarily, even if total revenue remains comparable with past periods.

So it is that U.S. mobile "service" revenues declined two percent in the second quarter of 2014, representing about $1 billion less revenue for the largest service providers. 

Total revenue grew, however, as device revenues grew more than service revenue declined, an accounting artifact, more than anything else.

In part, the service revenue declines reflect more aggressive discounting by a couple of the leading U.S.mobile service providers, but largely are caused by accounting changes triggered by widespread unbundling of device sales from service revenues.

That pattern also was seen in the first quarter of 2014,  mostly because of results at AT&T, Verizon and Sprint, according to Jackdaw Research,

The impact of device revenues can be seen in T-Mobile US average revenue per user and a new metric, average billings per user, which includes both device and service revenue.

source:Jackdaw Research

T-Mobile’s  ARPU is falling rapidly, but average billings revenue is growing. AT&T attributed the lower service revenue to major changes in the way most consumers buy devices and service.

"We are confident that what we saw in Q2 was part of the transition we had to make to go from service to equipment revenue in NEXT," said Ralph de la Vega, AT&T Mobility CEO.

NEXT is the AT&T plan that allows customers to unbundle device purchases from service plans.

AT&T mobile service revenue decreased 1.4 percent in the second quarter, while equipment revenue grew 44.8 percent.

That is one of the statistical anomalies AT&T, T-Mobile US and the other service providers will have to endure when making a shift from primarily bundled sales plans to unbundled sales plans.

On the other hand, such unbundling also increases the transparency of service plan pricing, allowing consumers to compare offers more directly, one might argue. With competition expected to increase, rather than decrease (some expected competition to decline if Sprint successfully purchased T-Mobile US), such pricing transparency likely will put even more pressure on service plan pricing.

Operating margins in the first quarter of 2014 were up sequentially for AT&T, Verizon and Sprint, but down at T-Mobile US. Most would attribute the T-Mobile US margin hit to aggressive retail promotion, allowing the company to take market share.

And that is the potential Achilles Heel of the T-Mobile US strategy. By sacrificing profit margin to gain market share, the company has to keep adding new customers at a high rate. The danger comes in the future, when growth rates slow. At that point, T-Mobile US will have to switch strategies and start to focus on profitability, which almost certainly means an end to the pricing attack.

The mobile data services revenue, nevertheless, is on track to exceed the $100 billion mark in mobile data services revenue for the first time, according to Chetan Sharma.  Data contribution to the overall revenues is now at 55 percent.

source:Jackdaw Research