Feature Article

August 08, 2014

Device Sale Practices Now Temporarily Distort US Mobile Operator Revenue

U.S. mobile “services” revenue declined two percent in the second quarter of 2014, but total revenue, including device sales, continued to climb. The exception was Verizon.

Total Verizon revenues were $21.5 billion in second quarter of 2014, up 7.5 percent year over year.

Service revenues in the quarter totaled $18.1 billion, up 5.9 percent year over year.

Mobile operating income margin was 32.5 percent and segment EBITDA margin on service revenues was 50.3 percent. This compares with 32.4 percent and 49.8 percent, respectively, in second-quarter 2013.

At the other three national service providers, service revenue declines were the story, in part because of a significant shift in the way device sales are recorded, and in part because T-Mobile deliberately is sacrificing profits to gain share, attacking the market with lower prices that AT&T and Verizon have responded to, with offers of their own.

Sprint has responded as well, but the results are harder to discern, as subscriber losses obscure most other elements of its revenue picture.

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.

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

T-Mobile’s ARPU is falling rapidly, but average billings revenue is growing.

AT&T mobile service revenue decreased 1.4 percent in the second quarter, while equipment revenue grew 44.8 percent, another example of how unbundling device purchases from service plans is changing the way revenue is booked.

That is one of the statistical anomalies AT&T, T-Mobile U.S. 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 U.S.), 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 U.S. Most would attribute the T-Mobile U.S. margin hit to aggressive retail promotion, allowing the company to take market share.

Aside from that impact, a resetting of comparables in the service and device revenue categories is happening. That will at least temporarily reset revenue baselines for the leading U.S. mobile service providers. 

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Edited by Adam Brandt

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