Mobile Equipment Installment Plans Apparently Working Out as Planned

AT&T expects total AT&T “Next” installment plan sales to be about 50 percent of all devices it sells in the quarter. That is one measure of how fast equipment installment plans have become a favored way for U.S. mobile service providers to encourage smartphone sales while reducing the financial impact of device subsidies.

Qualified customers are eligible to purchase handsets by making a down payment at the time of activation or upgrade and agreeing to pay the remaining balance in a series of 24 installment payments added to their monthly billing statement.

The installment plan impact on revenue and earnings has been nearly exactly as expected.

Verizon had indicated that its guidance for EBITDA growth and margin expansion for wireless and consolidated results in 2014 would hold true with or without the impact of installment plans, an indication that the overall effect is mostly revenue neutral, and margin neutral as well.

The key difference between a traditional subscriber and a subscriber on an installment plan is the amount of revenue booked for a device when it is sold.

The one short-term adjustment will be a near-term inflation of “device” revenue and a corresponding dip in “service” revenue, until the change mostly is finished.

Under an installment plan, the carrier recognizes something close to the full amount of the device as equipment revenue, instead of realizing that revenue over the life of a two-year service contract.

The big change is that device revenues will climb, while service revenue declines by the amount of lower recurring charges available to consumers on such equipment installment plans. For Verizon, that might mean a boost of 2014 equipment revenue of perhaps $1.2 billion, according to UBS equity analyst John Hodulik.

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Service revenue for Verizon in 2014 might dip $500 million.

Hodulik has estimated the Edge plan will boost Verizon Wireless earnings (EBITDA) by perhaps 1.6 percent. The Edge plan also might boost consolidated revenue growth by 0.6 percent—EBITDA by 1.6 percent and earnings per share 3.2 percent.

But free cash flow might decline by eight percent.

The AT&T Next program likewise has been expected to increase device revenues and reduce recurring service revenues for AT&T. Earnings (EBITDA) might grow.

So far, those predictions have played out largely as expected. On a net basis, overall revenue from devices and service is roughly flat to slightly up.  

At least so far, it appears the shift away from bundled plans with device subsidies is proving to be revenue neutral or slightly better. That is not a bad outcome, from a mobile service provider's perspective.