The debate over device subsidies has hit a fever pitch with carriers struggling to make the economies of smartphones jibe with their bottom line. However, a new report from Macquarie Equities Research seems to indicate that as carriers continue rolling out LTE networks and corresponding LTE-enabled devices, the need to curtail device subsidies could lessen – at least in the short term.
The report found that that cost to deliver a bit of data over an LTE network was roughly 66% cheaper than delivering that same bit over a 3G-based network. The firm claims that in talking with carriers and vendors, the cost in capital expenditures and operating expenditures to deliver 1 GB of data over LTE is roughly $3.20, while delivering 1 GB over 3G is $9.39.
“One major takeaway is that carriers do not need to reduce subsidies currently,” the report noted. “For the moment, they are better off filling their network with more profitable LTE subs. By 2014, this will begin to change however, as cash ROIC begins to slip.”
This news would seem to indicate that carriers should continue striving to load up their device portfolios with LTE-enabled devices and continue to furiously build out LTE coverage so as to get as many consumers as possible off of legacy 3G networks. Carriers have already begun to move in this direction as investments in 3G networks are being diminished in order to support LTE expansion, while smartphone prices across LTE-enabled and 3G-only smartphones has remained tight despite the expected increased costs associated with LTE chipsets.
The ability to move consumers to LTE-equipped devices is expected to receive a boost later this year as Apple is forecast to be launching an LTE-enabled version of its iconic iPhone device. The move could hit carriers in the short term due to subsidizing the cost of the device, which if rumors are correct will have a significantly different form factor from the current 3G-only model that could result in higher costs to carriers.
The iPhone conundrum could also have an interesting impact on the prepaid space as the 3G-equipped model is now starting to trickle into that channel. Leap Wireless, which is the first announced domestic carrier set to rollout the iPhone without a contract, plans to price the 4S model at $500 and previous generation 4 model at $400, or roughly a $300 premium over contract models. Analysts have noted that the no-contract pricing would indicate that Leap is providing around $150 in subsidies per device. The carrier continues to rely on its CDMA-based 3G network for a majority of its data services, a reliance that is not expected to subside until deep into next year as it continues to slowly rollout out LTE services.
Sprint Nextel’s prepaid subsidiary Virgin Mobile USA further pushed the envelope announcing it would offer a pair of iPhone devices for a basically unsubsidized price of $550 for the previous generation 4 model and $650 for the current generation 4S. Those devices are also being offered with very aggressive rate plans that if result in strong sales could force Sprint Nextel to continue paying the increased costs associated with supporting 3G data traffic in comparison to its move to LTE, or at least have to wait until an LTE-equipped iPhone is ready for the no-contract market.
Macquarie Research that in the near term, Verizon Wireless is set to dominate the LTE space due to its broader coverage as well as to benefit most from the cost benefits of the technology. The carrier is also better positioned to handle the continued erosion of voice-based revenues as it currently does not rely on those contributions as much as rival AT&T Mobility. The research firm noted that voice services accounted for $31.63 in average revenue per user for Verizon Wireless during the first quarter, compared with $44.75 at AT&T Mobility.
Verizon Wireless reported that 9.1% of its customer base was using LTE-equipped devices, while AT&T Mobility was at 4.7% at the end of the first quarter. Macquarie forecasts those numbers to increase to 21.4% for Verizon Wireless and 15.4% for AT&T Mobility by the end of the year. Those customers are also using nearly twice as much wireless data as consumers with 3G-only devices (roughly 1.4 GB per month for LTE compared with .78 GB per month for 3G) at the end of the first quarter, with LTE traffic representing 30.3% of Verizon Wireless total smartphone traffic and 15.1% at AT&T Mobility.
Bottom Line: The current subsidy dilemma remains a sticky wicket for wireless carriers, though the spectral enhancements embedded in LTE would seem to provide a short-term solution for operators once they garner enough coverage from those networks. However, care must be taken in being to forceful trying to migrate customers to LTE as network coverage is still not equal to 3G services and customer satisfaction could be impacted.
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