NEW YORK – Increasing handset subsidies by wireless carriers are putting more pressure on those company’s margins, according to a new report released Tuesday by Moody’s Investors Service.
In a special report on the U.S. wireless industry, which reflects trends seen here in Canada, Moody’s said that subsidy costs incurred by wireless carriers have increased 78% on average in the past three years for the seven largest U.S. wireless carriers by revenue.
Historically, carriers offset these expenses through cost improvements in other parts of the business, which has resulted in flat earnings before interest, taxes, depreciation, and amortization (EBITDA) margins of approximately 33% across the industry, the report says. Had handset subsidies been flat, margins would have expanded by almost 300 basis points over the past three years. And while falling handset costs could ease this pressure, relentless competition will mean carriers are likely to offer deals to attract and retain subscribers and give back any gains from lower-cost handsets.
The report also calls booming smart phone demand “a double-edged sword” for wireless providers, as while it results in higher-priced data plans that drive more service revenue, it also creates a recurring 18-24 month upgrade to new models cycle that increases handset costs. Further, heavy data traffic clogs wireless networks and requires additional network investment.
"Unfortunately, service revenues are not keeping pace with handset costs," said lead analyst and senior vice president Dennis Saputo, in the report’s news release. "As these costs continue to grow amid rising demand for smart phones, carriers will have to raise monthly charges or risk shrinking their margins."
The report contends that larger players such as Verizon, AT&T and T-Mobile USA will be better positioned to absorb these costs, primarily because of the size and scale of their businesses, as compared to smaller competitors like Sprint, U.S. Cellular, Leap and Metro PCS.
