The U.S. mobile phone industry has kicked into hyper-competitive gear. The latest round in the super-heated battle between the major cellular carries involves installment payment and early-upgrade plans for smartphones.
Hardly a day passes without one of the major carriers introducing a new plan or wrinkle. A few weeks ago, T-Mobile introduced a $5 iPhone 6S leasing program. Not to be outdone, later that same day Sprint rolled out its own $1 program! Today, T-Mobile updated their promotional program.
Understanding Carriers Competitive Smartphone Pricing
As we discussed in the previous blog in this series about the new wave of smartphone pricing, this hyper-competitive dynamic is creating great pricing options for consumers, but it also creates a painful level of complexity. In this blog, we’ll review the carrier side of the coin: How the carriers are trying to use these programs to gain a competitive advantage but are also creating billions of dollars in new risk for themselves.
A key feature of the carriers’ new plans is the “early upgrade” option. Most of the plans allow customers to upgrade before they have finished paying for their device. Basically, customers give back their devices and “walk away” from the remaining payments – and usually walk straight to the counter to buy their next one.
With these plans, the carriers are surrendering a portion of uncollected device revenue in exchange for a used phone. In order for the carriers to make up the revenue lost, they must sell a used phone for the same amount of money that they otherwise would have collected through the remaining payments. It’s amazing to think, but a very large portion of the wireless carriers’ future cash flow is becoming tied up with their ability to sell used phones in the future.
In their last SEC Filings, the top four U.S. carriers disclosed that they have more than $6 billion worth of accounts receivable that will be “exchanged” for phones if customers choose to upgrade when they are eligible. $6 billion! But that’s only the start of something big. The analytics team at HYLA Mobile, using our Risk Management Solutions, is projecting this market will grow to more than $16 Billion by 2018. Now, those are big numbers!
Carriers Require Different Amounts to Upgrade the Same Devices
Ultimately, the carriers’ ability to collect this value will depend on how much they can reap from the used devices they collect in exchange for those billions of dollars. It also creates accounting challenges as revenue recognition and reserve levels become dependent upon forecasts for the future value of used devices. HYLA Mobile has been helping the carriers, insurance companies, and others to improve their accuracy in forecasting these residual values and enabling them to de-risk their balance sheet reserves.
As you may have noticed, the different payment plans require that customers pay off different amounts before they can turn-in a phone and upgrade. This is an indicator of what the carriers think the phone will be worth and what they can sell it for. The table below shows an example using the iPhone 6S and how much in payments the carrier is writing off if you upgrade 18 months into the program. You can see that T-Mobile and Sprint are more aggressive than AT&T and Verizon. Not only are billions of dollars now at stake, it’s also a situation where some of the carriers are being more aggressive than others and may be even more challenged to ultimately collect the billions that are owed to them.
How Risk Management Solutions Help Carriers Navigate Risk
HYLA Mobile is pioneering Risk Management Solutions to help wireless carriers and device OEMs successfully navigate these new and large risk factors and win in this new competitive dimension. Our in-house data sciences team has created the first commercially available residual value forecast tool in the wireless industry. In ascertaining the residual value associated with thousands of SKUs, the HYLA Risk Management Solutions suite considers several factors, such as historical pricing behavior, ASPs, Global Demand, Social Sentiments etc, and deploys advanced statistical methods and prediction models. These tools are being used by key industry players to understand these new risks, manage them with demonstrable independent data, and profit from them.
In the chart below, we have overlaid HYLA Mobile’s predicted values to our 18 month iPhone upgrade example. As you can see, HYLA’s predicted residual values indicate a few of the industry players may be facing situations where they won’t be able to fully recover their value and will ultimately be forced to adjust their pricing schemes,face significant write-offs or worse restate earnings.
Indeed, in the race to keep and acquire more customers, the carriers are risking a significant chunk of uncollected revenue and banking on their ability to sell used phones in the future. But this gamble could pay off. In fact, it may not be as big a gamble as you’d think. The aftermarket for used cell phones is huge and shows no signs of shrinking. Using HYLA’s Risk Management Suite, carriers and other industry players can maximize this revenue, improve their accuracy and let their financial communities be at ease about the fact that sophisticated third party solutions are being used to “certify” the financial methodology being used to recognize and reserve for future revenues.
As we noted in the first blog in this series, through the trade-in programs that HYLA Mobile helps manage for carriers and retailers, nearly 24 million used devices have been redistributed to people around the world. The early-upgrade plans the carriers are now offering certainly attract consumers who want to have the newest devices as soon as they’re available, but they may also change customers’ outlook on used devices, prompting them to realize that old smartphones still have value.
Of course, we have to wait to see how it all plays out: either the carriers will be applauded for capitalizing on this new frontier, or some will be smarting from big write-offs.