Have U.S. Carrier Profits Peaked?

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Has wireless earnings before interest, taxes, depreciation and amortization (EBITDA) growth in the U.S. peaked? Investment banking firm UBS believes so. However other metrics that drive financial value come into play as well; that’s according to a new report from USB titled “Wireless clouds starting to gather.”

Unlike other developed wireless markets around the world, the U.S. has seen dramatic growth in EBITDA per POP over the past six years, despite the fact that the industry has essentially gone from a two player market to a four player market with the emergence of T-Mobile and Sprint as competitive factors. UBS believes this will begin to impact the financials in 2017.  

Over the past two years, wireless EBITDA growth has generated more than 100 percent of consolidated EBITDA growth for the four nationals. “Our models reflect 3 percent industry EBITDA growth in 2017, driven by T-Mobile and Sprint while wireless EBITDA remains flattish at AT&T/Verizon (implying the majority of consolidated EBITDA growth is coming from the wireline and other segments, which may prove to be too optimistic),” writes analyst John Hodulik.

However, this wireless EBITDA growth is not sustainable. “With 65 percent of the base under installment plans and 80+ percent of new sales taking equipment financing, we believe the boost the carriers have enjoyed will begin to abate. Savings from lower volumes, driven by record low handset upgrade rates and churn, are also unlikely to improve,” according to Hodulik.

Industry upgrades and churn have likely bottomed as low handset upgrade rates drive low churn. Slower changes in smartphone technology and more importantly, the move to handset financing plans means consumers now hold onto their device longer, an average of nearly four years for an iPhone, for example. “The 20.2M postpaid smartphone activations for the Big 4 in 2Q was the lowest since 2Q13 despite the fact that smartphone sales now represent 95.7 percent of handset sales – a new high,” according to UBS.

As wireless transitions to include video, that benefits tower operators; tower operators and spectrum holders like Dish Network should profit from increased traffic on mobile networks as bandwidth suppliers. Overall, “Spectrum deployments, rising data traffic and new technology upgrades should continue to benefit … towers.”

“While competitive intensity in U.S. wireless continues to ratchet higher — most recently with unlimited  data — financial metrics appear to tell a story of protected monopolies, large moats and ATM-like cash generation. The variance between what is happening on the ground and what is portrayed by the [profit and loss statements] is unsustainable and, we believe, will begin to give way in 2017 as carrier financials begin to reflect the difficulties of operating in a four player market,” concludes UBS.

Carriers will presumably bristle at the findings; generally executives of the big four say the rise of the IoT and sectors like autonomous cars have the potential to generate new opportunities for data carriage.

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