It’s payback time for handset makers that long profited from Americans’ tendency to upgrade their mobile phones early and often.
US consumers got a taste for phone financing two years ago and never looked back. They bought fancy new devices for a few more dollars a month with no service contract attached. Now they’re holding on to their old smartphones longer than they did when they signed two-year contracts and got freebies, spelling further trouble for manufacturers like Samsung Electronics Co. and HTC Corp. that have struggled with declining sales.
“When people spend $600 to $700, they are not in the mood to upgrade every year,” said independent wireless analyst Chetan Sharma. Thrifty consumers are starting to buy devices every 20 to 24 months instead of every 15 months when carriers subsidised all of their devices and made up the cost through higher service charges, he said.
Phone financing has been popular with customers ever since T-Mobile US Inc. pioneered it in 2013. Two years later, the impact on handset replacement cycles is about to hit harder because phone financing is now embraced by a majority of consumers after telecom giants AT&T and Verizon Communications Inc. followed suit. Almost two-thirds of AT&T subscribers who bought a new phone last quarter took the carrier’s phone-financing plan.
While iPhone maker Apple Inc. — whose customers tend to be less price sensitive — has remained largely unaffected, Samsung and HTC may see the most impact, analysts said.
Holding Onto Handsets
At first, handset makers benefited from the switch to phone financing. With device fees separated out, consumers responded by moving to higher-end devices, said Roger Entner, an analyst with Recon Analytics LLC in Dedham, Massachusetts.
“The handset makers enjoyed the ride on the gravy train while it lasted; now come the lean times,” said Entner, who predicts the handset replacement cycle will lengthen to 28 months this year. “Manufacturers were delighted, but now the growth is slowing. Today, everyone has a smartphone and they are holding onto it longer.”
Samsung, the maker of Galaxy phones, is undergoing a restructuring amid increased competition in mobile phones from younger rivals like Xiaomi Corp. Mobile equipment sales at the South Korean company declined 20% in the first quarter from a year earlier. Many reasons are responsible for the drop, including China’s spending slowdown and Russia’s economic woes. The longer upgrade cycle in the US is also a factor, analyst Sharma said.
At HTC, finished goods inventory climbed to a record 2.35% of total assets at the end of last quarter — leading to speculation that its latest phone, the M9, isn’t selling well. The Taiwanese company lowered its forecast on June 5 and announced a writedown, sending the stock to its lowest point in a decade.
Representatives of Samsung and HTC declined to comment, so did Apple.
The longer replacement cycles will contribute to the expected slowdown in smartphone sales. Shipments in the US will rise an average of 5.3% a year through 2018, according to IDC, down from the 8.9% increase last year.
No More Subsidies
In a sign that the end of subsidies is on the horizon, Dallas-based AT&T asked in May that retail partners like Apple and Best Buy Co. Inc. stop offering subsidised phones with two-year contracts and to sell them on its Next financing program instead. Verizon, which has been slower to move to phone financing, expects 50% of new sales to be on its Edge instalment payment plan this year.
“What the new plans do is make the true cost of the device more obvious to the consumers, and this will encourage consumers to make more comparisons,” said Carolina Milanesi, chief of research at Kantar Worldpanel ComTech US Business.
As a result, an increasing number of consumers are opting to buy their gadgets on EBay Inc. or through specialised used-phones retailers like Boston-based Gazelle or Glyde. The number of Glyde’s used-phone sales to consumers is up 88% this year compared with the same period in 2014, the company said.
Gazelle, which started its own website in October, expects that about a third of the 500,000 used phones it will sell this year will be through the site, said Chief Executive Officer Chris Sullivan. Previously, the company sold most of its phones through wholesalers, and 20% on Amazon.com and EBay.
“Because now the phones are so expensive, people are looking for an opportunity to buy a used phone that’s 20 to 50% less than a new phone,” Sullivan said. “The carriers educated the marketplace in a much quicker way.”
The carriers also have benefited: instead of selling phones at a discount, they are collecting the full price and booking it as equipment revenue, a boost to the top line.
“It masks the service revenue pressure very well,” said Sharma, the independent wireless analyst.
In the first quarter, US carriers’ service revenue declined 1%, Sharma estimated, in part due to pricing pressure spurred by T-Mobile’s offers. Yet partly because device sales increased 41%, overall revenue increased 5%, Sharma said.
What started as a simple shift to move phone costs off carriers and onto consumers now has larger implications for the industry, said Entner, the Recon Analytics analyst.
“Slowing down handset replacement slows down new technology adoption,” Entner said. “In the long term, the industry is making a bad choice.”
©2015 Bloomberg News