Why Wireless Carriers Are Raising Rates

By Markets Fool.com


Image source: Getty Images.

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If you've been enjoying the lower rates from wireless competitors as they compete for your business, you may be running out of time to take advantage. Carriers are getting stingier with their promotions and raising their rates for new customers. Part of the reason may be that U.S. wireless carriers saw the least amount of switching in 15 years, according to figures BTIG compiled for theFinancial Times.

Verizon (NYSE: VZ), AT&T (NYSE: T), T-Mobile (NASDAQ: TMUS), and Sprint (NYSE: S) have been aggressively battling for two years, but most are now working to keep the customers they do have versus drawing subscribers away from competitors. That may allow them to increase their average revenue per customer as they drop aggressive promotions to attract new subscribers, and some carriers have taken to raise their standard rates.

A look at churn

As mentioned, it seems carriers are doing a better job of holding on to the customers they do have, particularly profitable postpaid phone customers. Take a look at the postpaid churn rates for each of the four major carriers.

Carrier

Q2 2015

Q1 2016

Q2 2016

AT&T

1.01%

1.10%

0.97%

Sprint

1.56%

1.72%

1.56%

T-Mobile

1.32%*

1.33%*

1.27%*

Verizon

0.90%

0.96%

0.94%

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Data source: company reports. *Postpaid phone churn only.

Three of the four major wireless carriers improved or maintained their churn rate from the year-ago period. AT&T says its 0.97% churn rate was its second lowest ever, and Sprint and T-Mobile each said they just posted their lowest postpaid phone churn rates in history. Verizon pointed to increased churn in tablets following a free tablet promotion two years ago as a reason for a rise in this metric. Phone churn remains healthy.

Indeed, it looks as if just about every carrier is successfully holding on to more postpaid phone subscribers. The lone exception may be AT&T, which is still struggling with postpaid phone subscriber losses. Last quarter, the carrier lost 180,000 postpaid phone subscribers. All the other carriers had positive postpaid phone net adds.

The option to increase prices

T-Mobile and Verizon have already taken steps to increase their pricing. With their price increases, they also bumped up the data allotments, but most customers will pay a higher price.

T-Mobile made the move at the end of last year. It kept its lowest tier at $50 per month, but its two higher tiers moved up from $60 to $65 and from $70 to $80. It also increased the monthly price of its unlimited data plan from $80 to $95. Still, the company's adjusted average revenue per user remained flat both sequentially and year over year because of "continued strategic focus on family plan penetration, promotional activity, and Un-carrier initiatives." That means T-Mobile can continue to expand its promotions, or slow down and see ARPU rise.

Verizon just made changes to its pricing last month. All of its plans increased $5 to $10. The impact of the price increase will be seen on the company's third-quarter earnings.

Even fourth-place Sprint is considering getting rid of its biggest price promotion that offers to "cut your bill in half." On Sprint's fiscal first-quarter earnings call, CEO Marcelo Claure told analysts: "The 50% off promotion is not going to go on forever, right? There will be a time in the not so distant future in which we're going to go back to traditional rate plans and we are doing some testing of other rate plans." Sprint largely competes on price, so that's a strong bid of confidence in the market.

AT&T has mostly kept its pricing the same, and management hasn't hinted at its plans. Considering it's still losing postpaid phone subscribers to the competition, investors shouldn't expect anything in the near future.

Two sides to a coin

Seeing the lowest switching rates in over a decade means it's becoming more difficult for carriers to add new customers. After a couple of years of heavy promotions that drove down average revenue per user, the carriers seem content to grow through price increases instead of new subscribers. Investors should see average revenue per user start to increase in the near future, but subscriber growth may decline.

One major factor that could completely upset the current balance in the industry is another blockbuster smartphone release. When the iPhone 6 came out in 2014, nearly every carrier ran a promotion around the device because of huge pent-up demand. With device upgrade cycles extending, carriers could see a mega-upgrade cycle if a compelling new device hits the market. Since most customers switch carriers when they switch devices, it could cause a major land grab.

Until then, investors should see steady revenue improvement from the carriers that are able to increase their prices as churn remains low.

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Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends T-Mobile US. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.