‘Aggressive’ handset subsidies helped boost wireless subscriptions: analysts

The significant number of new postpaid wireless customers reported by service providers in the second quarter of 2016 can partly be explained by the aggressive push toward handset subsidies as new phones enter the market and drive demand, according to analysts. Wireless providers reported new postpaid accounts in the second quarter that blew away analyst expectations, with a year-over-year increase of 35,000 among the incumbents. Rogers Communications Inc. reported 65,000 net new postpaid wireless subscribers in the quarter, compared to 14,000 in just the previous quarter, while BCE Inc. saw 70,000 for the quarter compared to 61,000 in the same period last year. Telus Corp. added fewer subscribers (61,000) compared to the same period last year (76,000), but it was 53,000 more than the first quarter of 2016. The 196,000 net additions for the quarter were 76,000 more than RBC projected. “Heavier subsidies, potentially in advance of the Samsung and iPhone 7 launches, which may have stimulated new demand in the wireless market,” was one potential reason provided by RBC’s telecom analyst Drew McReynolds, who wrote in an industry review Tuesday that he could only “hypothesize” why there was such a significant increase. Rob Goff, head of research and a telecom and new media analyst at Echelon Wealth Partners in Toronto, agreed in an email that “the stronger-than-expected market growth” could partially be attributed to “aggressive handset subsidies.” For example, in June, Telus introduced a new smartphone tier called Premium Plus, which offers the carrier’s highest level of device subsidy. Total wireless subscribers for Telus at end of the second quarter were at 8,427,000, with total prepaid being 1,051,000. Rogers ended the quarter with a total of 9,962,000, with total prepaid standing at 1,612,000. Meanwhile, Bell had a total of 8,280,693 wireless subscribers, with prepaid at 809,624. In an email to The Wire Report, Iain Grant, a Seaboard Group Inc. analyst, said that Apple’s new phone will help drive demand, but subsidies are just “a carrier-specific response to market conditions and opportunities.” The subscriber bump in the quarter follows an increase in mobile prices across all major carriers. In a January research note, Scotia Capital’s Jeff Fan attributed the price increases to “the heavy handset subsidies in the fourth quarter” that he described as “intensely competitive.” He added that price increases might help the carriers recover some of the subsidies. The push to subsidize handsets is in contrast to what’s going on south of the border, with reports that U.S. companies are moving farther away from the practice while being more transparent about device costs. Troy Crandall, a telecom analyst at 3Macs, said in a phone interview the fact that net wireless numbers are up but gross subscriber numbers are down year-over-year — as is the case for Telus and Bell — shows that the companies lost fewer subscribers for the period. “It’s not really a whole bunch of subscribers jumping into the market,” Crandall said. “What it’s telling you is… either they’re doing better at customer service or they’re spending more to retain the customers they have, and I think you’re seeing a combination of the two.” Manufacturers discounting older generation phones, which would mean savings passed onto customers, could also be a driver for postpaid wireless additions, according to Crandall. He added these customers would probably be the ones on the edge of purchasing, a carry-over from the double-cohort or those who’ve still been hanging on to their old devices. “With these additional discounts, that might’ve been sufficient to drive them. So I think you’re going to see that a little bit in this quarter, too,” Crandall said. Desmond Lau, a research analyst at Veritas Investment Research Corp. in Toronto, said in an email that Rogers’ improvement — the biggest, with 41,000 more than the same period a year ago — was due to its investments in reducing churn, which included having “customer-friendly roaming packages and allowing customers to contact Rogers through modern mediums,” such as Facebook Inc.’s Messenger service. In a July 22 note following Rogers’ second-quarter earnings, Canaccord Genuity analyst Aravinda Galappatthige noted a “double-digit growth in subsidies per handset” that came despite the company’s wireless earnings before interest, taxes, depreciation and amortization (EBITDA) falling “well below” expectations. A sticking point for the quarter has been weaker revenues from wireless equipment, because fewer people were upgrading their phones, according to Crandall. He chalked that up to the current generation of iPhones, for example, being at the tail end of their life due to the impending release of the new crop; handsets costing more because of the low Canadian dollar; and carriers promoting their bring-your-own-device plans more. McReynolds said in his report that additional reasons for the growth in the quarter could be analyst models that may not have considered a “natural normalization of wireless activity” after the double cohort, the expiration of double-cohort related promotions and “greater in-quarter contribution/impact” from Rogers’ activity, including home phone, a bonus 3GB tablet promotion and its rewards program. — With reporting by Ahmad Hathout at ahathout@thewirereport.ca and editing by Charelle Evelyn at cevelyn@thewirereport.ca

‘Aggressive’ handset subsidies helped boost wireless subscriptions: analysts

News | August 12, 2016

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