Key Points:
- Q2 postpaid phone subscriber trends were as previewed. Peak iPhone subsidization has passed for now.
- Given the moderation in hardware revenue and softer traffic to Apple stores (-1%), we expect a softer number for Apple’s America and iPhone segment revenue.
- Reducing the size of Apple’s “bite” has been the industry’s intent. That’s more pressing today given the spike in memory and processor prices.
Q2 postpaid phone subscriber trends were largely as previewed. Gross adds were just modestly above last quarter’s level. T-Mobile was the share taker on a gross- and net-basis. Verizon’s net additions were better-than-expected, but it was still the doner. Industry-wide lines / sub growth continued at LQ’s pace (+4.6%). Lastly, the YoY decline in equipment revenue suggests a softer iPhone quarter (as previewed). Additionally, despite memory cost inflation driving up future handset prices, the telco operators aren’t planning to increase their contribution. That implies higher prices for consumers, given price elasticity, that’s fewer iPhone sales in the quarters ahead (than it would be without the inflation).
The lessening of the operators’ reliance on handset subsidies was their intent this year and that was achieved this quarter. (See our review of Q1 here.) The industry’s competitive intensity and encroachment has not eased, and convergence continues unhindered; new fiber continues to be trenched, fixed wireless continues to expand, and satellite is now being promoted on national TV. Bundled discounts are the incumbents' answer. Charter CFO Jessica Fisher said, “We continue to lead the market in converged connectivity pricing at connect and have higher market share than our fiber competitors, even in our mature fiber overlap.” However, the ways of competing are shifting away from hardware and onto ARPU. Net-net, the operators are striving for better LTV and FCF.
On the topic, T-Mobile’s CEO Srini Gopalan said, “So when we talked earlier in the year, just to be clear, what I talked about at that point was not moving away completely from device subsidies but more rounding off the value proposition, which is now that we're in a place where we have so many elements to our value proposition, how do we make sure that we have a balanced articulation of the 250 reasons why someone should be choosing T-Mobile. Now we started off with a big network campaign, articulating the network reasons why. Over the year, we've had Member Month, which brings together all of the benefit reasons why we're now running the 250 reasons to choose T-Mobile campaign. So our effort really is to broaden out the reasons why people should choose T-Mobile rather than purely a free phone. Of course, we'll be competitive on things like subsidy, but that's not kind of what we're leaning in on... Now as we look forward, what we're seeing is clearly the memory price increases are resulting in higher prices for smartphones across the board. Our intention, consistent with what we've said is not to increase our subsidy levels. Now that's going to mean that customers will have to pay more. And that's just the resultant of that dynamic.”
Our preview highlighted Verizon’s new Simplicity (a low monthly) plan (June 16th launch) and on the offering, CEO Dan Schulman said, “As we mentioned in my remarks, for the past 2 months, we've seen positive growth in our new accounts. And I would expect that for Q3, you will see positive new account growth as well. And the quarter is off to a strong start, quite frankly. We are seeing new segments being penetrated based on the new value proposition. We're getting a lot more 1- and 2-line accounts, a lot more of the youth market, a lot more diverse accounts coming in. And I would also just say like every new account onto Simplicity is basically subsidy-free, which, of course, that's just a huge structural improvement to our financial model. And it goes to your point around competition. I think the basis of competition is fundamentally changing. It's moving away from subsidies, at least for us, and it's moving to the overall end-to-end customer experience, like what do the products and services look like? What does your servicing look like?... And there's a new basis of competition going on, that is much more structurally beneficial to Verizon. And frankly, we're seeing that throughout the industry.”
