AT&T (
T
), which primarily competes with Verizon (
VZ
) and Sprint (
S
) in the wireless business, has recently increased its early
smartphone upgrade fee from $75 to $200. Can this help AT&T in
improving its mobile phone revenues or will it lead to further
customer dissatisfaction? Below we discuss how this move may affect
the company.
iPhone customers are special
AT&T has indicated that the current price hike will not
impact the iPhone or basic and quick messaging phones. Although the
company has charged as much as a $200 early upgrade fee to many of
its customers who upgraded from the iPhone 3G to the iPhone 3GS, it
has also made certain exceptions. For some of the users who were
subscribing to expensive plans, the company extended the upgrade
eligibility window for the iPhone 3GS. Also, during the launch of
the iPhone 4, AT&T allowed some customers to upgrade for
free.
This clearly indicates that the company wants to keep the iPhone
subscriber base satisfied as the iPhone has been one of the prime
growth drivers for AT&T's wireless business.
Even if 5% of AT&T subscribers upgrade early, stock
upside due to increased fee is highly limited
Early smartphone upgrades are only limited to customers who are
either lured by a new smartphone in the market and cannot wait till
they are eligible for an upgrade or have their smartphone damaged
after expiration of the warranty period. These customers are likely
to constitute a small fraction of AT&T's total subscriber
base. If we assume that 5% of AT&T's subscriber base opts
for early upgrades annually, this amounts to a little less than
$600 million in incremental mobile phone revenues as a result of
the recent fee hike. This results in a negligible upside of 0.5% to
the company's stock price.
Stock downside possible if customer dissatisfaction
increases
The above calculations inherently assume that AT&T's
subscribers will readily accept the fee hikes. However, this move
by AT&T can trigger subscriber dissatisfaction, and those
willing to go for a new device may prefer it from another carrier.
Possible subscriber migration can further limit AT&T's upside
and may even mitigate positive revenue impacts of higher fee.
You can modify our forecast for AT&T's mobile subscriber share
below to see what the impact on AT&T might be.
You can see
the complete $37.91 Trefis price estimate for
AT&T here.
AT&T increases upgrade fee to $200 for some
smartphones