The Trouble With Wireless Trade-In Programs

Growth will still be hard to find in the saturated market

   
The Trouble With Wireless Trade-In Programs

T-Mobile U.S. (TMUS) and Sprint — recently acquired by Softbank — have been aggressively promoting their trade-in programs, which allow customers to switch phones before their contracts are set to expire.

And the reason is simple: They are having the most difficulty in preventing those customers from quitting their services.

The post-paid churn rate in the latest quarter for Sprint was 1.89% — up from 1.69% a year earlier, and by far the highest of any of the major carriers. Meanwhile, T-Mobile’s churn rate was 1.58%.

The numbers are lower for the two largest carriers. AT&T (T) only had a churn rate of 1.02% during the most recent period, while Verizon’s (VZ) measure of customer defections was 0.9%.

Then again, Verizon and AT&T are still offering similar plans, although they all have slightly different names. (There’s “Jump”  from T-Mobile, “One Up” from Sprint, “Next” from AT&T and “Edge” from Verizon. You can click here for a chart that compares the particulars of each plan.)

But the purpose of these early upgrades is the same: To keep fickle customers from leaving.

“It’s a very low-cost way to assure customer retention,” Rob Enderle, an independent technology analyst based in San Jose, Calif., said in an interview. “And it might be slightly revenue positive.”

Many fickle customers are “early adopters” — people so passionate (or crazy) about technology that they have to be the first among their friends and family to have the latest and greatest gadget.

This small slice of the market is likely why even Apple (AAPL) has joined the fray by recently announcing a trade-in program. And rival Samsung (SSNLF), of course, is doing the same thing.

What percentage of customers fit this mold is tough to say, of course. Independent telecommunications analyst Jeff Kagan, for one, figures it may be about 25% to 30%. As a result, the plans may work for a “slice of the pie,” he said.

Still, the impact will likely trickle beyond the select few and the smartphone market may evolve along the lines of the car market. A few consumers will pay big bucks for the latest and greatest models. When they see the next big thing, they will trade their phones in — and those phones will be resold to a second group of consumers who are content to buy last year’s model. The phones will trickle down the market until they wind up being recycled.

Making it easier for people to switch phones is a natural evolution for the wireless industry, considering it’s so saturated that it has “possibly reached a level where most of the addressable market has a mobile device and service,” according to a survey by PricewaterhouseCoopers. Penetration rates already exceed 100%.

But these new programs could speed up the commodization of the smartphone market, which in turn could force carriers to slash prices and further pressure profit margins. And that could also lead carriers to push ever-more ambitious trade-in programs.

But if all companies push even more ambitious programs, it’s hard to see any of them having much of an impact. And so the vicious cycle begins.

As of this writing, Jonathan Berr does not not hold a position in any of the aforementioned securities. Follow him on Twitter@jdberr.


Article printed from InvestorPlace Media, http://investorplace.com/2013/10/trade-in-programs/.

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