In the last two weeks both Verizon (VZ) and Sprint (S) have increased the price of their unlimited data plans by $20 and $10, respectively. For Verizon, a company that prioritizes quality, this isn’t a big surprise, but it is for Sprint, a company that has tried tirelessly to essentially give wireless services away for free in hopes of gaining new subscribers.
While sudden price hikes do risk subscriber satisfaction, the bigger problem is that the entire model is flawed and unsustainable, thereby posing a great risk for carriers that sell unlimited data plans.
Why Unlimited Data Plans Are Unsustainable
The four U.S. nationwide wireless carriers combine to have more than 200 million customers.
For the last few quarters T-Mobile (TMUS) has grabbed just about all of the U.S. wireless industry’s subscriber growth, whereas companies like AT&T (T) and Verizon have seen an increase in wireless connections due to the rise of smart car technology and the addition of new lines.
However, there is very little customer growth upside in the U.S., a market that is essentially mature. Nowadays, if one carrier grows its customer count, it is taking customers elsewhere.
Therefore, data plan packages are one of, if not the only, legitimate drivers of growth left for U.S. wireless companies. With the consumption of mobile data on a five year compound annualized growth rate trajectory of 57% from 2014 through 2019, wireless companies selling cheap unlimited data packages are selling themselves short.
Click to Enlarge Not to mention, as wireless and spectrum networks become more congested, due to the increase in mobile data consumption, constant investments are needed to maintain networks and acquire spectrum.
Therefore, companies like Verizon, Sprint and T-Mobile that offer unlimited data packages, constantly see costs rise due to these network strains, but don’t see revenue rise from unlimited data packages, unless continuous price hikes are made.
That’s not a sustainable business model.
Who Suffers Most From Unlimited Plans?
With that said, Verizon has a business model where 99% of its subscribers do not have unlimited data plans because it is far more expensive than tiered data plans.
Therefore, Verizon’s move doesn’t affect a large number of customers, but does raise the ceiling for Verizon to hike data package prices elsewhere, while still maintaining the price advantages of tiered data packages.
Meanwhile, just about all of T-Mobile and Sprint’s customers are on unlimited data packages. Notably, the below chart reflects Sprint’s data prices before its recent $10 price hike.
Nevertheless, Sprint and T-Mobile are bound to the same network strain and spectrum requirements as its competitors. The only difference is that neither Sprint nor T-Mobile collect higher revenues as data consumption rises. Instead, both carriers accumulate higher costs.
For this reason, unlimited data plans are an unsustainable business model, as both T-Mobile and Sprint will continuously have to increase data plan prices.
This will risk customer satisfaction levels, and while both carriers still have far cheaper services than either AT&T or Verizon, it’s the fickleness of prices that could eventually frustrate customers, and lead to lost business.
In other words, so long as Sprint and T-Mobile maintain an unlimited data plan business model, it is hard to be too bullish long-term. This is a business model that will eventually come back to haunt T-Mobile and Sprint, whether it be continued free cash flow losses or angry customers once data limits are eventually implemented.
With there being very similar questions surrounding the sustainability of iPhone leasing prices, T-Mobile and Sprint have put themselves in quite a predicament long term, one that’s unlikely to end well for either’s stock price.
As of this writing, Brian Nichols was long shares of T Stock.
