UBS Says Move to Installment Plans for Handsets a key Driver for Wireless

The move of major U.S. wireless carriers to installment sales for handsets “has been a big driver of improved industry profitability given the accounting treatment,” UBS said Friday in a note to investors. But the plans also have a second effect, lengthening upgrade cycles for postpaid phones, UBS said. Postpaid subscribers now keep handsets for 3.3 years on average, up from 2.8 years in 2011, the firm said. “This is putting pressure on upgrade rates, which is in turn driving lower churn and fewer gross adds. We believe this will be a key theme for 1Q earnings, driving another quarter of strong sector profitability, especially at AT&T and Verizon.” At Sprint, UBS predicted low upgrade rates and churn in Q1 “will drive slower, albeit positive, sub growth.” T-Mobile will benefit with continuing strong growth, the analysts said. UBS also said it's paring back estimated handset losses for AT&T and continues to expect slight handset growth at Verizon. “In aggregate, we estimate the upgrade rate will reach a record low for the group [UBS estimates 6.2 percent], while postpaid churn continues to improve,” UBS said. “These metrics have been closely correlated for the past 2 years, and apart for record activity in 4Q14 with the iPhone 6, both have consistently fallen.”