New Wireless Plans: Great for Consumers, Terrible for Carriers

At one point it was unthinkable that wireless carriers would offer unlimited minutes and messaging. But today many of the largest carriers offer unlimited minutes and messaging plus an allowance for data usage.

And now, the largest carriers just improved the value behind these plans. While this is great for consumers, it could have unintended consequences for each company's bottom line.

Why are the carriers making changes?
The big three of the wireless business -- Verizon , AT&T , and Sprint -- have all updated their best family plans recently and each offers a better value than before.

Each company can talk about bringing customers a better value, or making it easier to connect, but the truth is they want more customers and more lines. Verizon says it changed the plans so you can "add devices to your account" and "connect multiple devices with Mobile Hotspot."

Verizon reports more than 97 million postpaid accounts, AT&T has 72 million, and Sprint has 30 million. Of the top three carriers, almost 200 million lines or accounts could benefit from these changes.

What is changing?
Each company offers a variation on the same theme: the more people you have connected to you, the better your price. If you have two lines, AT&T is theoretically the most expensive at $130 for two lines on its Mobile Share Value Plan. But AT&T is giving you 10 GB of data to share, compared to two lines with Verizon's More Everything or Sprint's Framily Plan, which start at just 1 GB of data.

When we get to three lines or more is where things get complicated.

Source: AT&T, Sprint and Verizon websites

As you can see, there is a significant difference between the carriers when you get up to five lines or more. What's ironic is AT&T has the second highest number of postpaid accounts but apparently isn't satisfied with this relationship.

AT&T's offering of 10 GB of data to share shows the company's issues handling the deluge of data when the iPhone was introduced is in the past. While Sprint's awfully named Framily plan offers more flexible separate billing, AT&T offers far more data included for the same price.

Why is this bad for the carriers?
There are two big problems these improved plans could bring about for the carriers. Before each carrier offered unlimited voice and messaging, customers had to watch their minutes and be aware of which network their family and friends were using.

In theory, Verizon had a huge moat because customers knew they could call as much as they wanted as long as everyone was on Verizon. Undoubtedly this caused more than one conversation suggesting a friend or family member switch to Verizon. But with each carrier offering unlimited voice and messaging, this moat has been effectively removed.

Today, Verizon's postpaid churn leads the top three carriers at less than 1%, but this may change over time. AT&T's churn has dropped to just 1.1%, and Sprint's postpaid churn has been improving, yet currently stands at over 2%.

The second issue is these plans give the carriers less money than they used to get for the same customers. While AT&T, Sprint, and Verizon all reported postpaid average revenue per account or user increased in their current quarters, it's hard to see how that would continue with cheaper plans.

As you might imagine, lower plan costs will eat into each carrier's gross margin unless new devices are added. With an estimated 340 million plus wireless subscriptions, the big three's growth is limited by the total domestic market. Since they already have just under 60% of the market, these new plans will have to either steal customers from each other or from smaller carriers.

The bottom line is carriers are headed toward unlimited everything including data for a flat price. With each company improving its coverage, the difference between the carriers seems to be narrowing. Investors need to be aware of these changes. While you may enjoy a better deal on your cell-phone bill, make sure you understand that the carrier you invest in might not be the cash-flow generator it once was.

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The article New Wireless Plans: Great for Consumers, Terrible for Carriers originally appeared on Fool.com.

Chad Henage owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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