Big 4 could see device sales plummet

Mobile phone sales are expected to drop sharply in the second quarter as carriers close retail stores and more Americans stay home in response to the ongoing COVID-19 public health crisis, dampening upgrade demand and negatively impacting subscriber additions, according to analysts.  

Most consumers buy phones at carrier branded retail stores, but as the coronavirus situation in the U.S. continues to evolve daily, all four major operators last week moved to temporarily shut some company-owned stores while people implement social distancing measures.  

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LightShed Partners, in a Friday research note, estimated that more than 5,500 carrier-owned stores have closed so far. Many more stores are operated by third-party dealers and likely to stay open unless forced, since the small businesses are more reliant on regular income, the firm noted. LightShed analysts Walter Piecyk and Joe Galone estimate more than 16,000 of the approximately 22,000 branded wireless postpaid stores are still open in the U.S.

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Still, they expect carriers to face a steep 80% decline in gross add volumes in branded retail stores in the second quarter, with additional store closures and shelter-in-place orders driving drops in sales. The estimates assume current conditions last until the end of May, though noting they hope that's overly conservative.

T-Mobile last week closed 80% of its company-owned retail stores. Sprint followed suit, closing 71% of locations, while Verizon in a Thursday (March 19) update said it had taken nearly 850 points of distribution offline, including the closure of more than 500 owned and operated retail stores.

After already closing 40% of its owned retail stores, AT&T later updated that it would “significantly reduce its retail footprint” to a minimum number of locations with more closures. Where possible, the carrier said it would keep at least one store open within a 20-mile radius in urban and suburban areas and just over a 30-mile radius in rural areas.

Company branded retail stores account for the lion’s share of consumer phone activations, making up 70-80% by LightShed estimates, compared to other distribution channels like big box retailers and Apple (10-15%) and online and telesales (10-15%).

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BayStreet Research earlier this month echoed a similar figure, pegging carrier activations via online channels historically at only about 10%, meaning most are in store.  

The significant drop at branded stores, along with 70% decline in big box distribution, could result in 6 million fewer gross postpaid adds in the second quarter, or a 45% decline year over year, LightShed estimates.

The firm said that amounts to 3.2 million fewer gross postpaid phone adds for the four major carriers and 2.8 million fewer gross prepaid additions in the second quarter.

Analysts at MoffettNathanson anticipate retail store closures to impact net additions across U.S. carriers.

“Retail store closures are likely to mean that total industry growth in new phone subscriptions will fall, reducing net additions for all players,” wrote the team led by Craig Moffett in a Monday research note to investors.

LightShed also cut net its addition expectations for the second quarter to 210,000, down from 647,000.

“Recall that industry net additions have been artificially inflated by BOGO offers that trade free phones for additional, and often unneeded, lines,” wrote Moffett. “Without retail stores, and with what we expect to be reduced appetite for phone upgrades anyway, we expect this kind of activity will be sharply curtailed.”

As people stay indoors, postpaid upgrade rates could hit a record low of 2.5%, LightShed anticipates. Fewer gross additions and upgrades could result in a 13.3 million, or 44%, drop in device sales for the Big 4 in Q2. The impact to equipment sales, including less activity in March, could top $7 billion, the firm estimates.  

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Recent data from Strategy Analytics shows global smartphone shipments dropped a drastic 38% annually, with February seeing the largest fall ever in the worldwide smartphone market after smartphone demand collapsed in Asia last month due to the virus outbreak.

“Despite tentative signs of recovery in China, we expect global smartphone shipments overall to remain weak throughout March, 2020. The coronavirus scare has spread to Europe, North America and elsewhere, and hundreds of millions of affluent consumers are in lockdown, unable or unwilling to shop for new devices,” said Yiwen Wu, senior analyst at Strategy Analytics, in a statement. “The smartphone industry will have to work harder than ever to lift sales in the coming weeks, such as online flash sales or generous discounts on bundling with hot products like smartwatches.”

Although carriers will see negative impacts from coronavirus in Q2, the firm also expects operators to experience lower churn and higher than expected EBITDA related to reduced costs.

MoffettNathanson noted that overall, the wireless industry may be better positioned than other sectors to weather fallout from the ongoing COVID-19 emergency.  

“Beyond these immediate impacts of the coronavirus crisis – for perspective, it should be clear that wireless companies will be far less impacted than most,” wrote Moffett.