Editor’s Corner—Here’s a big reason why churn is at an all-time low

Mike Dano

During the fourth quarter, some of the nation’s largest wireless carriers reported record low levels of churn. That’s due in large part to the fact that Americans are no longer getting a new phone every two years.

In the fourth quarter, for example, Verizon reported postpaid phone churn of just 0.77%, a significant achievement for the company and a number below most Wall Street expectations. Similarly, AT&T reported fourth quarter postpaid phone churn of 0.89%.

“Postpaid phone churn continues to run at record levels,” boasted AT&T CFO John Stephens during the carrier’s recent quarterly conference call, according to a Seeking Alpha transcript of the event.

Churn—the measurement of how many customers discontinue their wireless service and switch to a different carrier—can be affected by a variety of factors, of course. But churn rates in the wireless industry in general have been trending down to record low levels, particularly in the postpaid space, for several years. Carrier executives have attributed this trend to a variety of factors, including the success of their various strategies. AT&T, for example, has argued that its record churn levels are due in part to its strategy of bundling its wireless services with its DirecTV video offerings.

However, executives from T-Mobile and Verizon this week offered comments on what is likely a major reason for wireless customers’ apparent desire to stick with their existing carrier: They don’t want to buy a new phone.

"The U.S. consumer now understands that these devices are extremely expensive,” T-Mobile CFO Braxton Carter said this week. He explained that most smartphones are purchased today through equipment installment plans (EIP) rather than through two-year subsidies. Meaning, customers are no longer purchasing a free or $200 smartphone alongside a two-year service contract, and then getting a new phone after that two-year contract is over—instead, they’re seeing the full price tag for the phone through their EIP fee and are paying that gadget off in monthly installments of $20 or $40.

Thus, when customers pay off their phone through their EIP, their monthly bill shrinks. And, as a result, customers may be wary of purchasing a new phone.

"The consumer before really viewed the handset as disposable [through handset subsidies] ... and with phones approaching $1,000-plus, what you're seeing is really an elongation of a handset lifecycle. Right now, it's about 34-35 months for a smartphone. That's significant because when you make that type of investment in a new phone, that's the perfect time to go out and look at, are you with the right carrier and are you with the right plan,” T-Mobile’s Carter said. “We've been in this period of an elongation of the handset cycle. Our thesis is that, at some point, that will reach a natural level, and when that happens, it goes back to a more even flow. So, a lot of the switching has been taken out of the market during this period. So that's a really significant piece of it."

Carter added that the other major factor dragging down carriers’ churn levels is that there is now very little difference among carriers’ network performance.

In separate comments this week, Verizon’s wireless chief Ronan Dunne largely echoed Carter’s view of the new, longer handset replacement cycle.

"The relationship between the upgrade cycles, device replacement and churn has changed fundamentally,” Dunne said. “People’s hold time on the device has extended."

He continued: “So, people are separating their decision from this moment of replacement because they're extending the replacement cycle. That has changed the nature of competition in the sense that it's more focused on the device, and that same trend is one of the reasons we see more opportunity potentially for growth because what's happening is, instead of replacing their handset every 23 or 24 months, people are saying, ‘Well, maybe I'll add a wearable or maybe I'll add a connected device like a tablet.’”

And that, Dunne said, is paving the way for carriers to compete in other ways. "So, I think the shape of the market has changed,” he said. “And as a result, which I think is good for consumers, people are focusing on the services and the experiences they're delivering rather than focusing on discounting other people's hardware.”

The big question here, of course, is how the handset replacement cycle will eventually shake out. Previously, smartphone vendors like Apple and Samsung could reliably expect wireless shoppers to purchase a new smartphone every two years, when their service contract ended. (And carriers could then reliably look to poach customers from their rivals.)

Now, though, it’s unclear how long customers might hold onto their phones. Will it be three years? Or four? Or more? I’m personally entering my fourth year owning my current smartphone, which is fully paid up. I’m reluctant to tack on an extra $30 per month to my smartphone bill just to get another phone with a slightly faster processor and slightly better camera.

T-Mobile’s Carter predicted that it will be new smartphone launches, rather than the end of two-year contracts, that will eventually drive customer switching and carrier churn. “We do believe that it will reach a normalization, an equalization, and that switching events will be driven more around iconic phone launches,” he said.

Will Samsung’s Galaxy S9 be that catalyst? Or will it be Apple’s next iPhone, likely to be launched this fall? Or will customers balk on the $800 and $1,000 price tags for those gadgets and hang onto their phone for another year?

That remains to be seen. – Mike | @mikeddano