(By Mani) The business model for wireless carriers continues to evolve from a voice-centric service to one that is data-oriented (including voice itself).
The drivers of this transformation are technology (4G networks, smartphones, tablets and other data devices) and consumer behavior (email/messaging, social media, OTT applications). The pace of this evolution is driven forward by consumer shift towards more connected devices and greater data demand.
Most Major North American carriers have launched unlimited talk+text and tiered data-sharing plans. In the third quarter of 2012, the largest U.S. carriers – AT&T, Inc. (NYSE: T) and Verizon Communications, Inc. (NYSE: VZ) launched new pricing plans that removed the limits and overage charges) on wireless voice and text communication.
[Related -Sprint Corporation (S): Sprinting To $10?]
"It is worth noting that Verizon is offering this pricing exclusively and will no longer offer its legacy plans," BMO Capital Markets analyst Tim Casey wrote in a note to clients.
The difference between tiered data plans and shared data plans is not always understood by investors. While they currently go hand-in-hand, tiered data plans refer to the concept of metered data pricing (instead of flat pricing for unlimited data) whereas shared data plans refer to multiple users and/or devices sharing a single data plan (instead of each user/device having its own separate data plan).
[Related -Apple Inc. (NASDAQ:AAPL): What Does A Potential China Mobile Deal Means For Apple?]
"The move to tiered data in the U.S. was never a question of "if" but "when", as carriers were faced with increasing costs from rising data consumption and constraining network capacity," Casey noted.
For the wireless carriers, shared data plans are expected to sustain data revenue growth over the long term. Shared data plans are intended to generate greater adoption of data-only devices and, in turn, data usage on carriers' wireless networks.
While each incremental data-only device added to a carrier's network may be dilutive from an ARPU perspective, data revenue and EBITDA are expected to continue to grow by expanding the addressable market for data-only devices (tablets, USB stick, hotspots, etc.) and applications (video, M2M, mobile banking, home automation, auto connectivity, etc.).
"Lifetime profits from data-only devices are attractive, as they carry little, if any, device subsidies," Casey said.
Shared data plans are also expected to improve churn. The thesis is that a subscriber would be less inclined to switch carriers when it has multiple devices sharing a single data plan all attached to the same carrier's network.
An analogy to shared data plans would be family or corporate plans, which anecdotally have lower churn characteristics. As wireless penetration rates plateau and subscriber growth slow, churn and retention are expected to become a more meaningful metric going forward.
"From an earnings standpoint, we believe the net financial implications from the new pricing plans to be potentially negative in the near term, as "price-optimizers" (read anyone paying local voice overage or with multiple data plans) are likely to reduce their total bill," Casey wrote.
However, the impact would be neutral over the medium term, as dilution from "price-optimizers" is offset by accretion from subscribers coming off no longer available low-end legacy price plans and halted voice erosion that would otherwise likely have continued. The transition would be positive over the long term, as data consumption increases from more devices attaching to the network.
From an investment perspective, stocks with the greatest wireless exposure such as AT&T and Verizon would be most leveraged to potential gains (or losses) from the new pricing plans as these new data plans would actually beef up the revenues of these carriers by way of higher data fees.