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The U.S. wireless market is currently witnessing cut-throat pricing competition. Almost 68% of the market is controlled by U.S. telecom behemoths Verizon Communications Inc. (VZ - Free Report) and AT&T Inc. (T - Free Report) . The nation’s third and fourth largest mobile network operators, T-Mobile US Inc. (TMUS - Free Report) and Sprint Corp. (S - Free Report) , are also striving to expand their foothold. In this scenario, the entry of non-wireless cable giants like Comcast Corp. (CMCSA - Free Report) and Charter Communications Inc. (CHTR - Free Report) will further intensify competition.  

As a counteractive measure against competition, domestic wireless carriers continue to offer several low-priced service plans and attractive promotional discounts, both for individual customers and business entities. Toward this end, carriers have constantly been offering latest versions of iPhone to attract new customers from their rival carriers. iPhone is a line of smartphones designed and marketed by tech giant, Apple Inc. (AAPL - Free Report)

Wireless carriers like U.S. Cellular Corporation (USM) and T-Mobile US have previously offered iPhone 7 to attract new subscribers.

In order to bolster its wireless services, Comcast also inked a partnership with Apple to sell the latest version of iPhone along with its upcoming wireless venture. Comcast’s wireless service will be launched under the Xfinity Mobile brand.

Accordingly, all these efforts paid off, as the four wireless carriers witnessed a stark improvement in terms of their subscriber statistics in the last reported second quarter of 2017.

All the above-mentioned stocks currently carry a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Postpaid Churn

Postpaid churn is a crucial metric for the wireless industry. It denotes the percentage of subscribers in a given time frame that cease to use the company's services for one reason or another. It is used as an indicator of a company's subscriber base.

While Verizon’s quarterly retail postpaid churn rate was 0.94%, flat year over year, T-Mobile US’ branded postpaid churn declined from 1.27% to 1.10%.

Post churn of AT&T and Sprint improved year over year. AT&T’s wireless postpaid churn rate was 0.97% compared with 0.91% in the year-ago quarter. Sprint’s total retail postpaid churn rate was 1.65% compared with 1.56% in the year-ago quarter.

With such mixed churn rates from the telecom biggies and the costs of marketing campaigns (which is likely to hurt the company’s margins), we wait to see for how long will the customer retention rates sustain. Falling prices and growing consumption undoubtedly put more focus on subscriber acquisition to drive growth.

Bottom Line

With the launch of its mega edition iPhone 8, Apple is likely to make a big innovation leap. Following this, the battle between the wireless carriers to outperform each other with different promotional campaigns for iPhone 8, is likely to gain momentum in the second half of the year. 

Network operators have plans to leverage those new phones with aggressive promotions to boost their market share at a critical time of year. With the increase in smartphone launches, we expect aggressive promotional offers by Sprint and T-Mobile US, which may impede margins in the coming quarters. Least is expected from AT&T, as the telco seems to be more focused on establishing its entertainment services through its over-the-top (OTT) service, DIRECTV.

Other vendors including Samsung and Google are also gearing up with the release of new, high-end handsets.

Moving forward into the second half of fiscal 2017, we expect to witness continued handset momentum. This should impact trends in the second half of the year. Accordingly, we can anticipate an upgrade and switching activity throughout this period.

Customers keenly wait for new flagship phones and the opportunity to switch to the most competitive offers. Operators know that flagship season is the best time to entice customers, as long as the company is willing to compete and absorb increase in subscriber addition and even retention costs. With a month left for third-quarter 2017 results, churn rates will be the most interesting statistic to monitor.

We expect costs to rise, margins to shrink and churn rates to escalate.

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