UBS Reports US Carrier Profit Margins To Shrink Next Year

Investment bank UBS have written a report stating that the United States carriers are about to experience contracting margins after what it says are "historically high levels." UBS believes businesses will see the difference in 2017's figures. The report follows a period of relatively high profits, which have been mostly caused by a change in accounting bought about by the switch from traditional contracts to equipment installation plans. However, UBS analysts note that declining service revenues, which started last year, are likely to continue but despite this the industry's overall EBITDA (earnings before interest, taxes, depreciation and amortization, a common industry metric) climbed over 40% in the second quarter. Many customers who switched to the equipment installation plans are now seeking to replace their aging smartphones, but because the main carriers are now using this type of plan and two thirds of smartphones are sold this way, this will not favour one carrier over another. Essentially, the US carriers have never had it so good and won't for the foreseeable future.

As for the individual carriers in the market, UBS in particular favours AT&T and T-Mobile US. AT&T gets a gold star for its acquisition of DirecTV, which will form a key part of the business strategy going forwards whereby AT&T is bundling video content with its traditional offerings. Verizon Wireless' purchase of Yahoo and, earlier, AOL, is not seen as having the same positive benefit. For T-Mobile US, here UBS recognises that America's third largest carrier has momentum behind it thanks to three years of being the Uncarrier and acknowledges that the changes that T-Mobile US has started have changed the sector. T-Mobile US has successfully grabbed market share and overtook Sprint last year to move into the third largest carrier spot.

Unfortunately, as 2017 arrives so the investment bank are expecting a number of changes to unsettle the market. In 2016, the US carriers are enjoying record metrics including average revenue per customer and low churn figures, but it expects this to change as more customers seek to replacing aging smartphones. We have already seen a price war between the four national carriers, even if AT&T and especially Verizon Wireless have been keen to distance themselves from this. All of the carriers offer more per dollar than they did just a small number of years ago and T-Mobile's ONE plan looks set to continue this trend. It is also interesting that there is no mention of other devices that carriers can use for growth, such as devices such as new LTE-connected smartwatches or the Internet-of-Things.

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