As discount “family plans” become the top growth area for U.S. cell phone service providers, industry watchers are expected to monitor customer cancellation rates in coming years.
Since 2003 U.S. providers have stepped up efforts to take on more customers through family plans, which let people add additional phones to their cell phone accounts for fees that are often four times lower than popular individual plans.
Family plans were designed to add new customers cheaply by encouraging people to give phones to their children or older relatives as carriers race to sign up the remaining roughly 40 percent of the population that do not already have cellphones.
These plans tend to bring in less revenue per user than single accounts but the hope is that whole families are less inclined than individuals to switch to rival services, and that children will stay loyal to the operator as they get older.
‘Churn’ reduction is key
But it is not yet clear if resulting reductions in customer cancellations, otherwise known as churn, will be enough to offset the discounts, said John Krzywicki, an executive at the Management Network Group, a telecom consulting firm.
“We’ll have to watch how successful they are in churn reduction,” Krzywicki said. “If churn goes down only a little this does not work out well.”
While some U.S. carriers had churn rates around 1.5 percent last year, others saw customer cancellations closer to 3 percent in some quarters.
Operators do not reveal how many of their new customers sign up to these plans. But electronics retailer RadioShack Corp., which issued a profit warning last week citing weak wireless sales, said that about 50 percent of new users sign up through family plans. This percentage could rise to about 66 percent next year, one analyst said.
As family plans become more prevalent, they could hit profit margins of wireless carriers as well.
Concerns about competition
One investment manager said these calculations highlight competition concerns that have led him to keep his wireless holdings to a minimum.
“I’m very concerned about the RadioShack comments and their implications for growth in the industry.” said Michael Chren, portfolio manager for the Armada large cap value fund, which manages investments worth about $625 million.
“What they’re basically saying is that, in general, the growth is just going to be harder to find going forward,” said Chren. His fund has small holdings in Verizon.
But while increasing dependence on family plans reflects slowing growth from more traditional voice services, American Technology Research analyst Albert Lin said these plans attract young people who are likely to use advanced data services.
Lin said younger customers use profitable data services such as messaging and musical ringtones about twice as much as average customers.
Carriers are spending billions building data networks with an aim to substituting the falling price of mobile phone calls with revenue from data services such as mobile video and Web surfing for phones.
