Wireless Operators' Growing Pains

Growth in the wireless industry -- in an era of heightened competition, sparked by T-Mobile US and reinforced by AT&T – comes at a higher cost.

Subscriber additions in the second quarter are likely due in part to widespread adoption of equipment installment plans, which separate the cost of a device from wireless service. These plans and their service discounts have made the postpaid designation less distinguishable from prepaid, attracting subscribers who ordinarily would have stuck to the latter. Another factor is an increase in tablet adoption, spurred by promotions. But these subscriber-growth tactics have downsides. Despite Verizon's better-than-expected subscriber number, estimates for its earnings before interest, taxes, depreciation and amortization didn't rise. That suggests the extra subscribers, many likely lured by a limited-time tablet deal, carried little value. And while the new plans boost revenue and margins since a portion of revenue is booked upfront, those benefits will likely be offset by service discounts and higher retention costs.