Microsoft PowerPoint - Aizcorbe ACM May 2019 final.pptx

DisentanglingCellPhoneSpending

fromCellularTelephoneServices

AnaAizcorbe

BEAAdvisoryCommitteeMeeting

May10,2019

TheChallenge

• Over2010‐2017,mostconsumerspurchasedcell

phonesfromwirelesscarriersatthetimethat

theysignedupforaserviceplan

• Inthenationalaccounts,thespendingassociated

withthesebundled transactionsisrecordedas

services

• Thismisallocationofspendingonphonesto

servicesisproblematicwhentherespectiveprice

indexesaredifferent

Aizcorbe,ByrneandSichel (2019)findings

Anestimated28%of

PCEspendingon

CellularTelephone

Servicesisspending

onphones

Importantbecause:

• Deflatorsforphones

fallmorerapidlythan

thatforservices

• Correctingthe

nominalsandapplying

theappropriate

deflatorsraisesthe

growthofrealPCEfor

cellularservicesby4.2

percentagepoints,and

overallrealPCE

growthby4‐5basis

points

Price Deflators and Real PCE for Cellular Telephone Services

2010-

2017

Components

Estimated expenditure Shares

1. Phones 0.28

2. Services 0.72

Proposed deflators (percent change)

3. Mobile phones (Aizcorbe, Byrne and Sichel, 2019) -16.6

4. Services (CPI Wireless Services) -3.5

Cellular Telephone Services (percent change)

5. Prices: Tornquist aggregate of indexes in lines 3 and 4

using shares on lines 1 and 2 -7.7

6. Nominal Spending 3.8

Real PCE Spending

7. Proposed 11.4

8. Current 7.3

9. Difference 4.2

TheProblem

• Traditionally,mosthouseholdsobtainedphonesfromcarriers:

– ThecarrierbuysthephonesforresalefromOEMs(likeApple)

– Whenitsellsthephone,thecarrierincludesthephonerevenueinthe

revenuesthatitreportsintheEconomicCensusandthatrevenueisallocated

tocarriers’primaryNAICS(i.e.,services)

• Example:Twowaystobuya$499iPhone3Gwithatwo‐yearservice

contractin2010

Phone Service

Up front $499

Over time $50 x 24=$1200

Up front $499

Over time $50 x 24=$1200

Phone/Services revenues

bundled in PCE services

Timing of

Payments

Notes

Allocation in PCE

Purchase phone at retail outlet

Purchase phone from carrier

Phone/Services revenues

are allocated properly

Morerealisticexample

“Historically,wirelessserviceprovidersofferedcustomerswireless

planswhereby,inexchangeforthecustomerenteringintoafixed‐term

serviceagreement,thewirelessservice providerssignificantly,andin

somecasesfully,subsidizedthecustomer’sdevicepurchase.Wireless

providersrecoveredthosesubsidiesthroughhigherservicefeesas

comparedtothosepaidby

customersondeviceinstallmentplans.We

andmanyotherwirelessprovidershavelimitedordiscontinuedthis

formofdevicesubsidy.”

Source:Verizon’s2016annualreport

Phone Service

Up front $199

Over time $62.50 x 24=$1500

Purchase"subsidized" phone from carrier

Phone/Services revenues

bundled in PCE services

Timing of

Payments

Allocation in PCE

Notes

Carriersdoreportequipment revenuebut

onlyincludetheupfrontpayment

• Strategy:

– Finddatatoforma ratioofthefullpricetotheupfrontprice

– UsethatratiotoscaleuptheupfrontrevenuesreportedintheSAS

survey

• Caveats:

– Thisassumesthatcarriersrecoupedthefullpriceofthephone

– SAScover ageisbroaderthanideal:includescommercial(notjust

residential)andalltypesofequipment(notjustphones)

Allocation of PCE for Wireless Services Between Services and Devices

Service Annual Survey

(1) Total revenues Bill $ 237

(2) Reselling Services for telecomm equipment, retail Bill $ 32

(3) = (2)/(1) Share of total revenues pct 13.2

(4)

Ratio of full to upfront prices ratio ???

(5)=(4) x (3) Adjusted share of reselling services to total revenues pct ???

2010-

2017

IDCdataonthefullprice

• IDC“WorldwideQuarterlyMobilePhoneTracker”,availableat

https://www.idc.com/getfile.dyn?containerId=IDC_P8397&atta

chmentId=47322790.

• IDCestimatesrevenue,units,andpricesbymodelfortheU.S.

marketusingpublicandproprietaryinformationfromphone

manufacturers,componentsuppliersanddistributionchannel

companies(e.g.retailersandwholesalers)

JDPOWERdataontheupfrontprice

• Surveyofhouseholdssubscribingtowirelessplansfrom

thetopfourcarriers(AT&T,Sprint,T‐MobileandVerizon)

• Priceinformationisbasedonthequestion:

“Howmuchdidyourcurrentwirelessphonecost,

includinganyrebatesorcash‐backdealsreceived?Your

bestestimateisfine.”

• Weassumetheirresponses

reflecttheupfrontprice

– WeverifiedthisforApplephones

ValidatedpricesusingiPhones

JDPOWERIDC

Contract Nocommitment

3G 7/2008‐6/2010 8Gb‐‐16Gb $199‐299 $499‐$549

3GS 6/2009‐9/2012 16Gb‐‐32Gb $199‐299 $599‐$699

4 6/2010‐9/2013 16Gb‐‐32Gb $199‐299 $599‐$699

4S 10/2011‐9/2014 16Gb‐‐64Gb $199‐399 $649‐$849

5 9/2012‐4/2013 16Gb‐‐64Gb $199‐399 $649‐$849

5S 3/2013‐3/2016 16Gb‐‐64Gb $199‐399 $649‐$849

6 9/2014‐9/2018 16Gb‐‐128Gb $199‐399 $649‐$849

6Plus 9/2014‐9/2016 16Gb‐‐128Gb $299‐499 $749‐$949

6S 9/2015‐9/2018 16Gb‐‐128Gb $199‐399 $649‐$849

6PlusS 9/2015‐9/2018 16Gb‐‐128Gb $299‐499 $749‐$949

79/2016‐‐ 32Gb‐‐256Gb $199‐399 $649‐

$849

7Plus 9/2016‐‐ 32Gb‐256Gb $319‐519 $769‐$969

89/2017‐‐ 64Gb–256Gb $249‐$399* $699‐$849

8Plus 9/2017‐‐ 64Gb–256Gb $349‐$499* $799‐$949

X 9/2017—9/2018 64Gb–256Gb $549‐$699* $999‐$1149

Xs Sep‐18 64Gb–512Gb Notoffered $999‐$1349

XR Sep‐18 64Gb–256Gb Notoffered $749‐$899

*Onlyoffere dbySprint.

iPhone category Da tessold Flashcapacity

Introductionpricera nges

Results

• For2010‐2017,15%of

totalrevenuesrepresented

phonepaymentsincluded

inthemonthly“service

payments”

• Addingthattotheupfront

revenuesreportedinthe

SASsurveybringsthetotal

to28%

72%

15%

13%

Monthly

Upfront

Allocation of PCE for Wireless Services Between Services and Devices

2010-

2017

Service Annual Survey

(1)

Total revenues Bill $ 237

(2) Reselling Services for telecomm equipment, retail Bill $ 32

(3) = (2)/(1) Share of total revenues pct 13.2

(4) Ratio of IDC and JDPOWER average prices ratio 2.3

(5)=(4) x (3) Adjusted share of reselling services to total revenues pct 28.0

Fullandupfrontpricesareconverging…

• In2014,FASBannounced

thatallcarriersmust

recognizethefull priceofthe

phoneasrevenuewhen

ownershipchangeshands

(i.e.,upfront)by2018

• Carriersbeganmovinginthis

directionin2014

• Sincethen,theJDPOWER 

pricehasrisenassubscribers

increasinglypaythefullprice

upfront

...whichsimplifiestheadjustmentgoingforward

• By2018,weexpecttheratiooffull/upfrontpricewillgoto1andtheSAS

surveywillprovideasolidestimateofthefullpriceofphonesincludedin

carriers’reportedrevenues

2019AnnualUpdate

BEAisontracktoimplementthefollowingchangesatthis

summer’sannualupdate:

• PCEforCellularTelephoneSer vices

– Separateoutphonevsservicerevenues

• Pricedeflatorsforcellphones

– For2018andbeyond,usethenewBLSindexforcellphones

thatwasintroducedwiththeJanuary2018CPIrelease.

– Overhistory,usetheAizcorbe,ByrneandSichel indexes

Beyondcellphones

• Continue

– collaborationswiththeBLStoimprovemeasures

ofcommunicationservices

– ongoingworkoncloudservicesandon‐demand

platforms(likeUber)

• Lookingahead,setprioritiesandtargetareas

forfuturepriceindexwork

Thankyou

Ana.Aizcorbe@bea. gov