Tier 2 wireless carriers clamoring for more smartphones

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U.S. Celullar android smartphones

U.S. Cellular offers a range of Android smartphones.

The nation's Tier 2 wireless carriers--ranging from MetroPCS (NASDAQ:PCS) and Leap Wireless' (NASDAQ:LEAP) Cricket to U.S. Cellular and Cellular South--have been working to pack their handset lineups with a growing range of smartphones, primarily those running Google's (NASDAQ:GOOG) Android platform. And not surprisingly, handset makers both large and small are eager to exploit these small-but-fertile markets while concurrently chasing deals with Tier 1 carriers.

For many smaller wireless carriers, smartphones represent a critical element of their growth strategies for 2011. But they must also deal with the reality of volumes dwarfed by the nation's top carriers, a situation that can hinder their access to the latest gadgets as well as their ability to provide affordable devices. Nonetheless, representatives from both the carriers and handset makers agree that they must work together to deliver more smartphones to Tier 2 subscribers--because that is where the market is heading.

"For Tier 2s such as U.S. Cellular, it's a necessity that they have access to a wide smartphone portfolio to compete against the bigger players intruding into their postpaid customer base," said Current Analysis analyst William Ho. "It also represents an opportunity--not unlike Tier 1s--to upsell or upgrade the customer base. Data revenue is the 'brass ring.' This is also the case for the prepaid players."

Check out some of the key recent smartphone launches by the nation's smaller carriers:

The smartphone push 

Leap cricket huawei ascend android smartphones

The Huawei Ascend is one of Leap's most popular Android smartphones.

Smartphone users currently comprise around 20 percent of most Tier 2 carriers' subscriber base--both MetroPCS and Leap said as much during their respective first quarter conference calls with investors. But that figure is set to grow dramatically: MetroPCS and Cricket reported that in the first quarter around 40 percent of all handsets sold were smartphones. Similarly, Edward Perez, vice president of marketing and sales operations at U.S. Cellular, said that right now 40 to 45 percent of the company's handset sales are smartphones, and that by the end of the year the company hopes to have 55 percent of its device sales be smartphone by year-end.

"Everybody realizes that [smartphones] are going to be more than half the market," said Keith Nowak, a spokesman for HTC. The vendor--the world's seventh largest branded handset maker, according to ABI Research--works with U.S. Cellular South, Alltel and a variety of smaller carriers through the Associated Carrier Group, which is a collection operators formed in 2005 to leverage greater purchasing power for handsets. "We're looking at ways we can fulfill that demand."

Google's (NASDAQ:GOOG) Android platform leads the way among Tier 2 vendors, though several also offer BlackBerry devices from Research In Motion (NASDAQ:RIMM). And last year, cut-rate MVNO TracFone, a unit of América Móvil, added two Nokia (NYSE:NOK) Symbian phones to its portfolio.

"We try and stay very close to our customers and fulfill what their needs and requests are," said Matt Stoiber, vice president of devices for Leap's Cricket. "When Android in particular started becoming popular, we changed our position and we redeveloped the portfolio." Stoiber said Leap will continue to focus on Android, but he said he sees an opportunity with Microsoft's (NASDAQ:MSFT) Windows Phone 7 as well.

Tier 2 carriers work to tailor smartphone lineup

Though smartphones are in demand, handset vendors and smaller wireless carriers agree that the solution isn't simply to pull Tier 1 carriers' smartphone portfolios down to the Tier 2 market. For one thing, Tier 1 operators routinely work to obtain exclusivity deal with handset vendors--AT&T Mobility's (NYSE:T) four-year agreement with Apple (NASDAQ:AAPL) for the iPhone is a prime example. And while there have been efforts to reduce or minimize handset exclusivity agreements (for instance, Verizon Wireless has offered to deliver its exclusive handsets to smaller carriers after a certain period of time, and separately lawmakers have looked into the fairness of exclusive handset deals) smaller wireless carriers remain on the sidelines of most major smartphone launches.

"There is an understanding that when you have a smaller potential market you can't divide it up into as many devices," HTC's Nowak said. "That's a given at the end of the day."

Still, Nowak said the onus is on handset makers to provide compelling devices that can appeal to a wide range of subscribers. "It may not as broad in terms of numbers, but you should be able to reach the full gamut of consumers," he said.

Tony Lau, vice president for handset product management at MetroPCS, said MetroPCS is about one-tenth the size of Verizon Wireless (NYSE:VZ)--and the carrier recognizes the volume disadvantage it faces. "Therefore, it is even more important to invest in the relationships," he said. "We have to work harder to make sure that the products that are coming out of OEMs do meet the needs of our portfolio both from a product and price standpoint."

For instance, Lau pointed to large-screen devices like the HTC ThunderBolt for Verizon or the Evo for Sprint Nextel (NYSE:S). "Do we need to have a 4.3-inch display? We will certainly continue to work at getting those devices," he said. "But we didn't want to see if a $500 or $600 phone will sell."

samsung galaxy induldge metropcs

The Samsung Indulge is MetroPCS' first LTE Android smartphone.

As Lau notes, a major problem facing many of the nation's Tier 2 carriers is the higher selling price of smartphones compared with feature phones. Tier 1 wireless carriers typically offer smartphones through a two-year postpaid contract, and are therefore able to subsidize the cost of the phone and recoup it over time (an unsubsidized iPhone goes for around $600, but AT&T offers it for $200 with a two-year service contract). Tier 2 carriers, on the other hand, typically offer month-to-month wireless service, which prevents them from being able to subsidize the cost of a smartphone. Nonetheless, carriers like Leap and MetroPCS have made the best of the situation: For example, Leap offers the Huawei Ascend Android phone for around $150. Leap's most expensive smartphone is the BlackBerry Curve, which sells for around $250.

"We have a fairly lean lineup in comparison to other carriers, both on Tier 1 and Tier 2," Leap's Stoiber said. "We want to be strategic and smart in terms of how many phones we have on the shelf." He said that because of those factors, Cricket works closely with its OEM partners on its go-to-market strategy so that sales targets can be achieved. 

"The Tier 2 guys, in aggregate, are a very smaller percentage of the handset market in the U.S., and have struggled to get access to exclusive devices and leading-edge devices," said CCS Insight analyst John Jackson. "They don't have the purchasing power to command these things."

Is the future upmarket?

Now that smartphones are relatively common among Tier 2 carriers, the next obvious question is: Should they go upmarket with higher-end smartphones?

Carrier representatives tend to categorize their smartphone offerings in a "good, better, best" ranking, with the majority of their current smartphones in the "good" category (meaning entry level). However, carriers are working to fill out their "better" and "best" lineups.

For instance, Leap's Stoiber said the carrier plans to release 7-8 Android handsets in the second half of this year. He said those forthcoming second-half devices would include ones cheaper than $150 as well as at least one higher-end phone that will sport a dual-core processor.

CCS Insight's Jackson said he thinks Huawei and ZTE will continue to work with smaller U.S. wireless carriers; the Chinese vendors have positioned themselves as alternatives to the bigger handset vendors that are focused on Tier 1 U.S. wireless carriers. Further, Jackson said, vendors like LG and Samsung will continue to work to bring some models to the smaller carriers--for instance, LG's Android-powered Apex phone is offered by U.S. Cellular and others.

However, Jackson cautioned that the Tier 2 carrier opportunity for OEMs will remain relatively small. "And that is because, in aggregate, the volumes are not that meaningful," he said.

U.S. Cellular's Perez acknowledged the situation. "Many of us [smaller carriers] are going to have many similar phone lineups, and what we try to do is differentiate on that experience" via pricing plans and services.