Entner: T-Mobile returns to the fight in Q2

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Roger Entner Recon Analytics

Roger Entner

In the second quarter of 2013, the industry grew by 335,000 subscribers, which is the lowest subscriber-add number this millennium. A significant reason for the low growth is that approximately 1 million Lifeline connections had to be disconnected because the carriers were unable to verify eligibility. The contract segment grew by 1 million subscribers, while the prepaid shrunk by 1.26 million, most of them ineligible Lifeline customers. This is an overall expected and healthy trend as the economy has improved, the employment rate is increasing and welfare rolls are decreasing. The wholesale and connected device segment grew by more than half a million subscribers.

The industry make-up changed considerably in Q2. Sprint was acquired by Japan's SoftBank and then Sprint acquired Clearwire after a long and drawn-out bitter battle with Dish Network. T-Mobile incorporated MetroPCS, while Leap Wireless announced that AT&T Mobility was willing to purchase it. The third, fourth and fifth largest service providers--Sprint, T-Mobile, and TracFone--are now foreign-owned, which is a testament that they view the U.S. market ripe with opportunity to make a competitive difference. Foreign money is flowing into the U.S. market with the expectation to make a positive return.

The once-large regional carrier segment ran into the arms of the willing acquirers. Large regional carriers such as MetroPCS and Leap focused on the credit-challenged segment with unlimited price plans as a niche that nationwide carriers could not or did not want to serve at that time. As the wireless market became more competitive and the government-sponsored Lifeline services became more prevalent, the oxygen that the regional carriers needed simply disappeared. The large regional carriers never found a way to offer the same quality as the national carriers or compete on price against a free, government-supplied offer.

The biggest culprit for the demise of the regional carriers has been the government-sponsored Lifeline service. The Great Recession and the growth of the Lifeline program prompted more than 22 million customers to either churn off or to never choose the regional wireless carriers such as MetroPCS and Leap. The subsequent economic recovery and shrinking of the Lifeline program simply came too late for MetroPCS and Leap.

More than four out of five Americans choose a smartphone when they buy a new device. Within the next three years, we will see the end of the feature phone and all phones will be "smart."

For years, Sprint's Nextel service has been the gift that kept on giving for the other wireless carriers, especially for Verizon Wireless, since many Nextel subscribers left Sprint in favor of Verizon. Now that Sprint has shuttered the Nextel service and T-Mobile's subscriber churn has slowed, expect to see a massive shift in the subscriber flow patterns going forward.

As T-Mobile has impressively shown this quarter, the industry presents opportunities to gain market share even by companies that have been on a path to implosion.

 

Q2 13 Subscriber Analysis

Contract

No-contract

Wholesale and Connected Devices

Total

AT&T

551,000

11,000

70,000

632,000

Sprint

(1,045,000)

(761,000)

(228,000)

(2,034,000)

T-Mobile

685,000

(10,000)

452,000

1,100,000              

Verizon Wireless

941,000

97,000

 

1,038,000

Leap Wireless

 

(255,000)

(109,000)

(364,000)

U.S. Cellular

(120,000)

(7,000)

90,000

(37,000)

TracFone *
(MVNO)

 

(192,000)

 

(192,000)

Total

1,012,000

(1,264,000)

587,000

335,000

* Off due to rounding.
** Not counted in totals to avoid double counting. TracFone is additive to no-contract and subtracted from Wholesale totals.
*** Verizon has stopped releasing wholesale and connected device connections, which makes it impossible to calculate its total connection number. Therefore only retain connections are provided.

AT&T had a decent quarter in which the bright spot was tablet sales. Of the 551,000 contract connections AT&T added, 398,000 were tablets. Even though 414,000 reseller lines were disconnected, AT&T's connected devices group saved the bacon and managed to achieve a 70,000 line gain. The device portfolio is rapidly upgrading with more than 88% of postpaid phones being smartphones. A total of 35% of AT&T' smartphones are now LTE capable and data usage per smartphone is up by 50% year over year as the data tsunami continues. Smartphones are now 73% of AT&T's postpaid base. With smartphone consumers using 50% more spectrum bandwidth than other devices, the push for more spectrum to avert capacity shortages needs to continue. Not surprisingly, AT&T announced it would acquire Leap Wireless, which has been struggling and up for sale for a while. AT&T is continuing to chase Verizon Wireless's LTE coverage lead and has now 225 million people covered, which is about two-thirds of the population.

Sprint had the most transitional quarter in its history. One can only hope that Sprint is the second proverbial Phoenix out of the merger and acquisitions fire. It has now the largest spectrum portfolio in the wireless industry and access to the financial strength of SoftBank. Sprint captured 34% of the old Nextel customers while the remaining went to Verizon and others. The company should be considerably better positioned than in years past to be a greater force in the market. 86% of Sprint's postpaid additions bought a smartphone but with Sprint's huge cache of spectrum, the company's network should be able to support the surge in capacity demands. Prepaid losses were due to the adjustment of Lifeline phones though Sprint's Assurance program.

T-Mobile had a kick-ass quarter. The reinvigorated T-Mobile grew faster than any other carrier this quarter. Postpaid branded churn was down to a record 1.58%, in large part because the company acquired its most direct competitor. Prior to the merger of the two companies, more than a third of gross additions in most of the overlap markets between T-Mobile and MetroPCS have been exchanged between the two carriers. By combining the two companies, the market dynamics changed substantially, allowing T-Mobile to grow without driving up churn at the other carriers. The company reported that 86% of postpaid phones sold were smartphones, which now represent 74% of the company's postpaid base. Only 21% of new subscribers were iPhone as the iPhone 5 goes through the tail end of its flagship status. It will be interesting to see if T-Mobile will have to face a similar Apple guaranteed payment balloon as Verizon is facing.

Verizon Wireless continued to execute and delivered another strong quarter and had again the most contract-customer gains in the industry. In the second quarter, 84.4% of phones activated were smartphones, which is a company best. 4G LTE now covers 300 million Americans or 99% of Verizon's 3G footprint. What will be interesting is how Verizon Wireless will perform in the next few quarters as the Nextel customer source will disappear by Q4 and it is starting to lose the public perception war of having the fastest, most reliable network against AT&T.

Leap Wireless had another rough quarter, losing 7.5% of its customer base in just the last quarter alone, an acceleration compared to the previous quarters. The company reported that 72% of new handset sales were smartphones, which is below the average of the nationwide operators, but consistent with the customer base that Cricket attracts. Nevertheless, APRU increased by almost 10% as the number of smartphones with higher price plans increased substantially. Leap found someone to purchase them right in time as free cash flow fell to a negative $33 million and net loss was $161 million.

U.S. Cellular lost 120,000 contract customers and 7,000 prepaid customers in the last quarter, but was able to partially make up the losses by adding 90,000 wholesale customers. U.S. Cellular sold its licenses in Chicago, St. Louis, Central Illinois, and New York and is planning to sell Mississippi Valley licenses. Through these sales US Cellular is withdrawing into less competitive markets where it hopes to gain market share. Of all the larger carriers, U.S. Cellular had the lowest percentage of smartphones activated on its network even though the company has 4G LTE up and running in most of its footprint.

TracFone is going through a consolidation phase after acquiring several other MVNOs. After the removal of non-active accounts, subscriber numbers fell by 192,000. The continuing shift from low ARPU Tracfone-branded subscribers to higher-ARPU Straight Talk and América Móvil USA subscribers has led ARPU to increase by 19.2% year over year, while churn held steady at 4.1%.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.