How Verizon, AT&T, Sprint and T-Mobile stacked up in Q4 2014

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Jan Dawson

The fourth-quarter earnings season is coming to a close, so now it's time to see how the nation's top wireless carriers stacked up against each other in terms of key metrics.

Jackdaw Research analyst Jan Dawson has assembled these slides that provide an in-depth look at how Verizon Wireless (NYSE: VZ), AT&T Mobility (NYSE: T), Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) performed in the fourth quarter.

Dawson's research covers relatively standard metrics including revenue growth and net adds, but also includes deep dives into prepaid vs. postpaid performance, subscriber acquisitions vs. losses, and more.

Thanks to a partnership between Dawson and FierceWireless, we're publishing these fourth-quarter slides exclusively for a short time. These slides are part of a larger report Dawson has assembled on the fourth quarter. Dawson's quarterly slide deck, with about 40 charts, is available as part of a subscription service. In addition, he provides the underlying data behind the charts along with his analysis in custom presentations to certain clients, including carriers and device vendors.

He can be reached at [email protected] or (408) 744-6244.

Check out Dawson's fourth quarter slides and commentary below, and let us know what you think in the comments!

A huge quarter for smartphone sales

The four major carriers sold more smartphones in the fourth quarter than they ever have before in a single quarter, by quite some margin. They report slightly different numbers, the two largest carriers just postpaid sales and the two smaller carriers postpaid and prepaid together, but these numbers are shown in the chart below.

Sadly, Sprint has stopped reporting the number of smartphones sold over the last couple of quarters, but a year ago, when Sprint did report, the big four carriers sold 28.5 million smartphones in the quarter by these metrics. This time around, just the three carriers who did report sold 31.5 million, and it's likely that Sprint sold 6 million or more in addition. What drove this huge quarter for smartphone sales? I'd suggest three things: new iPhones, which have sold like hotcakes around the world; high switching behavior (which I'll come back to later); and an aggressive move to installment billing for devices. These three factors combined to drive huge sales this past quarter, but two of them will continue over the next few quarters, which should continue to drive really high sales. According to Kantar, the iPhone made up almost half these sales, beating Android on market share for the first time in two years. It's likely that Apple sold around 20 million iPhones in the U.S. in Q4. 

The shift away from subsidies continues

As I mentioned, one of the big drivers of these high smartphone sales was the aggressive move by all the carriers away from the subsidy model and towards installment billing. The chart below shows the percentage of the postpaid base at three of the carriers that's already moved off the subsidy model (Sprint doesn't report this metric yet):

As you can see, T-Mobile leads the industry on this metric, having started the move much earlier than the others. It hit 89% in the quarter and expects to plateau at around 90% because certain customers don't get access to this option because they buy through dealers and resellers, for example. But AT&T, starting much later, has moved very rapidly to majority adoption of post-subsidy models, with almost 60% of its postpaid base no longer receiving subsidies. Verizon has been the most reticent among the big carriers to embrace the installment model, but it's finally getting there, and these plans are finally starting to have an impact in its base too. Sprint, as I mentioned, doesn't report this metric, but 46% of its device sales in Q4 were on Easy Pay and Leasing plans, and that rate of adoption will quickly have an impact on the overall base. All this means that the traditional ARPU metric is falling for all the carriers, as service feels fall to account for the end of subsidies, and in part too because of the impact of lower-ARPU tablets and other devices in the base. But the carriers are all embracing average billings per user (or per account) which gives a better sense of total revenue from customers, and that's stable to rising for several of them. Meanwhile, the four major carriers billed almost $3 billion between them in Q4 for installment payments from customers, up by a factor of five or more from a year ago. The installment billing model is rapidly becoming the norm.

Net adds are increasingly dominated by things other than phones

All the attention on smartphones could make you believe that phones are a major source of subscriber growth for the carriers, but that's actually not the case. The chart below shows three sets of net adds for the four major carriers combined: connected devices (machine to machine, e-readers and other devices with connections not billed directly to consumers); postpaid phone net adds; and postpaid tablet net adds:

As you can see, postpaid phones are the smallest of the three in terms of net adds, with all of that growth and more coming at T-Mobile and Verizon, which added a million and 670 thousand respectively in the quarter, with both AT&T and Sprint actually losing phone customers on a net basis in the quarter. What drove much of the subscriber growth in the quarter was tablets and those connected devices. Only T-Mobile added more phone customers than tablet customers in the quarter, with each of the other three adding many more tablet subs than phone subs. Much of that smartphone growth, then, is coming from upgrades within the existing base and from switching between carriers (as we'll see in a minute). AT&T continues to dominate connected devices net adds, with approximately 1.3 million in Q4, driven mostly by connected cars and to a lesser extent its Digital Life service. It had almost 20 million connected devices at the end of the quarter, dwarfing the other two that report (Verizon doesn't report this number, but likely had about half that). Regardless, the era of phone-driven growth is rapidly drawing to a close, with service upgrades and additional non-phone devices driving much of the growth in future. Verizon continues to add the most tablets by far, partly helped by its low-cost Ellipsis tablet. 

High switching behavior drives up churn and gross adds

The aggressive pricing moves and promotions from all the major carriers except Verizon in the quarter drove very high switching behavior, resulting in higher churn levels and higher gross adds at all the carriers. The chart below shows postpaid churn:

The fourth quarter is always the high point in the year for churn because of the high smartphone upgrade rate, which in turn drives switching, but this quarter continued the year's trend of rising churn at AT&T, Verizon and Sprint, while T-Mobile saw more typical seasonal increases. All four carriers saw higher churn in Q4 2014 than Q4 2013, reflecting the increased competitiveness in the market and the resulting high switching behavior. It's likely that high iPhone sales also contributed to the churn, with some subscribers getting their first chance to buy an iPhone on Sprint or T-Mobile, for example. By my estimates, there were 13.5 million postpaid gross adds in the quarter between the four big carriers, much higher than the 11.3 million in Q4 2013 or 11.5 million in Q4 2012. This higher churn is likely here to stay, as the price war continues to intensify and Verizon finally joins the fray. T-Mobile was the carrier whose churn rose least over the past year, and at the same time its quarterly gross adds have risen by about eight hundred thousand year on year, helping to explain its rapid subscriber growth. 

A quick note on T-Mobile "passing" Sprint

John Legere predicted in late 2014 that T-Mobile would pass Sprint by the end of the year in total number of subscribers. I said at the time that I thought it would fall short, and it did indeed. On the T-Mobile earnings call, Legere referred to an obscure part of Sprint's 10-Q report which mentioned a large number of wholesale subscribers which haven't been active for some time but which it still counts on its books. Sprint reports these subscribers because the wholesale customers who serve them do, and there's nothing wrong with that. But in terms of "active" subscribers, T-Mobile did technically "pass" Sprint in the quarter. However, we all know that's not what John Legere meant, and it's a bit irrelevant anyway, since T-Mobile is very likely to pass Sprint in total reported subscribers in the near future anyway, as Marcelo Claure has already conceded. This is a symbolic event at best, and Claure is right to downplay it. He has more postpaid subscribers, while Legere has more prepaid subscribers – neither is a significant fact in its own right. The key for Sprint at this point isn't market share ranking but trajectory: can it turn around its performance and get back to real growth in 2015? That's the major task ahead of Claure, and in the ultra-competitive market I've just described, he's got his work cut out for him. 

How Verizon, AT&T, Sprint and T-Mobile stacked up in Q4 2014
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