How Verizon, AT&T, Sprint, T-Mobile and TracFone stacked up in Q2

The second quarter earnings second has come 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 13 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 second quarter. Dawson also covers América Móvil's U.S. MVNO, TracFone Wireless, which is by far the nation's largest MVNO. TracFone's service piggybacks over the networks of Verizon, AT&T and other top carriers.

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 net additions by device type.

Thanks to a new partnership between Dawson and FierceWireless, we're publishing these slides exclusively for a week. These 13 slides are part of a larger report Dawson has assembled on the second quarter, which he publishd here. (Check out his first quarter report here.) 

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

Jan Dawson's commentary: Over the last several years, we've moved into a period of slower revenue growth as the US market reaches saturation, and all four major network operators have seen their growth slip below 10% year on year. However, MVNO Tracfone has managed to grow more quickly, and saw a nice bump in year on year growth in the quarter. At the same time, there's significant variation between the four major network operators too, with Sprint struggling to achieve consistent positive growth, and T-Mobile dramatically increasing its growth rate over the last several quarters. AT&T and Verizon have been roughly neck and neck, although AT&T's aggressive move to get customers onto Mobile Share plans and Next has dented revenues this past quarter and will likely do so for several more quarters to come, because it's giving subscribers who were previously on subsidy plans a break on their service revenues even before they've started paying for their own phones. Some 17 million subscribers are in this "pre-Next" category, compared to just 7 million who are already on Next plans, and over the coming quarters AT&T expects 90% of these subscribers to move to Next billing for their upgrades, which will start growing revenues again. Verizon, meanwhile, is the most consistent performer, with revenue growth at 5-8% every quarter. The major drivers of revenue growth continue to be the addition of data plans to existing lines, growth in the size of the data bucket attached to those plans, and the addition of additional devices such as tablets to those lines.

Jan Dawson's commentary: This chart is the best possible argument for the merger of T-Mobile and Sprint, whose margins languish well below those of AT&T and Verizon, in large part due to their smaller scale. High fixed costs apply in the wireless market when you're a network operator, and these are spread over far fewer subscribers at both Sprint and T-Mobile than they are at Verizon or AT&T. Verizon has also shifted a greater proportion of its operating costs to its wireline business than AT&T, boosting its wireless margins but depressing its wireline margins. Sprint has seen a significant improvement in its margins in the last two quarters, but T-Mobile's margins are worsening as the cost of its subscriber acquisitions takes its toll. Since many of T-Mobile's Uncarrier initiatives involve discounting and other financial incentives, its margins have naturally been depressed.  

Jan Dawson's commentary: This comparison shows the subscriber bases of the major US wireless operators, with one significant caveat: Verizon has long since stopped reporting its wholesale and connected devices subscribers, and as such we're only getting a partial picture of Verizon's base. But what's clear here is that each provider has a different focus. Verizon is the largest postpaid carrier by some margin, Tracfone is the largest prepaid operator, AT&T has the most connected devices (M2M) subscribers and the most wholesale subscribers, and Sprint and T-Mobile have a similar mix of all four subscriber types. The relative scale of the two largest carriers compared with the two smaller network operators is also highlighted by this chart: both AT&T and Verizon have around double the subscribers of Sprint and T-Mobile today, especially if Verizon's wholesale and connected devices subs are factored in. That's an insurmountable obstacle to both effective competition and higher margins for both of the smaller carriers.

Jan Dawson's commentary: You'll notice that Sprint's net adds briefly drop off the bottom of the chart in Q2 2013, which was a singularly poor quarter for Sprint. But for the most part the carriers have stayed within certain patterns, with Sprint largely losing subscribers overall, T-Mobile turning its business around as we've already seen, and in the process driving the highest net adds for the past two quarters, AT&T and Verizon largely adding subs at a steady rate, with a brief dip in Q1 of this year for Verizon, as it lost lots of low-end subscribers to competitors, and problem it has since fixed. Until T-Mobile's resurgence, Verizon regularly beat the rest of the industry handily on net additions, and it remains to be seen whether T-Mobile's recent performance is sustainable over the long haul without continued heavy financial incentives. Tracfone's performance is the most unpredictable, going from almost two million net adds last quarter to a negligible number in Q2. 

Jan Dawson's commentary: The detailed net add picture is also complex, with each carrier having a very different mix of new subscribers. Verizon's results are again dominated by postpaid retail subscribers, losing a tiny number of prepaid subscribers but gaining almost one and a half million postpaid subs. AT&T lost both prepaid subscribers (mostly Cricket subscribers it failed to transition over to the new Cricket) and wholesale subscribers. Sprint gained in the two non-retail categories but lost both prepaid and postpaid subs, while T-Mobile was the only carrier to make gains across the board. Tracfone doesn't even appear to be shown on the chart, but that's only because its net adds were just 8,000 in the quarter. Verizon went back to owning the best record in postpaid net additions, with AT&T second and T-Mobile third, after T-Mobile took the crown in Q1 and second place in Q4 2013. 

Jan Dawson's commentary: Each of the carriers also provides more information on the device mix among its postpaid net additions, and these tell an interesting story too. Verizon's total postpaid net adds were significantly helped by tablet net adds, which dwarfed both the other carriers' tablet net adds and its own phone net adds. However, Verizon did add a million 4G smartphone subs in the quarter, although these were offset by a significant reduction in feature phone and 3G smartphone subs, hence its lower overall phone net adds. T-Mobile made the first significant gains in tablet subs, boosted by its new tablet plans, but still came in fourth place. Its postpaid phone additions were smaller than in previous quarters, and despite its claims to be first in branded postpaid phone net adds, AT&T's reported number is higher. It's possible that feature phones are factored into T-Mobile's calculations and that these make up the difference, but on the surface at least it appears that AT&T added more smartphones than T-Mobile. AT&T's postpaid net adds and its phone net adds specifically were both the best in a long time, likely boosted by the aggressive pricing moves onto AT&T Mobile Share plans at 10GB and above.

Note on the charts that follow: the carriers don't explicitly report either gross additions or defections. The numbers shown in the charts below are estimates based on calculations using the companies' net add and churn figures. As such, I believe they're accurate, but they are strictly speaking estimates and may vary a little from the actual numbers.

Jan Dawson's commentary: This chart helps to explain why AT&T's net adds suddenly shot up. Its gross adds have been pretty consistent for the last three quarters, so it didn't gain any more new subscribers than it did in Q1 or Q4. What changed was its churn rate, which fell significantly thanks to its push to get subscribers onto Mobile Share plans, and that in turn significantly reduced defections, leading to higher net adds. 

Jan Dawson's commentary: Sprint has been losing subscribers at a pretty steady rate - around 2 million per quarter – but its gains have fluctuated far more, and for three of the last four quarters it's lost more than it's gained, largely due to the disruption caused by its network upgrades. In time, the number of defections should start to fall as its network upgrades reach completion, and that in turn should help turn net adds positive again. Note, too, that the number of customers leaving Sprint is roughly equal to the number leaving AT&T, at around 2 million a quarter, even though Sprint's churn rate is significantly higher, because AT&T has a much larger base. This highlights the challenge faced by the two largest operators - even at if churn rates are equal, they lose far more subscribers than the smaller carriers would at the same churn rate, meaning they have to gain new subscribers at a much more rapid clip to stay above water.

Jan Dawson's commentary: T-Mobile has managed to keep its defections to around one million per quarter, by far the lowest of all the five major operators. Its gross additions are actually lower (for the most part) than those of the other four big operators, but because of its smaller scale and its relatively low churn over the last several quarters, it has far fewer losses than the other operators, and so has been able to turn many of those gross additions into net additions. 

Jan Dawson's commentary: Tracfone's losses have been fairly stable at between two and a half and three million for most of the last two years, but its gross additions have been far less predictable. This past quarter is saw both its highest number of losses and lower gross adds, leading to net additions of just eight thousand. As a prepaid carrier, Tracfone has higher churn overall than any of the other carriers, and as such has to add new subscribers at a higher rate to break even than any other operator except Verizon.

Jan Dawson's commentary: As the largest carrier, even with its consistently very low churn, Verizon has to work the hardest to keep its net additions in positive territory. Its gross adds are the highest in the industry at over three million every quarter, and over four million in some quarters. But they're largely offset by rising losses, which have climbed from just over two million two years ago to closer to three million in the last few quarters. Over the last nine quarters, Verizon Wireless has lost about 24 million subscribers, but gained almost 35 million. Compare that to Tracfone's total subscribers of 25.5 million, or T-Mobile's 40 million total subs. The relatively small net additions number can mask huge changes in the underlying base that you don't see unless you break the gross additions and losses out in this way.

Jan Dawson's commentary: These numbers show the dramatic impact on Sprint's business of the rapid move towards equipment installation plans and away from traditional subsidies. Over 50% of Sprint's equipment costs were covered by subscribers in Q2, up from closer to 30% just a few quarters ago. Meanwhile, the net subsidy cost has dropped from over $1.5 billion per quarter to just over $1 billion. The cost of handset sales is therefore steadily being passed from Sprint's coffers to its customers' wallets, and in the process greatly benefiting Sprint's margins.

Jan Dawson's commentary: T-Mobile is reporting the impact of its shift to installment billing in a different way, but the effect is even more dramatic. A large majority of its base is now on installment billing plans, and almost all of its equipment costs are covered by installment payments now too. It's several quarters further along than Sprint, but it's easy to see the overall impact both Sprint and AT&T can expect to see as they embrace installment billing, while Verizon's transition is likely to be much slower as it remains considerably more cautious on the move away from subsidies. AT&T hasn't reported financial metrics that directly allow us to see the impact of the move away from subsidies, but it has reported that 44% of its base is now off the subsidy model, and 50% of its smartphone sales in Q2 2014 were on Next plans, so it should be following close behind T-Mobile and Sprint. 

How Verizon, AT&T, Sprint, T-Mobile and TracFone stacked up in Q2
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