Appraising U.S. wireless operators in the first quarter

Mike Dano

As the first quarter reporting season comes to a close, it's time to start parsing the information to see which carriers slipped and which managed to get ahead.

Here are some of the big themes:

AT&T's resurgence

The nation's second largest carrier managed to pull off a bit of a surprise: matching or surpassing industry leader Verizon Wireless (NYSE:VZ) in several key areas. Perhaps most importantly, AT&T Mobility (NYSE:T) matched Verizon's postpaid churn figure--1.07 percent--a statistic in which Verizon has long led the industry. Analysts said AT&T's improved churn, down from 1.15 percent in the year-ago quarter, largely is due to the carrier's newly refreshed device portfolio. Specifically, Current Analysis' William Ho said AT&T's line of quick-messaging devices--feature phones with Qwerty keyboards, essentially--served to convince more customers to stick with AT&T. Further, as Strategy Analytics' Susan Welsh de Grimaldo pointed out, AT&T's data revenues continue to trail those of Verizon, but the carrier has been making progress on that front too.

AT&T also managed to record more net additions than Verizon--1.9 million vs. Verizon's 1.6 million. Not surprisingly, AT&T was helped along by its exclusive deal to sell Apple's iPhone. AT&T activated 2.7 million iPhones during the period, and more than one-third of them were new to AT&T. AT&T was also helped by its embedded activities.

Embedded will be huge

Both Verizon and AT&T provided new details on their respective "connected" businesses--wherein wireless is inserted into gas monitors, ereaders and other non-phone gewgaws. AT&T said it added 1.1 million connected devices in the quarter, reaching a total of 5.8 million. Verizon revealed it has 7.3 million "other" wireless connections, which it defines as machine-to-machine, ereaders and telematics. However, the company did not say how many connected devices it added in the quarter. Concluded AT&T CFO Richard G. Lindner, according to SeekingAlpha: "While ARPUs and connected devices are typically low, the churn and margin characteristics are quite attractive. And it's an important growth area. We believe the range of devices that will be connected wirelessly in the future will be both broad and deep."

The big guys won't compete on price

Current Analysis' Ho said that, despite lowering their unlimited calling plans from around $100 a month to around $70 per month in January, neither Verizon nor AT&T will sacrifice profits to compete with low-cost unlimited carriers. He said both carriers enjoy wireless margins of around 40 percent--far above most of the rest of the industry--and both carriers likely will continue to focus on the "high-ARPU users" that support those margins. Indeed, Verizon CFO John Killian said the carrier plans to continue to focus on the higher-value postpaid market, despite figures from New Millennium Research Council showing that nearly two-thirds of U.S. net subscriber additions in the fourth quarter were prepaid.

From the smaller guys, expect the unexpected

Click here for Strategy Analytics’ list of the top 10 carriers in the United States in the first quarter and their respective first quarter metrics.As Verizon and AT&T get bigger, there may be less and less business for the market's smaller players. T-Mobile USA's tumble in the first quarter served as a clear illustration of this possible outcome: The carrier recorded a dramatic loss of 77,000 net subscribers in the quarter, a stark reversal of the 415,000 subscriber additions it reported in the first quarter of 2009. Ho said the stumbling primarily is due to threats from the likes of Boost Mobile and Leap Wireless (NASDAQ:LEAP), which are crowding T-Mobile out of the "voice savings" selling point the No. 4 carrier has traditionally used to entice new users. (To be fair, though, Strategy Analytics' Welsh de Grimaldo pointed out that T-Mobile's margin improved year-over-year from 29 percent to 30 percent.)

Ho predicted that, if T-Mobile continues to suffer in the coming months, the carrier likely will engage in a major strategic shift in order to reignite growth. Welsh de Grimaldo said that effort could include experimentation with new service pricing in conjunction with the rollout of T-Mobile's HSPA+ network.

Indeed, regional player U.S. Cellular appears poised for just such a refresh. The carrier announced in conjunction with its first quarter results that it will appoint Mary Dillon, the former chief marketer of fast-food chain McDonald's, as it new CEO. Ho said the move could foreshadow major changes at the carrier, which is feeling the heat from an increasingly competitive wireless landscape. (U.S. Cellular added 6,000 net subscribers in the first quarter, substantially weaker than the 47,000 it had in the year-ago quarter. However, the carrier has managed to maintain industry-leading ARPU figures.)

Continued rivalry in the unlimited, prepaid space

Flat-rate carrier MetroPCS (NASDAQ:PCS) managed to post notably improved metrics in the first quarter, which Ho said is a reflection of the success of the carrier's January revamp of its unlimited plans. Leap in March announced similar changes to its rate plans, which Ho said could lead to similar results in the coming quarter.

Separately, Sprint Nextel (NASDAQ:S) today put the finishing touches on its new multi-brand prepaid strategy, which includes Virgin Mobile USA, Boost Mobile, Assurance Wireless and now Common Cents Mobile. The carrier's actions are a direct response to increased competition in the prepaid space.

"I think that's going to position them well," Welsh de Grimaldo said of Sprint's prepaid effort, noting also that the carrier's first-quarter performance indicated Sprint has made strides in improving its overall operations.

Both Ho and Welsh de Grimaldo forecast continued jostling in the prepaid market this year, especially in the mobile broadband space. (Leap has been testing new mobile broadband offerings, while Sprint has hinted at a prepaid mobile WiMAX offering.)

For a complete analysis of wireless carriers in the first quarter, make sure to check out Strategy Analytics' list of the top 10 carriers in the United States in the first quarter and their respective first quarter metrics. --Mike

Article modified May 14 to correct information about AT&T's data revenues.