Appraising U.S. wireless operators in the second quarter

Mike Dano

As the second-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 from the quarter:

Continued strength at the top

"I don't see any weakening in the top two," noted Susan Welsh de Grimaldo, an analyst with research firm Strategy Analytics.

Both Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T)--the nation's largest and second largest carriers, respectively--scored net customer additions of more than one million, and both continued to improve their churn metrics. Verizon recorded net adds of around 1.3 million, while AT&T showed adds of 1.6 million, and both had average monthly churn of around 1.3 percent.

One interesting item, though: According to Current Analysis, Verizon added 896,000 wholesale customers during the quarter, and around 460,000 of those came from TracFone's unlimited, prepaid Straight Talk service, for which Verizon provides service. (The TracFone numbers comes from America Movil, and Current Analysis' William Ho said that, because they don't show loss, it's unclear if there were more Straight Talk gains.) Ho noted that Verizon's wholesale customer additions appear to be brisk beyond Straight Talk, which means that Verizon is offering service to other, unnamed MVNOs and is deriving noteworthy net adds from those efforts.

"It means the other MVNOs are doing well," Ho said, adding that it's not clear which MVNOs Verizon is gaining customers from.

Currently Analysis' Maidy Whitesell said the Verizon wholesale numbers indicate that "customers are not afraid of going to new brands."

However, Welsh de Grimaldo pointed out that the net add numbers for both AT&T and Verizon slowed in the second quarter compared with past quarters, which she said is partially attributable to improvements at Sprint Nextel (NYSE:S). This leads into the second quarter's second major trend:

Improvements at Sprint

"They are coming back," said Ho, pointing to Sprint's re-emergence into positive net customer addition territory during the second quarter.

Click here for Strategy Analytics’ list of the top 10 carriers in the United States in the second quarter and their respective second quarter metrics.Welsh de Grimaldo agreed: "Sprint has really gotten its feet back under itself."

Sprint, the nation's third largest carrier, added a net total of 111,000 wireless subscribers in the quarter, a reversal of three years of losses, and posted its best-ever postpaid churn of 1.85 percent.

One cloudy area though was the performance of Sprint's various prepaid efforts. The company gained a net 173,000 prepaid subscribers, much weaker than in the second quarter of 2009. The prepaid numbers include net additions of 638,000 CDMA customers, offset by net losses of 465,000 iDEN customers. The carrier during the quarter put the finishing touches on its multi-pronged prepaid strategy, which stretches across brands Virgin Mobile, Boost Mobile, Common Cents Mobile and Assurance Wireless.

"We don't know how the individual pieces roll up," Ho said.

So is Sprint's recovery a threat to the likes of Verizon and AT&T?

"They're not threatening, but they've stopped bleeding customers to them," Welsh de Grimaldo said. "It takes a long time to rebuild, and I think (Sprint) has turned the corner."

Troubles at Leap and T-Mobile

Cricket provider Leap Wireless (NASDAQ:LEAP) and No. 4 carrier T-Mobile USA both reported troubling customer losses during the period. Leap said it lost a net 112,000 customers, comprised of around 73,000 voice customers and 39,000 broadband customers, and its churn rose. T-Mobile, meanwhile, lost 93,000 net customers in the quarter, and Rene Obermann, the CEO of parent company Deutsche Telekom, warned that it's "too early to talk about a turnaround in the U.S."

Current Analysis' Ho said T-Mobile is simply not competitive in postpaid or prepaid. He said the carrier lacks eye-catching smartphones, and its prepaid offer--$50 for unlimited talk and text--is no longer competitive with the likes of MetroPCS (NYSE:PCS) or TracFone.

"Prepaid is just a way competitive market," Ho said, pointing to the success of MetroPCS' "inclusive" plans during the second quarter, which add taxes and fees into the monthly price tag.

"We haven't really seen any compelling flagship products out of T-Mobile," Welsh de Grimaldo said. "I think they need to come up with something new and innovative."

She said the carrier continues to score highly on customer satisfaction surveys, but lacks the momentum driven by products such as AT&T's iPhone or Verizon's Droid line of phones.

"I don't think it's a downward story, it just needs some tweaking," Welsh de Grimaldo said.

Smartphones, smartphones, smartphones

Of course, a major and continuing trend in wireless is the rocket-like momentum behind Android, iPhone, BlackBerry and other smartphones. Indeed, the HTC Evo played a notable role in Sprint's second quarter recovery, though carrier executives said Sprint could have posted positive net adds without the device.

Welsh de Grimaldo said the rise of smartphones could cut into carrier margins since operators must dole out hundreds of dollars in subsidies for each phone--high-end smartphones in the United States generally sell for around $200 with a contract, while the non-contract price often exceeds $600.

Nonetheless, "we still saw good margins across the board," Welsh de Grimaldo noted, which she said indicates careful cost management among the nation's Tier 1 wireless providers. For example, she said Sprint's margins bottomed out in the fourth quarter of 2009 at 16.9 percent, and rose to around 17.5 percent in the second quarter of this year.

Current Analysis' Ho pointed out that Verizon and AT&T have managed to maintain margins of around 40 percent, partially due to the data services they require smartphone buyers to purchase.

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