Entner: Non-carrier branded subscribers dominated in Q3 again

In my analysis of the third-quarter wireless carrier earnings results, I noticed several trends worth sharing. They are as follows:

  • Wireless operators have abandoned their walled gardens. There were 4.9 million increases in wireless connections in third quarter 2011. Almost half, or 49.5 percent, of the new connections were among non-carrier devices, which were 2,447,000 connections. There were 734,000 contract additions (14.8 percent) and 1,758,000 no-contract additions (35.5 percent).
  • There were increases in every wireless customer segment, with contract customers obtaining secondary devices and no-contract customers flocking to great value at the $40 to $50 price point. The increase in number of connected devices and wholesale net additions are driven by ereaders, tablets, and the MVNO TracFone.
  • AT&T Mobility's connected device group continues to lead the wholesale and connected devices segment, leveraging its early lead in the ereader market. Sprint Nextel is gaining market share in the space, while Verizon Wireless fell behind this quarter. T-Mobile USA's connected device segment seems to have disappeared. One of the major differences between Sprint's and Verizon's connected device strategy is 3G vs. 4G. While the future is 4G LTE, prices for modules are still favoring 3G devices.
  • The no-contract customer segment grew again by leaps and bounds, led by TracFone and Sprint. The two companies combined make up more than half of the market share among prepaid subscribers. New price plans by AT&T, Sprint, and Verizon should make fourth-quarter activity among the prepaid segment very interesting.
  • With the iPhone 4S in its lineup, Sprint is positioned to grow subscribers in the fourth quarter.
  • MetroPCS and Leap Wireless retained their positions as facilities-based no-contract providers catering to price-sensitive customers. Leap Wireless continues to address its subscriber losses related to its lack of a competitive wireless broadband offering.
  • Verizon Wireless continues lead the pack in growing its contract customer base with 882,000 adds, more than the industry total of 734,000. AT&T's contract adds were constant at 319,000, similar to Sprint's CDMA adds. T-Mobile is still struggling to hold onto its contract customers, losing 389,000.
  • T-Mobile's strategy of de-emphasizing contract customers in favor of no contract customers is almost impossible to execute profitably. One contract customer is as profitable as three to four no contract customers combined. Using this quarter as a benchmark, where T-Mobile lost 389,000 contract customers (excluding connected devices), it would have had to gain more than a million additional no-contract customers to break even financially. In addition, it would have to bring its cost structure into alignment with a no-contract business model, mercilessly slashing marketing expenditures and reducing its employee headcount.

Q3 2011 Subscriber Analysis

Contract

No-contract

Wholesale and Connected Devices

Total

AT&T

319,000
-12,000

293,000
+156,000

1,511,000
+884,000

2,123,000
+1,028,000

Sprint

(44,000)
+8,000

485,000
-189,000

835,000
+316,000

1,276,000
+176,000

T-Mobile

(389,000)
+448,000

254,000
+23,000

262,000
-294,000

127,000
+177,000

Verizon Wireless

882,000
-375,000

86,000
+25,000

367,000
-523,000

1,335,000
-873,000

Leap Wireless

 

10,000
+113,000

 

10,000
+113,000

Metro PCS

 

69,000
-130,000

 

69,000
-130,000

US Cellular

(34,000)
+7,000

11,000
+28,000

(13,000)
-11,000

(36,000)
+24,000

Clearwire *

 

35,000
+35,000

1,860,000
+360,000

1,895,000
+395,000

TracFone *
(MVNO)

 

515,000
+267,000

 

515,000
+267,000

Total

734,000 (14.8%)
+35,000

1,758,000 (35.5%)
+311,000

2,447,000 (49.5%)
+103,000

4,939,000
+449,000

* Not counted in totals due to avoid double counting. TracFone is additive to no-contract and subtracted from Wholesale totals. Clearwire was not added to totals

The third quarter  of2011 was generally one of growth for almost all wireless carriers. Overall, 4.9 million new wireless connections were activated for a run rate that is more than 20 million new connections for 2011. However, we could be coming close to the all-time high of 25 million new connections activated in 2007 if all of the backorders for blockbuster smartphones such as the iPhone 4S can be filled before year-end. In past years, prepaid feature phones were a favorite stocking stuffer, making Dec. 25the heaviest phone activation day of the year. This year the phenomenon will shift to smartphones.

AT&T made significant improvements in third quarter in the wholesale and connected devices segment, where it added 1.5 million new connections, more than twice as many than in second quarter. The improvement was due to a resurgent TracFone that started selling its StraightTalk on GSM, as well as AT&T's increasing strength in the ereader segment.

It will be interesting to see how Verizon's market share is impacted by the much-hyped Verizon Unleashed prepaid product, which goes head-to-head with the other $50 unlimited no-contract offers in the market. Verizon has certainly the network reputation to win, as long as the marketing works and the handset portfolio compares well. The impact of affordable smartphones coming to no-contract consumers will certainly reshuffle the relative market position of every provider at the $50 price point.

Sprint is continuing to tease the market with when they will actually go contract customer positive--the third quarter was not that quarter.  To put it in perspective, Sprint's CDMA contract customer base grows as quickly as AT&T's. This is the comparison that is actually meaningful, since Sprint effectively no longer competes with its iDEN products and merely manages the decline until the network gets turned off in 2013. In the wholesale and connected devices segment, Sprint has also made significant progress by adding 835,000 new connections, which is an increase of 316,000. Sprint's growth has come at the expense of Verizon and T-Mobile and has catapulted Sprint into the No. 2 position among all U.S. carriers.

The implications for competition are quite enlightening. Despite all the soothsayers, Sprint is competing well in the market. AT&T, with twice the number of contract customers, is growing in absolute numbers roughly as quickly as Sprint. Furthermore, Sprint has beaten Verizon again in the all-important non-carrier-branded segment, which encompasses the rapidly growing M2M segment. Sprint continues to add more 4G customers than anybody else--more than 1.8 million compared to 1.4 million new 4G customers at Verizon. The new double data allowance from Verizon for LTE smartphones is clearly taking aim at Sprint and its success with its unlimited data offering. We have to wait for fourth-quarter numbers to see if Verizon is able to overtake Sprint in 4G adds when they have twice the 4G coverage that Sprint has.

Clearwire's success is obviously dependent on Sprint's 4G performance. Almost all new customers come in through Sprint. While the two are in the process of finding a solution on how they will work together, time is running out. Clearwire has a debt payment due Dec. 1. While it has enough funding on hand for this payment, the company believes it can also get together the money for the June 1, 2012 payment, but not without painful cutbacks. The dramatic fall of Clearwire's stock price after Sprint's investor conference in October should serve as a clear message by the market that Clearwire needs Sprint more than Sprint needs Clearwire.

MetroPCS and Leap both grew this quarter with 69,000 and 10,000 subscriber additions, respectively. The problem that Leap is facing in its broadband segment is the same that T-Mobile is facing: Too little investment, too late. Leap's 3G broadband offer is competing in a 4G world and customers are moving to the faster technology. A clear path to 4G LTE is what is being rewarded by customers who think about who gives them the best value today and tomorrow.

U.S. Cellular reported another lackluster quarter with a loss of 34,000 contract customers and a gain of 11,000 no-contract customers. The company continues to focus on its Belief Project advertising and positioning play and its endeavor to have the happiest customers in the wireless industry. While the Belief Project seems to work well in containing churn (1.5 percent in third quarter compared to 1.4 percent in second quarter) it has not been able to get new people to believe. Rolling out 4G LTE is certainly a move in the right direction. What the company desperately needs is a new marketing campaign that actually moves people to join U.S. Cellular.

TracFone, with is multi-brand approach, is growing significantly again with more than half a million net adds. The combination of going more budget through the Lifeline services and more upscale through StraighTalk is gaining traction. The new Android devices are clearly taking StraightTalk to the next level as its customers graduate from voice-only devices to integrated devices.

As always, T-Mobile reported concerning but improving customer metrics. The company lost 389,000 contract customers, an improvement of 448,000 compared to last quarter. In addition, it added 254,000 no-contract customers, an increase of 23,000 compared to the previous quarter. It also added 294,000 wholesale and connected device customers, but which was 294,000 less than in the previous quarter. The big concern is that churn is increasing and T-Mobile itself is warning that it will increase even further. The company's Value plans, which significantly reduces the handset subsidy that T-Mobile is recording, have helped the company to improve its short-term profitability. T-Mobile is trading a reduction in handset subsidy ($60 less in third quarter 2011 than in second quarter 2011), which it expenses as a cost, for a reduction in service revenue, which becomes accretive over the duration of the customer's stay with the company. T-Mobile is following the reverse strategy of Sprint with the iPhone. Sprint is expensing the handset subsidy for the iPhone now, which hits its profit line today, but will provide a significant profit in about two years. T-Mobile, in breaking with industry norm, is therefore able to improve its short term profitability compared to the other carriers. T-Mobile's fundamental problem remains that its contract business is being savaged by Straight Talk, MetroPCS, and Leap from the low end and clobbered from the high end by Verizon, Sprint, and AT&T.

Roger Entner is the Founder and Analyst at Recon Analytics. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications.

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