Entner: In Q2, industry keeps growing albeit at slower speed

Roger Entner Recon Analytics

Roger Entner

·        In Q2 2012 the industry grew by 2 million connections, a marked slowdown compared to previous quarters. The slowdown is cyclical and, upon further analysis, shows the early impact of governmental crowding out in the prepaid market.

·        Industry-wide net adds resulted in 2 million new subscriptions compared to 4 million in the previous quarter. Meanwhile, contract subscriptions moved into positive territory again on the strength of Verizon Wireless and AT&T. No-contract subscriptions declined by almost 80 percent to less than 400,000 subscriptions. Growth at all prepaid providers plummeted, with only US Cellular able to grow its prepaid sales. Wholesale and connected devices also had another down quarter with 1.3 million additions.

·        Among the carriers, only Verizon Wireless and AT&T could expand their net additions compared to the previous quarter. Solid execution built on a strong foundation of both contract and no-contract customer acquisitions created a solid financial quarter for the two carriers.

·        Churn has been on the decline for all operators. Customers are seemingly settling down with their carrier of choice. The weakness in growth comes through a decline in gross additions, with fewer people entering wireless for the first time. With a wireless penetration rate of more than 100 percent this should not come as a surprise to anyone.

·        Competition in the marketplace continues to be intense along different friction points as differentiation becomes increasingly difficult. A case in point is the introduction of a differentiated shared data price plan by AT&T and the re-introduction of unlimited data plans by T-Mobile in Q3 2012.

·        One of the biggest themes is how the government's Lifeline service is beginning to crowd out traditional prepaid providers. One sixth of all American households are on government assistance and are eligible for wireless Lifeline service. More than 18 million connections rely on the free wireless service. While it serves as a lifeline for Americans in dire financial straits, it has become a game changer for entry-level prepaid providers. With offers, depending on the state and where people live, from 80 minutes for free to 1,000 minutes for $1 per month, entry-level prepaid providers have a hard time competing. The government's good intentions are reshaping the wireless world with winners and losers on both sides.

·        Some operators are profiting from the trend, such as TracFone and T-Mobile, Sprint, Verizon Wireless, by offering their own branded solution, hosting one of the more than 1,000 Lifeline providers or offering a $10 discount for Lifeline customers (like Leap Wireless).

·        Going upstream with smartphones and 4G networks is the logical direction, but as the numbers indicate, success is limited because the no-contract providers are trying to enter the traditional sweet spot for contract providers.

·        Clearwire is stuck in a technological changeover and has to launch its new 4G TD-LTE network as quickly as possible, but with greater coverage than ever.

2Q 12 Subscriber Analysis

Contract

No-contract

Wholesale and Connected Devices

Total

AT&T

320,000
+133,000

92,000
-133,000

854,000
+440,000

1,226,000
+540,000

Sprint

(246,000)
-54,000

141,000
-348,000

388,000
-397,000

283,000
-799,000

T-Mobile

(557,000)
-47,000

227,000
-22,000

125,000
-362,000

(205,000)
-392,000

Verizon Wireless

888,000
+337,000

290,000
-57,000

***

1,172,000***
+448,000

Leap Wireless

 

(289,000)
-547,000

 

(289,000)
-547,000

Metro PCS

 

(186,000)
-317,000

 

(186,000)
-317,000

US Cellular

(48,000)
-10,000

20,000
16,000

 

(24,000)
10,000

Clearwire *

 

(8,000)
-57,000

(34,000)
-571,000

(42,000)
-628,000

TracFone *
(MVNO)

 

100,000
-269,000

 

100,000
-269,000

Total

357,000
409,000

387,000
-1,510,000

1,333,000
-482,000

2,077,000
-1,952,000

* Off due to rounding.
** Not counted in totals to avoid double counting. TracFone is additive to no-contract and subtracted from Wholesale totals. Clearwire was not added to totals.
*** Verizon has stopped releasing wholesale and connected device connections, which makes it impossible to calculate its total connection number. Therefore only retain connections are provided.

AT&T's second quarter was strong, especially in postpaid and connected devices rebounded. The real impact was on the churn and margin side with best-ever wireless contract churn of 0.97 percent and margins with EBITDA margins of 45 percent. Customers are staying with AT&T longer than ever before. With these results, AT&T refuted once again the baseless concerns of Wall Street that the smartphone boom would be the death of margins. People find smartphones more useful than the devices they had before and are willing to pay more for that added utility which the increase in ARPU indicates. In addition, customers are more satisfied and leave less often. The iPhone continues to be AT&T's growth engine; more than 800,000 new AT&T customers chose the iPhone.

Sprint had a more headwinds this quarter and could only add 283,000 customers compared to slightly more than a million in the previous quarter. The Nextel transition, which is the major culprit of the decline in net additions, is progressing better than expected with more than 40 percent of Nextel customers choosing to stay with Sprint. During Q2 2012, Sprint was also able to add less no-contract customers and wholesale customers as well indicating a more difficult environment for Sprint. On the bright side, Sprint's Network Vision network transformation is progressing well, which is a key requirement for Sprint's long-term survival. Network Vision will allow Sprint to offer 4G LTE, but also provides larger cell coverage, which will reduce its cost structure by reducing the need to roam on other operators. While profitability still remains a challenge, the company is ahead of its milestones for iPhone sales, which was a major concern on Wall Street among the soothsayers. Furthermore, churn is coming down for Sprint, but still at elevated levels compared to the more premium providers AT&T and Verizon Wireless.

T-Mobile continues its attempt to turn around, but as we have seen over and over again in the mobile industry, it can take years to gain customers again. Like Sprint, T-Mobile is doing a lot of the right things now, but once customers are disappointed it can take years before a company gets another chance. T-Mobile is continuing to invest in its network by building more sites and buying more licenses to serve its customers. It is expanding its distribution channels so that it will be easier for more people to purchase T-Mobile service. Unlike in other quarters, unfortunately there is no bright spot in T-Mobile's numbers. Contract, no-contract, wholesale and M2M had more significant declines than the quarter before. The churn numbers are still concerning. Contract churn of 2.1 percent is among the highest among the nationwide providers and branded no-contract churn is 6 percent, which is above the all-important threshold of 5 percent when operators start making money on no-contract accounts.

Verizon Wireless grew again at the fastest rate among contract customers with 888,000 retain adds. No-contract net adds declined as with every other of the nationwide carriers. Verizon Wireless reached 50 percent smartphone penetration among its customer base, which is in line with the overall market. This is a significant achievement for Verizon Wireless as it has been behind its competitors in smartphone penetration. One significant contributor to the growth in smartphones is Verizon Wireless' leading 4G LTE network, which currently covers 233 million Americans in 337 markets, more than that of all other competitors combined. Roughly 10.9 million 4G LTE smartphones are active, which is about 12.2 percent of its retail customer base. Similar to AT&T, Verizon Wireless also achieved record EBITDA service margin levels.

Leap Wireless, after gaining subscribers last quarter, lost customers again this quarter. Overall churn was 4.4 percent, with its core voice customer segment at 3.4 percent. On the positive side, Leap continues to increase its ARPU by upselling. MetroPCS also lost subscribers in the second quarter, 186,000, even though churn decreased from 3.9 percent to 3.4 percent. The problem that Leap and Metro are facing is that their traditional customer base is being eroded by Lifeline service and both companies have a hard time competing on the higher-end smartphone market, especially with limited 4G coverage.

US Cellular. US Cellular has expanded its prepaid reach with U Prepaid, which is being sold in more than 400 Walmart stores. This is a significant positive for US Cellular as Walmart is the largest prepaid point of sale in the country. Conversely, it is a negative for TracFone because this is another step of encroachment in its prime sales channel. Whereas the loss of subscribers at Leap and Metro came on the heels of falling gross additions, US Cellular was able to increase gross additions but was impacted with slightly higher churn due to competition from other carriers. Service revenue increased as with every other carrier due to customers willing to pay more for higher value smartphones.

Clearwire also lost customers in the second quarter 2011, 8,000 retail no-contract customers and 34,000 wholesale customers. The significant decline in wholesale connections is due to Sprint focusing its smartphone adds on iPhones rather than WiMAX devices that would run on Clearwire's network. Clearwire has to execute on building out its 4G TD LTE network to a critical size so that it becomes worthwhile for Sprint to include Clearwire in its new 4G LTE devices.

TracFone gained a total of 1.2 million no-contract customers, of which almost 1.1 million were from the acquisition of Simple Mobile. The slowdown of prepaid net additions is in line with the entire industry. The Simple Mobile acquisition rounds out TracFone's prepaid portfolio. Simple Mobile is a SIM-only prepaid provider; customers have to either bring their own device or purchase it through an associated distributor. This allows Simple Mobile to eliminate the handset subsidy, which contrary to common belief is quite common.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner

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