Entner: In Q3, T-Mobile's innovation was rewarded while Sprint's 'unlimited for life' falls flat

Roger Entner Recon Analytics

Roger Entner

·        In 3Q 2013, the industry grew by 2.4 million subscriptions, which is a substantial increase from the last quarter.

·        After last quarter's correction due to the exuberantly excessive growth in Lifeline subs and the subsequent hemorrhaging of prepaid subscriptions when the government forced some operators to conform to the rules, wireless carriers reported some prepaid growth again. The organic growth was probably higher because some Lifeline disconnects still needed to be flushed out of the system.

·        While Sprint's subscriber losses recovered significantly after the shut down of the Nextel network, the company still lost more than 300,000 subscriptions, while the other three nationwide operators gained around one million additional subscriptions each.

·        Sprint desperately needs a repositioning, in the same way that T-Mobile has shown is possible. As the last quarters have proven, just providing "unlimited for life" is not enough for consumers to switch to Sprint in significant numbers because the other operators offer packages with more data per month than most consumers use. Unless Sprint can provide more value than Verizon or AT&T, the customer losses will continue.

·        T-Mobile continues to show that the wireless industry remains wide open and that consumers are rewarding innovative offerings that provide them with value. Leap's comments show how much pressure the new un-carrier initiatives are creating on the competition.

·        The new free 2G data and texting for 100 countries that T-Mobile introduced will make the company a stronger competitor in the business sector. In addition, T-Mobile lowered voice calls in these countries to 20 cents per minute. While T-Mobile will get a lot of goodwill from consumers, the real cost savings will come from business travelers who until now did not have a lot of choice when it came to international voice and data pricing.

·        The JUMP plan by T-Mobile is very successful, with 2.2 million enrollments, which is significantly more than their roughly 1.3 million Simple Choice gross additions. This indicates that a considerable number of base customers upgraded to JUMP. Since the additional $10 charge is added to service revenues it provides an important increase to ARPU and the overall topline.

·        With near full penetration, a carrier needs a dual-pronged strategy of upselling its existing customers to more products and services while continuing to attract new customers. AT&T has made the most progress in upselling its existing customer base to tablets and other connected devices, especially with customers that have already switched to smartphones. AT&T seems to have a continuing challenge with upgrading its feature phone base.

·        At the same time, AT&T became the top seller of prepaid during 3Q 2013 by extending its LTE network to prepaid customers and making it easier to bring your own device. This double accelerator of significantly enhancing value of prepaid through higher speed and lower latency data and the ability to just bring your own device yielded good results.

2Q 13 Subscriber Analysis

Contract

No-contract

Wholesale and Connected Devices

Total

AT&T

363,000 -188,000
551,000

192,000 +181,000
11,000

432,000 +362,000
70,000

989,000 +357,000
632,000

Sprint

(535,000) +510,000
(1,045,000)

28,000 +789,000
(761,000)

194,000 +422,000
(228,000)

(313,000) +1,721,000
(2,034,000)

T-Mobile

648,000 -42,000
685,000

24,000 +34,000
(10,000)

351,000 -101,000
452,000

1,023,000 -107,000
1,130,000           

Verizon Wireless

927,000 -14,000
941,000

134,000 +37,000
97,000

 

1,061,000 +23,000
1,038,000

Leap Wireless

 

(140,000) +115,000
(255,000)

(56,000) +53,000
(109,000)

(269,000) +95,000
(364,000)

US Cellular

(60,000) +60,000
(120,000)

(11,000) -4,000
(7,000)

(21,000) -111,000
90,000

(92,000) -55,000
(37,000)

Tracfone *
(MVNO)

 

5,000 +197,000
(192,000)

 

5,000 +197,000
(192,000)

Total

1,343,000 +331,000
1,012,000

227,000 +1,491,000
(1,264,000)

900,000 +313,000
587,000

2,472,000 +2,137,000
335,000

* Off due to rounding.
** Not counted in totals to avoid double counting. Tracfone is additive to no-contract and subtracted from Wholesale 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 had an overall good quarter and was able to increase its net additions to almost one million subscriptions. Revenues also went up by 3.7% on increases in both device revenues and ARPU. In addition, both prepaid and connected device sales were up substantially and churn remained near record lows. The only areas of concern were declines in resellers and reduced growth in postpaid connections. Although tablet sales were outstanding and smartphone sales were acceptable, the continued weakness in AT&T's feature phone base is worrisome. Without the industry-leading tablet subscription additions, AT&T would have lost postpaid subscribers. Overall, the strategy is sound: Upsell your existing customers with more products and services. The key is not to lose the unconverted feature phone users who have not bought into the connected world where everyone has smartphones, tablets and other connected devices. More than 22 percent of its customers have chosen Mobile Share plans. AT&T continues to spend heavily on its VIP program with $5.9 billion just during 3Q 13, which is more than what some of its smaller competitors spend in a year.

Sprint languished for another quarter, with 360,000 postpaid subscriber losses. The recovering prepaid and wholesale segments were unable to make up for large postpaid loss and the company lost 313,000 subscriptions overall. The only real good news to come out of the earnings call was that Sprint's revenues have continued to increase, that it has launched in 230 markets with 4G LTE and will have 200 million people covered by the end of 2013. Since 4G LTE has become such a huge game changer in the industry, Sprint has now only to tell more than Wall Street that. Sprint needs to hurry up and become more aggressive along the lines of T-Mobile, who have impressively shown that the wireless market in the US is still wide open if you are only willing to play by your own rules.

T-Mobile had a good quarter again, adding 1 million subscriptions. As part of its series of its un-carrier initiatives, T-Mobile made another publicity splash with its free 2G data and texting in over 100 countries program; at the same time, it got some egg on its face for its free (or not so free) 200 MB data for tablet initiative. The free data for tablets is an update to an older program in which it offered the same deal now on 4G LTE on HSPA+ that was then largely ignored by the public. We will see if the new initiative can attract more customers and improve T-Mobile's 5,000 tablet activations during 3Q 2013. The bulk of T-Mobile's growth came from postpaid phone subscriptions in what is basically a mirror of AT&T's profile: Heavy on smartphones, light on tablets. One of the unheralded secrets of success in the un-carrier strategy is that the equipment installment plans typically lower the upfront cost of devices by spreading it over the 24 month installment period. By lowering the upfront cost, T-Mobile is making it easier to sign up with them (e.g., the upfront cost of an iPhone 5s is $100 cheaper than with competitors). The lowered upfront cost makes T-Mobile more vulnerable to bad debt expenses and while bad debt expenses dropped this quarter, it is still too early to declare this program a comprehensive success. We only have to remember Sprint's ASL programs to realize all the things that can go wrong here. While T-Mobile is rightly proud of its strong postpaid phone additions, the prepaid numbers must be a disappointment. T-Mobile was the first carrier in the United States to add family plan features to its prepaid offering but this innovation was largely ignored by customers during the last quarter. T-Mobile invested $1 billion in its network in Q3 2013, making large strides forward and now cover more than 203 million Americans with 4G LTE. It also has begun making speed and reliability claims that should make Verizon especially nervous. Now it's not only AT&T claiming to be more reliable than Verizon, but also T-Mobile. In addition, T-Mobile claims to have the fastest 4G LTE network in 10 of the 20 largest metro markets. This is a harbinger of things to come when all four nationwide providers will reach for the prize of being largest, fastest, and most reliable. T-Mobile had roughly 1.7 million gross additions, of which 74% or 1.3 million chose Value or Simple Choice programs. A significant part of the difference came from the Walmart Family Plans. T-Mobile's widely publicized JUMP! program already has 2.2 million net enrollments, which is 10% of the branded postpaid base.

Verizon Wireless continued to lead the pack in wireless, with 1.06 million new subscriptions. Very strong industry-leading contract net additions and the second-strongest prepaid additions gave Verizon Wireless another excellent quarter. The subscriber additions, combined with an increase in APRA, supported over 50% EBITDA profit margins. Churn remained at record lows. The company spent $2.4 billion in CapEx even though it has completed its geographic build out. In all likelihood, most of the capital expenditure went into adding the spectrum it has in the AWS-Band to its existing 700 MHz 4G LTE network for additional speed and capacity.

Leap Wireless had another rough quarter, losing an additional 140,000 no-contract customers. Leap in particular felt the impact of T-Mobile's un-carrier initiatives, which significantly lower the out of pocket device cost for new subscribers. Its shareholders overwhelmingly approved the sale of Leap Wireless to AT&T and everyone is waiting for the Department of Justice and the FCC to approve this sale.

US Cellular lost a total of 92,000 subscribers last quarter. Even though the company has respectable churn of 1.7 percent, the key problem is that, despite covering 90 percent of its footprint with 4G LTE, US Cellular has problems getting people to sign up. The company has a very good network and good devices. But its marketing does not give customers a good enough reason to sign up.

Tracfone is slowly gaining customers again after it had to clean out inactive accounts on its books due to the recent slew of acquisitions. At the same time, while voice is growing at the same pace of its subscriber base, data is growing by 50 percent. This re-confirms that no-contract is following the same trend as contract towards becoming increasingly data-centric.

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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