Entner: Wireless reaches contract subscriber maturity in Q1, but prepaid shows growth

Roger Entner
While there is a lot of headroom left for prepaid and especially connected devices, the first quarter of 2012 marked the final point of contract people maturity in the history of the U.S. wireless industry. For the first time, wireless contract subscribers declined, by 52,000 customers. It was no surprise that it would happen in a first quarter. Operators generally spend February and March digging out of the January hole that the returns from holiday overbuying creates.

The contract subscriber decline indicates that the United States has reached full penetration of contract customers with the current economic framework. The contract customer base will grow with population modified by economic conditions. When the economy expands and credit scores increase the addressable contract customer base increases. Conversely, if the economy struggles the number of people who can afford the monthly recurring charge that comes with a contract decreases.

Operators that differentiate themselves on price/value, such as Sprint and T-Mobile, are more affected by the tapping out of the addressable contract market. Both operators lost 192,000 and 510,000 respectively. Sprint, which was recovering well, faced a slowdown at its CDMA platform with only 35,000 subscribers new to Sprint.

The no-contract category grew by almost 1.9 million customers in the first quarter of 2012 and did not suffer the same significant slowdown as the contract category. This indicates that the decline of contract subscriptions is clearly an affordability issue rather than an issue of the attractiveness of the wireless devices. As no-contract choices have expanded and have become almost identical to contract choices, this trend is going to continue. The continued growth in prepaid is especially remarkable as wireless Lifeline services are continuing to crowd out the low end prepaid segment. See a future report on this "Great Migration" in the near future.

The wholesale and connected device category grew by 1.8 million customers. This was nominally about 250,000 connections less than during the fourth quarter of 2011, but does not take into account the approximately one million connection loss at Verizon. On an apples-to-apples basis, the connected and wholesale segment shrank by about 1.2 million adds quarter over quarter. This is roughly the size of AT&T's decline in connected and wholesale connections, which is heavily dependent on the e-reader market. As the holiday season ended, the gifting of Kindles and Nooks also declined significantly which is probably the major driver of that business.

Interestingly, Verizon did not report the connected device category in its first-quarter financials. This comes on the heels of a more than one million customer reduction in this category in the fourth-quarter of 2011. Generally speaking, when data is no longer reported circumstances have worsened rather than improved.

Sprint's reliance on Clearwire has also diminished further, with 4G WiMAX sales decreasing by approximately a third. This is primarily because Sprint sold a lot more iPhones than WiMAX devices.

For the second quarter in a row, no operators added more connections that Sprint.

1Q 12 Subscriber Analysis

Contract

No contract

Wholesale and Connected Devices

Total

AT&T

187,000
-530,000

125,000
-34,000

414,000
-1,207,000

726,000
-1,771,000

Sprint

(192,000)
-353,000

489,000
-18,000

785,000
-169,000

1,082,000

T-Mobile

(510,000)
+196,000

249,000
+29,000

448,000
+487,000

187,000
+713,000

Verizon Wireless

501,000
-706,000

223,000
-29,000

*

724,000*

Leap Wireless

 

258,000
+79,000

 

258,000
+79,000

Metro PCS

 

131,000
-66,000

 

131,000
-66,000

US Cellular

(38,000)
-18,000

4,000
-3,000

 

(34,000)
-21,000

Clearwire *

 

49,000
+18,000

537,000
-367,000

586,000
-287,000

Tracfone *
(MVNO)

 

369,000
-124,000

 

369,000
-124,000

Total

(52,000)
-1,711,000

1,897,000
-86,000

1,815,000
-266,000

4,029,000
-1,694,000

* 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

AT&T's total subscriber base grew by 726,000 connections, which is the second most after Sprint. The company had another record first quarter for smartphone sales. The higher long-term profitability of smartphones has driven data revenues up by 19.9 percent year-over-year. As a result, EBITDA margins increased to 41.6 percent while contract churn was 1.1 percent. AT&T's connected devices sales were down in the first quarter down due to lack of holiday shopping as the number of Kindles and Nooks were down, which are on AT&T's network.

Overall, Sprint had another good quarter. Again, the company added more connections than any other wireless operator in the United States. However, the company still needs to improve on the contract side. Dragged down by the end-of-life Nextel network, the company lost 192,000 contract customers, but even the long-time strong CDMA platform did not perform well. Only 35,000 Sprint-platform net additions were counted if we leave out customers who have switched from Nextel. Churn was 2 percent on the Sprint platform, up 0.22 percent compared to a year ago and flat compared to last quarter. As a consequence of its increasing involuntary churn (i.e., customers who do not pay their contract on time), Sprint has tightened credit requirements again, reducing net additions but also future involuntary churn.

T-Mobile rebounded from a challenging fourth quarter of 2011. While more than half a million contract customers are still leaving the company per quarter, T-Mobile added about a quarter million no-contract customers. At the same time, the wholesale and connected device segment grew quite nicely again by almost half a million.

Verizon Wireless continued to lead the industry for contract customers with more than twice as many new contract customers as AT&T. Data revenues increased by 21.1 percent compared to the year before as more customers signed up for smart phones. As a consequence, EBITDA margins increased to industry leading 46.3 percent. Contract customer churn fell to below 1 percent again.

Leap Wireless increases net adds by 79,000 to 258,000 in the first quarter compared to the fourth quarter of 2011, bucking the industry trend. Churn was 3.3 percent down from previous quarter of 3.9 percent but up from year ago 3.1 percent. Metro PCS gained 131,000, down from 197,000 in the previous quarter, with ARPU up slightly due to smartphones and 4G. After struggling most of last year with Lifeline inflicted losses, both companies have found new pockets of growth.

U.S. Cellular lost more subscribers, based on low gross additions, even though gross additions in the notoriously weak first quarter went up by 7 percent. More concerning, churn increased to 1.6 percent from 1.4 percent, while finally Smartphone sales increased to more than half of all device sales. U Prepaid, which is being sold at Walmart, should give US Cellular a much needed boost in prepaid. At the same time, this puts U Prepaid head to head against TracFone, for which Walmart is the most important distribution channel.

While Clearwire Sprint added more than 500,000 subs in the first quarter of 2012, it is clearly a slowdown from the million-plus days of last year where WiMAX was the biggest competitive option for Sprint. Now with the iPhone, a lot of the focus has shifted and the iPhone has eaten significantly into Clearwire's growth. It highlights more than ever the need for Clearwire to roll out TD-LTE in a more robust fashion than it rolled out WiMAX and blew a multi-year time to market lead.

TracFone quietly continues to grow, while moving upmarket from its traditional low ARPU, low MOU core Tracfone business to the higher ARPU, high MOU Straight Talk business. As a result, ARPU rose 13.2 percent and MOUs exceeded more than 400, when only 3 years ago it was in the low 100s. In a marketing shift, this thrifty operator now even advertises on television to reach their more smartphone-centric StraightTalk customer base. This sleeping giant has more than 20 million customers.

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. Follow Roger on Twitter @rogerentner

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