For wireless carriers, the smartphone party is ending

Mike Dano

According to a detailed report from New Street Research analyst Jonathan Chaplin on wireless carriers in the first quarter, fewer people are buying smartphones. This means that wireless carriers as a group will no longer benefit from millions of people upgrading from a feature phone to a smartphone--those who want smartphones already have them, and those who don't most likely won't buy one anytime soon.

For wireless carriers, this means that years of growth in their average revenues per user--driven by customers upgrading to the more expensive service plans for smartphones--will slowly taper off.

"Service revenue grew 3.2% (in the first quarter), down from 3.9% in 4Q12 and 5.9% in 1Q12," Chaplin wrote in a new research note. "Subscriber growth continued to slow; however, falling postpaid ARPU is the primary driver of slowing revenue. We see three drivers of slowing ARPU: 1) a mix shift to tablets; 2) slowing smartphone penetration gains; 3) a declining ARPU lift from the shift to smartphones as more of the penetration gains come from lower ARPU subs. We expect ARPU and service revenue growth to continue to slow through the rest of the year."

According to comScore, 136.7 million people in the United States owned smartphones (or 58 percent of all wireless subscribers) during the three months ending in March, up 9 percent since December. While that number will likely continue to climb, it likely won't grow as fast as it has during the past few years. This means wireless carriers will be forced to compete with each other more directly in smartphones, rather than working to encourage their existing subscribers to upgrade their feature phones to smartphones.

And, in a related trend, the prepaid market continues to boom at the expense of the postpaid market, further cutting into wireless carriers' ARPUs (prepaid customers typically yield much lower ARPUs compared with postpaid customers). As Recon Analytics and FierceWireless contributor Roger Entner notes, new wireless customers in the first quarter chose no-contract service over contract service by a 10 to 1 ratio. Entner found that the nation's wireless carriers added around 140,000 contract customers in the first quarter, far fewer than the 660,000 no-contract customers.

The wireless market is definitely changing. As the sale of smartphones slows, wireless carriers will need to focus on tablets, MVNO operations, prepaid services and (as AT&T Mobility showed earlier this month) new brands in order to stay ahead of the competition.

For a detailed look at how U.S. wireless carriers performed during the first quarter, check out Strategy Analytics' grading of the top 12 operators in the first quarter.

Separately, make sure to also check out Roger Entner's review of wireless carriers' first-quarter results.

And let us know what you think in the comments! --Mike | +Mike Dano | @mikeddano