Lowenstein's View: The battle for the next phase of smartphone subscribers

Mark Lowenstein
Smartphone growth, especially in the postpaid segment, has started to level off over the past two quarters. This might be due in part to heavy anticipation of Apple's next iPhone, which the company is expected to announce in September. But, with smartphone penetration at about 50 percent of the U.S. subscriber base (and nearing 60 percent of the postpaid base), I believe we are starting to see some signs of saturation in smartphone adoption. Getting the next 25 percent of smartphone subscribers is going to be a lot more challenging, and will involve different competitive dynamics.

One strong indicator of this is the huge amount of activity we have seen around data pricing this year. Verizon Wireless and AT&T followed up their moves to tiered pricing with Share Everything and Mobile Share, respectively. A family of four with, let's say three smartphones and a feature phone, will spend north of $200 per month on these plans, once taxes and fees are included. For the individual postpaid smartphone user on AT&T, Verizon, or Sprint, the ante is about $75 per month. That's an expensive nugget for a lot of people in this tough economy.

This is why there's a lot of action these days in the prepaid/unlimited/MVNO spaces for smartphones and data:

  • Prepaid offerings. The 4G battle in prepaid is heating up. T-Mobile, Virgin Mobile, and MetroPCS are all offering "4G" plans in the $50-60 range for unlimited talk and text and a healthy dose of data, undercutting Verizon and AT&T plans by about 30 percent.
  • MVNOs. Solavei, an MVNO using T-Mobile's network, will launch in September with a $49 plan for unlimited voice/text/data, with the added twist of extra cash for subscribers who refer friends. Republic Wireless is an MVNO that plans to use 8 million curated Wi-Fi hotspots to deliver unlimited voice/text/data for $19 per month. Virgin Mobile is the MVNO offering an iPhone.
  • Expansion of Unlimited. Sprint, whose Simply Everything has been a key differentiator among the Big Four operators, is getting some competition. The most aggressive offerings are from T-Mobile, which just yesterday announced an unlimited voice, text and 4G data plan for $70 (non-subsidized) or $90 per month (subsidized) that undercuts Sprint by  about 20 percent; and from MetroPCS,, which earlier this week introduced a $55 per month plan for unlimited voice, text and LTE data (though only in its markets and currently positioned as a promotion). (see Is Unlimited Data Making A Comeback?, by Fierce Wireless Executive Editor Mike Dano).

It's safe to say that most middle to upper income individuals who want a smartphone have one. But getting from 50 percent to 75 percent  smartphone penetration is going to require attracting three types of potential subscribers: lower to middle income consumers, who are more price-sensitive; additional household members such as spouses and teens/young adults, for whom a smartphone is "nice to have," rather than "need to have," and the credit-challenged, who have to pay the non-subsidized price for the phone.

On the supply side, three dynamics that are enabling this next rung of competition for smartphone subscribers are: a broader array of perfectly good, but less expensive Android devices; the more favorable economics of LTE, which costs the operator  about 50 percent less to deliver a GB of data; and more aggressive courting of MVNOs by T-Mobile, hence providing an alternative to Sprint.

This flurry of more affordable smartphone/data options does require compromises. The Unlimited plans have pretty compelling pricing for individuals, but break down in a "family plan" model where household members want to pool their data. Unlimited plans generally do not support tethering. Also, except for Sprint (and Virgin Mobile), there are no prepaid/unlimited offerings for the iPhone--a choice that will be even more pronounced when the expected LTE iPhone is unveiled in September. And LTE coverage is currently more limited from Sprint, T-Mobile, and Metro.

I also expect the push into the next tier of smartphone users will usher in a "bring your own device" phenomenon among consumers. Among the new adds, rather than switchers, a much higher percentage will pay full price for the device. I believe this will put a lot of pressure on Apple to make a less expensive iPhone, if it wants to maintain its share of the smartphone market. The "BYOD" market for consumers will also make for a more vibrant market for pre-owned and refurbished devices.

The current wireless industry structure is akin, in my view, to what the airline industry looked like a few years back. Verizon and AT&T are the " legacy carriers" offering a full service to both leisure and business travelers; Sprint is Jet Blue, the challenger, sticking to Unlimited and expanding its LTE network to more cities; T-Mobile is Southwest, the value operator but no frills (no iPhone, no LTE yet); and MetroPCS, Leap Wireless, and the MVNOs are the AirTrans and Spirits of the world--less expensive but not as full service. Like the airline business, there will be further consolidation. And hopefully happier customers.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.