Where will subscriber growth come from now that Sprint's iDEN network is shut down?

Phil Goldstein

Sprint (NYSE:S) officially shut down its Nextel iDEN network at the end of June, and forecasted that during the second quarter it would "recapture" 30 to 40 percent of the remaining 1.31 million iDEN customers still left, and keep them on Sprint's network. That means, by Sprint's estimation, that at least 786,000 and as many as 917,000 iDEN customers left Sprint. Those customers presumably helped fatten the subscriber numbers for competitors in the second quarter. A major question facing the industry now though is, now that leaving iDEN subscribers won't be a source of subscriber growth for Sprint's competitors, where will growth come from?

There are several possibilities for U.S. carriers, but I think they will all require creative thinking on the part of operators, a stronger focus on future growth opportunities and new device categories and, for some operators, a rethinking of how their service pricing plans are structured.

The market may also need to recalibrate its expectations for growth. 556 Ventures analyst William Ho noted that the days of 1 million-plus postpaid additions per quarter may be coming to an end, if we're not there already. However, he said other markets, most notably Europe, have continued adding subscribers despite higher than 100-percent subscriber penetration.  

Here are a few of the main possibilities for potential subscriber growth in the months and years ahead:

  • Shared data plans: Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) have made these plans their bread and butter for growth over roughly the past year, by getting customers to add on multiple devices on top of smartphones. At the end of the second quarter, AT&T said it now has more than 4.3 million Mobile Share accounts serving 13 million subscribers, and Verizon said it had 35 million retail postpaid accounts, with an average of 2.7 connections per account. As smartphone penetration continues to climb, carriers will look to shared data plans to help them add incremental subscriber connections to offset slowing handset additions. AT&T said that of the 551,000 postpaid additions it had in the second quarter, the bulk of them, 398,000 or 72.2 percent, were postpaid tablets. That trend line is likely to continue in the years ahead, analysts said, and shared data plans that make it easier for customers to add on devices will lead to more subscriber gains. Currently, these plans are built around smartphones and to a lesser extent tablets, and I think in the years ahead carriers will need to make it easier and cheaper for customers to add more devices if they want accounts with average devices in the range of, say, five to seven.  

    Although Sprint and T-Mobile US (NYSE:TMUS) currently base a lot of their marketing around unlimited smartphone data plans and do not offer shared data plans for individual subscribers, the analysts I spoke with said that sooner or later they will need to adopt them to continue growing, and I tend to agree. Sprint, in particular, has the opportunity to shake up the market once it fully deploys Clearwire's 2.5 GHz spectrum for additional LTE capacity, something it plans to do starting in the second half of the year. "Once they deploy 2.5 GHz spectrum, their killer weapon is going to be the massive amount of capacity they have," New Street Research analyst Jonathan Chaplin told me. "The best use of that is tablets, data cards and other connected devices. I'd be absolutely shocked if they didn't adjust their plans to play to their capacity advantage."
  • Wholesale additions: Another avenue for growth is wholesale customer additions, from multiple perspectives, including B2B enterprise sales, M2M opportunities as more devices come with cellular connections and module prices fall, and MVNO connections. Ho said he expects carriers to strike more deals in the years ahead with consumer electronics makers and car companies, as AT&T recently did with Sirius XM and Nissan. Developments like AT&T's Digital Life home automation service also are an avenue for growth. Another opportunity is MVNOs. As carriers migrate more of their retail customers to LTE, they can use the freed up capacity on their legacy networks for MVNOs (though MVNO customers will likely want LTE sooner rather than later). Ho noted that lately Sprint has become "the master" of MVNO partnerships, which I'd tend to agree with. "A subscriber, whether it's a retail subscriber or a wholesale subscriber, is still there for the taking," Ho said.

    Chaplin, however, said he viewed wholesale as a zero-sum game for carriers and wasn't as bullish on its prospects. "The industry overall is getting tougher for AT&T and Verizon's retail business," he said. "There's no way they are going to make up for the pressure they see in retail with growth in wholesale."
  • Mergers and acquisitions: Although the number of regional carriers is falling, there are still some M&A opportunities out there for the Tier 1 carriers, with AT&T's proposed acquisition of Leap Wireless (NASDAQ:LEAP) serving as a prime example. Other potential acquisition targets include nTelos and U.S. Cellular (NYSE:USM), though it's unclear when those kinds of deals with come to fruition.
  • Wearable computing and next-gen devices: One of the most exciting growth prospects for me is in wearable computing, including things like Google (NASDAQ:GOOG) Glass, smart watches, tiny health monitors and the like. If these devices come with cellular connectivity enabled, both their makers and the carriers will need to convince consumers that they are worthwhile investments. Carriers will also need to make it frictionless and relatively cheap for consumers to add these devices to data buckets, especially because they are likely not going to be consuming a great deal of bandwidth.

This list is obviously not exhaustive, but I think it does prove that there are opportunities out there. The days of competing carriers feeding off the iDEN shutdown for growth are over. But that doesn't mean subscriber growth is over as well. If carriers are creative, forward thinking and willing to adopt new business models, there's no reason they can't keep on growing their subscriber bases.--Phil