Will Tier 2 carriers always be left behind in smartphones?

Phil Goldstein
It seems pretty clear by now that smartphones are booming at Tier 2 and flat-rate carriers in the United States. But how much bigger will the market get among the smaller carriers, and will it ever measure up to what exists among the largest four U.S. operators?

For the likes of MetroPCS (NASDAQ:PCS), Leap Wireless' (NASDAQ:LEAP) Cricket and U.S. Cellular, smartphones not only represent higher-ARPU customers, but also the carrot that could lure value-conscious consumers at the larger postpaid carriers.

There are some similarities between how smaller carriers and the larger Tier 1s operate in the smartphone market. Both sets of companies have to assiduously choose which vendors to partner with, and which models, designs and feature sets will appeal to their subscribers. Just like the big carriers, the smaller operators go on trips to China, South Korea and Europe to meet with handset OEMs and discuss their wares. The handset makers in turn have incentives to court these carriers: They represent fertile ground as more customers migrate to smartphones. But that's where the similarities stop.

Smaller carriers have to contend with a host of disadvantages that the larger carriers don't when it comes to smartphones. Smaller carriers generally get a smaller selection of models, lower volumes and lower-end feature sets. Some of this is because the prepaid carriers don't subsidize the cost of the phones, meaning a high-end device like the HTC ThunderBolt--$500 to $600 unsubsidized--isn't going to make it onto the shelves of a MetroPCS store any time soon. Tradeoffs have to be made between feature sets and price, and smaller carriers don't have as much power (in terms of size and marketing budgets) as the Tier 1s.

"The volumes [at smaller carriers] are not that meaningful," CCS Insight analyst John Jackson told me.

Will this situation change? Smaller carriers likely will keep adding more powerful smartphones to their lineup--what's considered high end today likely won't be in six months. Better screens and faster processors will trickle down to the Tier 2s.

However, I think that, for the most part, the dynamics separating the Tier 1s and Tier 2s largely will remain in place. For every HTC Merge out there--which is not a device to sneeze at and is available at U.S. Cellular and Alltel--there will be an HTC Sensation for T-Mobile USA or an HTC Trophy for Verizon Wireless (NYSE:VZ). The larger carriers will always get the latest and greatest first, because they can afford to and because they have more subscribers to sell to--and the smaller carriers will get the scraps of those hero devices six months down the road.

I explore all of this and more in a new feature on smartphones for Tier 2 and prepaid carriers. Please let me know what you think in the comments. --Phil

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