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Q3 2008 Metrics and the Big Four Wireless Landscape
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By Bill Ho, Current Analysis Research Director, Wireless Services,
and Eddie Hold Current Analysis Vice President, Consumer Services
Nov 19, 2008
Issue
The third quarter of 2008 has drawn to a close and there were clearly winners and losers among the top four wireless carriers. As a broad brush, the larger players AT&T and Verizon Wireless did well. T-Mobile fell behind in pace in several areas and Sprint continued its slide. When financial metrics are taken out of the equation, Current Analysis views the most apparent performance indicators as a sign of competitive health and success. They are subscriber count, net additions, churn, average revenue per user (ARPU - overall and data). But what are some of the not-so-overt factors in each company’s key performance indicators?
Current Perspective
AT&T
At the end of the third quarter, AT&T maintained its market leadership position with 74.9 million subscribers and added nearly 2 million new subscribers, the best organic (i.e., not including acquisitions) growth of the four carriers. Looking at the top line numbers, AT&T matched its net adds from a year ago in Q3 2007. However, the subscriber mix this year is far more focused on the all-important postpaid category, while a large percentage of the previous year’s growth was in prepaid and wholesale.
The term halo device in the past had been identified with the Motorola RAZR, but the new era belongs to the pull of the iPhone. By AT&T’s account, the device had over 2.4 million activations in Q3 2008 of which 40% were new to AT&T. This is over 950,000 subs. In light of AT&T’s nearly 1.7 million postpaid additions, iPhone accounted for over 56% of the new postpaid base. The postpaid base is a very important segment to any carrier but the urgency for AT&T is great. For the last five quarters, AT&T has seen the postpaid base percentage shrink from about 80% in Q3 2007 to now just over 78% in Q3 2008. Despite the downward trend, Q3 oddly enough represented the largest postpaid net additions in these five quarters accounting for over 85% compared to 60% a year earlier and 67% for Q2 2008. Indeed, AT&T owes much to the iPhone. By contrast to its success with postpaid growth, the carrier continues to see a downward trend in its prepaid segment. The height of AT&T’s prepaid growth was in Q4 2007 when the carrier pulled in 750,000 net additions. The thought was that prepaid was to be the net addition growth engine as postpaid subscribers tailed off. But through the quarters since, AT&T’s prepaid business dropped precipitously and has now reached into negative territory with a loss of 36,000 prepaid customers. And this comes after last quarter’s paltry 12,000 prepaid net additions that contributed to churn. What happened? Clearly, while the prepaid sector is seen as an area for potential growth for AT&T (and others), it is also an extremely competitive one. While prepaid competitors spent the H1 2008 launching a slate of new plans or upgrades to existing plans, AT&T’s portfolio stayed static. There are several possibilities. One may be that AT&T is just too big and slow to respond quickly, another is that it is purposely not devoting attention to prepaid and concentrate more on mining the more lucrative postpaid business. Finally, AT&T could be waiting to retool with a more competitive set of prepaid offerings. If this is the case, AT&T will need to get it in gear as Q4 and Q1 are the traditionally heavy growth quarters for the industry.
From a data perspective, Q3 continues the trend of increasing data revenue growth, and data revenues grew over 50% relative to the previous year. Clearly some credit for this can be placed at the feet of the iPhone, but it would be wrong to over-emphasize the iPhone’s power over the total data ARPU growth: after all, while the iPhone has been a clear winner for AT&T, it still represents a relatively small slice of the total customer base. As a result, a reasonable amount of credit for the data ARPU increase should also go to data cards, BlackBerrys and other smart devices, as well as the “mere mortal” consumer handsets that are used for messaging and limited Web browsing. Overall, data ARPU now represents over 24% of ARPU, a 6% jump from a year earlier (interesting to note: Verizon Wireless’ data ARPU accounts for slightly more, at 25%). As with other carriers, AT&T has seen voice ARPU steadily decline and it needs data to offset that. At some point, data will need to drive overall ARPU, moving from a flat-ish state to an inclining slope. An encouraging sign for the carrier is that despite lagging in 3G deployment and ARPU being lower, AT&T kept a similar data ARPU growth pace as rival Verizon Wireless.
Verizon Wireless
While Verizon Wireless remains (for now) the number two carrier in terms of total subscribers, the carrier has proven to be the king of net additions and has consistently added more postpaid subscribers, quarter on quarter, than any other U.S. carrier. But Q3 saw the crown slip a little and Verizon Wireless only remained the king of additions through the completion of its Rural Cellular acquisition. This deal accounted for 630,000 of the 2.1 million net adds and without Rural Cellular, Verizon Wireless would have ceded Q3 postpaid bragging rights to AT&T, although its organic growth was in line with the same quarter in 2007. Even more noticeable is the fact that Verizon Wireless’ churn spiked slightly higher with an uncharacteristic uptick from 1.12% in the previous quarter to 1.3% While Verizon Wireless still has the lowest churn in the industry, this small spike clearly highlights that the carrier felt the impact of the iPhone 3G. As such, all eyes will be on the all-important Q4 results to see if the launch (and pre-launch publicity) of the BlackBerry Storm managed to deter other would-be churners, especially as Q4 is typically the quarter of highest additions – and therefore by default, the quarter in which the most contracts expire two years later.
On the positive side, Verizon Wireless’ base remains solidly postpaid, with 93% of its 75 million subscribers on a postpaid plan. Going into 2009, Verizon Wireless will reclaim the largest wireless carrier title with the acquisition of Alltel’s subscriber base. While it’s certain that Verizon Wireless will not absorb all 13+ million as they divest markets (and subs) as a condition of merger approval, the carrier will firmly hold that title for the foreseeable future. Not even AT&T’s acquisition of Centennial’s 1.1 million wireless subscribers comes close.
In looking at ARPU trends, the bright spot continues to be the data ARPU climb, now over 25% of overall ARPU. Relative to the previous year, data ARPU jumped about 25%, with a 42% increase in revenues. Data has been making somewhat of an impact as overall ARPU is inching up and offsetting the decline in voice ARPU.
T-Mobile
To put it bluntly, T-Mobile USA had a poor quarter and clearly lost customers to AT&T. Churn spiked to 3% and net additions remained at less than 700,000 for the second quarter in a row. Worse still, the majority of the net additions resulted from prepaid growth, not the all-important postpaid side of the house. Indeed, postpaid accounted for only 293,000 net new subscribers. One key reason for this lack of growth and increased churn is that T-Mobile is finally paying the price for the lack of a national 3G network. The iPhone has focused the consumer’s attention on the smartphone category and smartphones equate closely to high-speed networks. But with T-Mobile’s limited 3G footprint to date – and the use of 1,700/2,100 MHz limiting the range of suitable devices – many subscribers are having to move beyond the classic value proposition that T-Mobile offers and look elsewhere for a suitable data network offering. The G1 phone may help counter this exodus in Q4, or may (somewhat bizarrely) feed the exodus by people that want G1-type functionality but who do not like the single choice of the G1 device. Such customers may migrate to either AT&T or Verizon Wireless – both of whom offer a range of compelling “smartphone”/touchscreen devices – or even to Sprint, which has the benefit of an excellent 3G network, a reasonable range of devices and an all-in-one calling plan.
Relative to a year earlier, Q3 overall additions lagged about 22% while prepaid became the lion’s share of additions, going from about 21% in the last quarter to about 56%. The prominence of prepaid growth may be attributed to the cloudy economic environment, the prepaid offering Pay by The Day launched in May and FlexPay which mirrors the postpaid plan lineup. As Q4 rolls around T-Mobile still has the opportunity to mine additional lines out of existing customers beyond family plans. The landline calling T-Mobile @Home product nationally launched in June has yet to have a chance to make its mark in the market and upcoming products like the Cameo digital picture frame with a built-in data modem can help fuel non-traditional growth.
Still there should be some urgency in customer retention as churn has shot up in the last two quarters. As with all carriers, there is an iPhone effect but beyond that, the risk for T-Mobile may be greater than other carriers as prepaid makes up over 17% of its overall base compared to over 8% at AT&T, nearly 8% at Sprint and over 4% at Verizon Wireless.
It’s not all bad news for T-Mobile, however. Even with the data ARPU lagging significantly behind the competition (again, due primarily to the lack of a 3G network), T-Mobile’s overall ARPU is slightly higher than that of the other three competitors ($55 compared to a range from $50-$53 for the other three). This stronger ARPU certainly sets up T-Mobile for additional success as it rolls out the 3G network and increases the cost of the low end data add-on plans (which are set to increase from $6.99 to $9.99).
Sprint
The past year has been one that Sprint would no doubt prefer to forget, with postpaid subscriber losses for the past five quarters now. Indeed, Q3 saw the worst postpaid and prepaid losses despite self-reported improvements in network quality and customer service satisfaction. Clearly Sprint has become – at least for now – the industry’s feeding ground and Sprint’s losses are clearly the gain of its competitors.
The loss of 1.1 million postpaid subscribers and 329,000 prepaid ones clearly has spiked the overall churn metric to over 3.6% and put Sprint in the territory of some prepaid players [note that all Sprint numbers provided in this report include Boost Mobile, the wholly-owned prepaid subsidiary]. Sprint has been primarily focused on subscriber retention and rightly so but going into Q4 2008 and Q1 2009, it will also need to increase its efforts at acquiring customers and to win back lost iDEN customers. The iDEN base that was over 20 million subs at the time of the Sprint/Nextel merger is now down to about 13.5 million, including the Boost base. PTT rejuvenation is a strategic imperative and aside from its data bet, PTT needs to be relevant as a competitive differentiator again.
While Sprint had generally gloomy Q3 numbers, its data ARPU reversal is telling. Although it was clearly the data industry leader a year ago, the decline through Q1 to Q2 has been turned as the Q3 metric reflects the traction of its data value story. Indeed, Sprint characterized a 140% smartphone subscriber growth from the previous year of which the Instinct, BlackBerry, and Centro devices helped the cause. Despite the previous decline, Sprint’s data ARPU is in the same ballpark as Verizon Wireless and AT&T at about 25% of overall ARPU. There is a conscious effort on Sprint’s part to court high-value and data-centric customer. To be sure, Sprint’s data plans represent one of the best if not the best value in the industry. It needs to let the world now this, especially as the gloomy economic climate persists.
Sprint’s primary focus of the rest of Q4 and into Q1 should be to aggressively target T-Mobile subscribers. The G1 has fed the imagination of the T-Mobile subscriber base, but with its quirky design the G1 will not be a desirable device for many potential smartphone/data users. This is clearly an opportunity for Sprint, which needs to become more aggressive in acquiring new subscribers – as well as retaining the all-important focus on churn reduction.
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