U.S. Wireless Telecom: Weakest Subscriber Additions in Three Years

With over 85% penetration and a slowing US economy, the wireless market was not expected to post any significant subscriber gains in 1Q CY09 and as per expectations subscriber additions were weakest in the last 3 years. Service providers in 1Q added just over 3 M subscribers compared with ~4.9 M net additions in 1Q CY08 (Exhibit 1).

Exhibit 1: Slowing subscriber additions

Source: Gridstone Research

With these net additions, the overall wireless subscriber base reached 264.67 M with top 4 service providers (VZ, T, S and DT) securing ~93% market share.

Exhibit 2: Market share based on Customer base

Source: Company Reports and Gridstone Research

While the overall subscriber additions were impacted by the worsening economic conditions, standout performance came from LEAP and PCS as both accounted for a yoy increase in subscriber additions to 684,000 and 493,000. Another surprise was the decrease in subscriber loss at S (3^rd largest service provide) to 182,000 compared with 1,087,000 in 1Q CY08; the improvement was primarily due to improvement in quality initiatives.

Exhibit 3: Subscriber addition by service provider

Source: Company reports and Gridstone Research

With the lower additions, service providers took steps to keep the existing subscriber base intact and to maintain the revenue and profit levels by improving quality and handset offerings. This effort resulted in decline churn rate at all major service providers except for VZ who posted a 10 bps quarter over quarter increase in churn rate to 1.5%.

Exhibit 4: USM jointly with VZ has the lowest industry churn

Source: Company reports and Gridstone Research

Consistent with previous quarters, ARPU continued to decline in 1Q09, despite a double digit increase in data ARPU by most service providers.

Exhibit 5: Consistent decline in ARPU despite increase in data revenue

Source: Company reports and Gridstone Research

Conclusion: With declining net additions and ARPU, service providers have started taking a look at alternative sources of revenue generation. T and VZ spotted this earlier and started with their fiber cable offerings of broadband and satellite TV services; however, these services have not generated substantial returns till date. Another scenario that likely emerges is further consolidation with VZ taking over AT purely for subscriber numbers it remains to be seen that regional players like USM, LEAP and PCS will be able to work independently or will be gobbled up by any big service provider.

Disclosures: No positions in VZ, T, S, PCS, USM, LEAP, DT, CYCL or ALSK.

Comments

[Aryamehr:]

Recessions hit every segment of the economy and as you have noticed the Wireless industry is not immune, however it is a segment of the economy that has become indispensable. As next generation, 4G platforms become ubiquitous you will see more content and services being offered via the wireless industry, hence creating an opportunity for an increase in ARPU for both the carrier and content provider. The vanguard in this evolution to the next generation, 4G, at this moment is SPRINT, which to date appears to have the backing of the most venerable techology names, Intel, Google, Time/Warner, Comcast, Samsung and just recently Cisco. With 4G Sprint has raised the Ante with the hope of increasing its margins, which will IMHO manifest themselves with the cash flow generated from their Smart Phone users, especially when their pruview of Smart phones is enhanced. With the launching of the Pre and their eventual 4G platform Sprint has made a bold move by raising the Ante and giving itself at least a two year lead over its major competitors, ATT & VZ.

On another note, the next generation Smart phone user will demand more content as we evolve from 3G to 4G and so forth. You should also note that the new household has evolved from a single Land Line to numerous cell phones, hence you will notice an increase by a factor of 3 to 4 for needed units.

Notwithstanding the effects from the Recession, which is not a Depression or an end to the world, the economy will bounce back and when it does it will be more efficient and demanding of more wireless resources, which in turn will benefit the major carriers, especially those that have made investments into the next generation platforms, such as Sprint.

An apropos Afghan proverb I heard from the lips of Sec. State Clinton, which paraphrased states, "patients is bitter but by God its fruits are sweet." This is fitting especially for Sprint which has invested heavily, way ahead of ATT & VZ, into the next generation, Wimax (4G) platform.

My conclusion, the wireless sector still has plenty of room for growth, especially as we evolve into the next generation of services that will be enabled with 4G, 5G etc.

May 15 11:57 AM

[Geddy:]

@ Aryamehr-wow, as I peruse your posts all over lately I can definitely conclude you must be a "Sprextel" employee. Again I must state, there will NOT BE a "time to market" advantage for Clearwire (or whatever they call themselves nowadays since they let Sprint advertise for them). They're "great" 4G networks (again by the way, the standard has yet to be officially written) only added 25K customers this past quarter....hardly a great start. VZW will have LTE launched by EOY 2009, with a full national market by 2010. AT&T is not in a hurry to deploy LTE as it's current minor upgrade to HSDP+ will be much faster than what Sprint has for WiMax. Sprextel does not have enough capital to build out a national network (please see Barron's to confirm).

May 15 02:15 PM

[Aryana:]

Aryamehr, I am in complete agreement with you regarding Sprint and Palm. I have been researching most of what you have written for some time. Good work, keep it up.

May 15 04:52 PM

[Nextel Acce...:]

look for the smaller "economy" carriers to be bought up.

May 21 03:31 PM