“We have run out of people (in the United States) who can pass a credit check and want a wireless phone,” said Roger Entner, vice president of North American wireless telecommunications for research and consulting firm Ovum.
With 182 million wireless subscribers in the United States, wireless carriers are struggling to figure out how to make money off the 40 percent of Americans who don’t yet own mobile phones. Entner explained that carriers employ two main strategies in tackling this market-prepaid plans and family plans.
“If you want to continue to grow … you have to have a whole arsenal of products targeting that unpenetrated market,” he said.
Prepaid has long rankled wireless carriers and Wall Street. Although prepaid can be used to tap out the credit-challenged sector of the market, investors generally frown on the potentially erratic nature of prepaid revenues. Thus, the United States has the third-smallest market for prepaid subscribers in the world-around 7 percent of American wireless subscribers use prepaid services, according to Merrill Lynch. In the lead with least prepaid is Japan, with 4 percent of the market consisting of prepaid subscribers, and next is Finland with 5 percent.
To defray the risks of prepaid, some carriers have turned to mobile virtual network operators as a way of adding subscribers. Indeed, Verizon Wireless recently signed a deal with Amp’d Mobile Inc. to offer pre- and postpaid services to the youth market. The carrier’s move follows similar efforts from Nextel Communications Inc. through its Boost Mobile offering and Sprint through its Virgin Mobile USA L.L.C. deal.
Although carriers continue to pursue prepaid approaches, their main penetration strategy now appears to be family plans. Indeed, advertising from most of the nation’s carriers prominently features family calling plans, offering up to four free phones and $10-per-month service plans. Essentially, family plans shift the credit risk from carriers to subscribers themselves. Credit-challenged family members or children and young adults can now get postpaid wireless services through family plans, and the associated risks are transferred from the carrier to whichever subscriber receives the bill.
Ovum’s Entner estimates that between 40 percent and 60 percent of current net additions in the United States are through family plans. Entner said Cingular Wireless is likely on the high end of that range, with 60 percent of its subscribers signing up through family plans, while Verizon Wireless is likely on the low end with around 40 percent.
Interestingly, anecdotal evidence indicates that some family-plan subscribers are actually not members of a family, a trend that could lead to low-cost mobile-phone clubs. A group of friends, for example, could all sign up for a family plan and potentially enjoy cheaper rates. Entner said carriers may not support the non-family usage of family plans and could require family-plan subscribers to share the same address.
Although generally preferred over prepaid, family plans carry their own share of financial and market consequences.
First, family plans can significantly cut into carriers’ average revenues per user. Standard postpaid calling plans generate around $55 per month per customer, whereas most family plan contracts sell for around $10 per month. Indeed, Cingular recently cited family plans specifically as a reason for its declining ARPU.
However, some numbers offer hope for the fiscal sense of family plans. Although ARPUs may be lower, so too are acquisition costs, operating costs and churn. Adding subscribers to family plans can generally be done over the phone, obviating the standard lengthy in-store visit to activate an individual subscriber. And a five-member family of wireless subscribers may be less likely to switch carriers if they all share the same plan. According to a recent report from Compete Inc. and Bear, Stearns & Co. Inc., carriers can achieve similar or better results with a pair of subscribers sharing a $90-per-month service plan than with those same subscribers paying separate $50 plans.
Although potentially a boon for carriers, family plans may represent a bust to others in the industry. RadioShack Corp. recently lowered its first-quarter sales expectations due in part to its inability to capitalize on family plans. The company said 50 percent of new wireless activations are through family plans. RadioShack said it will not meet its previously stated forecast of 39 cents to 41 cents in earnings per share, but will instead post earnings per share of between 30 cents and 34 cents. The company also said it won’t meet its full 2005 earnings per-share guidance. RadioShack sells service from Sprint and Verizon Wireless.
Although RadioShack cited family plans as a reason for its sluggish sales, industry analysts said the company is also suffering from an industry transition from indirect to direct sales channels. As carriers look to shore up their revenues after years of robust growth, they appear to be pulling back from the indirect channel in favor of their own outlets.
“We believe recent wireless weakness reported at a major national retailer is attributable to share shift (e.g. from indirect to direct, as well as possibly within the indirect channel) rather than any sector weakness,” wrote Jonathan Atkin with RBC Capital Markets in a recent research note to investors.
“The indirect channel has typically lower ARPU and higher churn,” said Ovum’s Entner, adding that the indirect channel is relatively inexpensive and can be quickly called on for additional sales, but supplies lower revenues and sometimes unhappy customers. “The third-party channel is the channel everyone loves to hate.”
Along with a shift to direct sales, a reliance on family plans and an increased focus on Internet sales, carriers are also spending billions to introduce high-speed wireless data networks. The goal is to prop up flagging ARPUs. However, demand for such services in the United States is still unclear at best.
Despite an increasingly saturated market and activations that trend toward lower revenues, most analysts appear relatively positive on the wireless sector in general.
“Across the U.S. wireless industry, we believe underlying growth remains strong,” wrote Merrill Lynch in a recent note to investors.
“Big carriers understand it’s cash that really counts, not customer adds, especially as the penetration curve starts to plateau,” wrote Ric Prentiss with Raymond James in a recent research note to investors.
Compete and Bear Sterns forecast that the industry will sign up 54 million people during the next six years, driving total penetration from 61 percent at the end of last year to 75 percent by the end of 2010.
