One factor many investors look at before sinking money into the wireless industry has been the ability of wireless devices to penetrate the general population. During the past several years, penetration rates have ballooned from around 50 percent to nearly 70 percent, coinciding with a rebound of telecom stocks.
While that growth has influenced wireless stock prices, analysts are beginning to worry about the industry’s ability to continue growing. Many claim that nearly everyone who wants a wireless device already has one and that any incremental growth likely would come from lower-revenue generating niche market segments.
Others cite many European and Asian countries that have seen their wireless penetration rates soar past the 100-percent mark as consumers stock up on multiple mobile devices. A recent RCR Wireless News By The Numbers list showed a dozen countries surpassing 100-percent penetration rates and another half-dozen with more than 90-percent wireless penetration.
Despite the perceived ability for such super-saturation, analysts note that several factors could be clouding true penetration-rate figures, and subsequently how much growth potential a market has left. Most erroneous claims are associated with countries that have a high percentage of prepaid customers, though penetration rates in the United States also are beginning to be questioned.
“As we approach 70-percent penetration by year-end, investors are rightly concerned about a major slowdown in subscriber growth, which turns the industry into a risky market-share game,” wrote Zachary Investment Research & Management L.L.C. analyst Patrick Comack in a recent research note. “However, we’re not sure how much double counting there is in that 70-percent penetration rate. We’ve heard that 10-20 percent of the 70 percent could be double counting, meaning strip out the double- and triple-device business people and you’re looking more at a 50-60 percent penetration rate.”
Comack’s statement appears positive for investors looking for reassurance that the wireless industry still has room to grow, but raises questions as to the accuracy of subscriber results and related penetration rates.
Cingular Wireless L.L.C. earlier this month was forced to subtract more than 150,000 customers from its previously reported customer base as it reconciled billing practices with recently acquired AT&T Wireless Services Inc. The carrier was quick to point out that the adjustment accounted for less than .3 percent of its more than 51 million customer base and would not have an impact on its financial statements.
Some have attributed Cingular’s restatement to AWS’ penchant for adding prepaid customers just prior to being acquired in an attempt to boost its sagging fortunes. Prepaid customers generally are on contracts, and carriers differ on how long they wait before declaring customers who have not renewed their billing minutes as churned customers.
Analysts note the prepaid conundrum is rampant in Europe, Asia Pacific and Latin America, where a majority of customers are not on plans, but claim that the U.S. market has managed to mitigate questionable penetration rates because only around 10 percent of customers are not under contacts.
“It’s definitely an issue with many European and Asian carriers,” said Gartner senior analyst Tole Hart, who added that those markets could have as much as a 20-percent discrepancy in reported penetration rates compared with actual numbers. “But, I don’t think it’s a big issue yet for U.S. carriers.”
Hart added that a bigger concern for U.S. carriers is how they count postpaid customers who might have multiple devices.
“If a customer has both a [Research In Motion Ltd.] BlackBerry or a laptop card as well as a regular voice phone, is that counted as one customer or two?” Hart asked.
Roger Entner, vice president of wireless telecom for Ovum, echoed Hart’s concerns on how carriers account for multiple device users, but said he did not think the impact was significant.
“There is definitely a fudge factor in how carriers account for those customers,” Entner said. “But the number is so insignificant that I don’t think carriers are that concerned yet about that sort of detail.”
Entner added that only around one-third of wireless customers are on a business-compensation account, and that only a small percentage of those are carrying around multiple devices.
“I don’t think with current subscriber numbers that the fudge factor can get that large,” Entner said.
Entner estimated that the difference between actual penetration rates and reported penetration rates for the U.S. industry is 10 percent at the most, and more likely below 5 percent.
