Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Greetings from Dallas, home of Texas-style fog. It’s been a crazy weather week in “Big D” – almost as crazy as the reaction to many of the telecom and technology earnings last week.
Leading the parade was Verizon Communications. They let the cat out of the bag earlier in the month, pre-announcing retail postpaid net additions as well as the magnitude of the effect of Superstorm Sandy. For those of you who missed the headlines, Verizon Wireless added 2.1 million postpaid retail customers, including 600,000 tablets and 1.9 million smartphones (and the loss/migration of 400,000 basic phones). It was a strong quarter by any measure.
The migration to smartphones accelerated in Q4, and with it the rapid migration to Verizon Wireless’ more efficient/profitable LTE network. Nearly all of the of the 9.8 million Verizon Wireless smartphone buyers selected Apple (63%) or Android (35%) operating systems. Interestingly, just under half of the Apple buyers selected the iPhone 5 (LTE capable) model, and the remainder chose the less expensive (or free) iPhone 4/iPhone 4S models. The probability that the iPhone 4/4S will scream through bandwidth tiers is a lot lower than the likelihood the iPhone 5 will. Fortunately, they also had 3.4 million Android sales, and 95% of these were added on LTE.
Bottom line: Of the 9.8 million smartphones added in Q4, just under 6.4 million of them came with LTE radios, and 3.4 million did not. This statistic is critical to Verizon Wireless’ performance for 2013. Here’s (Verizon CFO) Fran Shammo’s comment on the earnings call regarding the way in which fourth quarter activities affect growth in 2013:
“A key point of differentiation for us, which speaks to our incremental revenue opportunity, is the improved mix of gross adds and upgrades within our smartphone activations. In the fourth quarter, gross adds or new to Verizon represented about 30% of total smartphone activations, a sharp improvement from the 20% to 23% range we reported throughout 2011 and the first half of 2012.
We also have incremental revenue potential within our upgrades, as about 42% of customers upgrading this quarter were buying a smartphone for the first time. In addition, if we include customers upgrading from a 3G to a 4G LTE smartphone, considering the likelihood of higher data usage, we can say that three out of four upgrades represent incremental revenue going into 2013.”
About 9% of Verizon Wireless’ postpaid base, or about 8.1 million subscribers, upgraded their devices in Q4. Forty-two percent of that number is 3.4 million. Assuming an upgrade from voice/text to voice/text/data means $180 in additional annual revenues (a conservative figure at $15 per month), upgrades to smartphones will generate at least $600 million in new revenues for Verizon Wireless. Add on 33% that upgraded from a 3G to an LTE device and Share Everything plan (and conservatively assuming $100 in additional revenues per year at $8.125 per month as a result), and Verizon Wireless has at least $1 billion of incremental growth in the bank for 2013.
That’s before you get to the 30% “new to Verizon” figure discussed above. This number needs to be netted against churned customer revenues. Using the Q3 postpaid figure, three months of churn at .95% per month means that approximately 2.7 million Verizon Wireless customers left, likely at an ARPU in the $55 to $60 range (not all of these customers were smartphone users). However, 2.9 million came to Verizon Wireless at the higher Share Everything rate, many of them additions to existing plans. Netting the benefit of 2.9 million smartphones against 2.7 million churn of smart and feature phones and their associated ARPUs likely has a $650 to $700 million impact.
Bottom line: Verizon Wireless’ terrific fourth quarter means at least $1.7 billion in revenue growth in 2014. $1.7 billion equals 35% of their total 2012 growth.
There’s a lot more to talk about with Verizon, and we will do so once Sprint Nextel, Comcast, Time Warner and T-Mobile USA have released results. Verizon Wireless is growing the most profitable customers in the telecom industry (postpaid + LTE + metered) faster than each (and perhaps all) of their competitors. The most important chart Verizon showed in their whole presentation (see chart bellow) tells the tale – LTE penetration accelerated in the quarter. Depending on the upgrade mix (feature to smart phone conversion, total percent of base upgrading), it’s very possible that Verizon Wireless will end 2013 with more than 45% of their total postpaid base using the LTE network. We will go into the profitability impacts (gross margin per gigabyte) in an upcoming column.
Both Verizon and AT&T are “A students,” and while AT&T had an interesting quarter, you have to give the edge to Verizon Wireless, not only for profitability, but also for growth. Sure, AT&T Mobility beat Verizon Wireless on iPhone activations (8.6 million vs. 6.2 million), and they also win on total smartphone penetration of their postpaid base (70% vs. 58%) and total smartphone activations (10.2 million vs. 9.8 million), but Verizon Wireless crushes AT&T Mobility on service revenue growth (8.4% to 4.2%) and cash flow margin (41.4% to 24.6%). To be growing at $2 in service revenue for every $1 of your largest competitor, and at the same time to grow 37 cents of operating margin for every dollar of growth (vs. no operating income growth for AT&T Mobility) signals a shift. Verizon Wireless may very well be breaking away from the pack.
The best way to describe AT&T Mobility’s quarter is “slowing.” Have a look at this table from their earnings release:
Yes, AT&T Mobility grew postpaid net additions faster than Q4 2011, but that growth came from aggressive tablet promotions (400,000 net additions from tablets were indicated in the conference call Q&A). The rest of the AT&T picture is pretty dismal. Branded computing subscribers in the second half of 2012 are less than a third of what they were at the beginning of the year (surprisingly, none of the analysts asked about this on the conference call). Tablet sales are up, but net additions of branded computing subscribers are down. Fewer wireless modems? Probably, but that would be too much of a drop. More likely, it’s iPad users who are not using their AT&T Mobility connection any longer. It could also be an indication of Kindle inactivity (if it’s the Kindle, look closely at AT&T’s 10-Q verbiage). Hopefully the company will include more detail on what’s driving up branded computing churn and driving down net adds.
Finally, quarterly data growth slowed to 1.7% in Q4, down from 3.4% in Q3 and from 4.9% in Q4 2011. It’s still a large portion (45%) of AT&T Mobility’s service revenues ($28 billion run rate going into 2013), but it’s slowing. Non-data service revenues are declining at 1% per quarter ($1.5 billion for the year).
While many see this as a 2013 opportunity (more LTE = more shared data plans = more growth), this might be the consequence of AT&T Mobility’s new price plan positioning. Unlike Verizon Wireless, AT&T Mobility allowed upgrading customers to choose to keep their current individual/family plan or move to their new Mobile Share plans. The effect of this “least cost” option is likely what is holding back their growth. Verizon Wireless’ mandate is yielding better results (to date) than AT&T Mobility’s multiple choice strategy.
Who’s got wireless growth? For 2012 and 2013, it’s Verizon Wireless.
Jim Patterson is CEO of Patterson Advisory Group, a tactical consulting and advisory services firm dedicated to the telecommunications industry. Previously, he was EVP – Business Development for Infotel Broadband Services Ltd., the 4G service provider for Reliance Industries Ltd. Patterson also co-founded Mobile Symmetry, an identity-focused applications platform for wireless broadband carriers that was acquired by Infotel in 2011. Prior to Mobile Symmetry, Patterson was President – Wholesale Services for Sprint and has a career that spans over twenty years in telecom and technology. Patterson welcomes your comments at jim@pattersonadvice.com and you can follow him on Twitter @pattersonadvice.
