Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. This article is an excerpt from RCR Wireless News’ July Special Edition, “Riding the Wave: The Forces Impacting Carrier Strategy.” The 80-page special edition is available here.
It’s no secret that the wireless industry has been competitive for quite some time. Postpaid growth is flattening while prepaid services are the next frontier. Mainstream customers with the hopeful prodding from carrier marketers are moving from a voice-centric view to slowly discovering the benefits and stickiness of data services. The U.S. is dominated by the big four – AT&T Mobility, Sprint Nextel Corp., T-Mobile USA Inc. and Verizon Wireless, but the national wireless segment has bifurcated into AT&T Mobility/Verizon Wireless and Sprint Nextel/T-Mobile USA.
For the most part, each pair reacts to the other. AT&T Mobility and Verizon Wireless have a long history of matching each others’ competitive moves, and there is nothing to suggest that this trend will cease. Yet it’s not so clear cut for Sprint Nextel and T-Mobile USA, as each carrier is vying for the data value leader title with different approaches.
Of course all this is true when we think with a postpaid mindset. In the prepaid realm, leadership shifts as each carrier’s strategy is affected in part by their postpaid success. To understand the broader view, it’s best to look at each carrier and understand their postpaid and prepaid approaches.
AT&T Mobility
The wireless landscape has only gotten more competitive as the economy and pricing pressures eat into margins and growth. To that end, AT&T Mobility has not played the pricing game as it stays in line with main competitor Verizon Wireless to maintain healthy margins. Though T-Mobile USA and Sprint Nextel play up price value, AT&T Mobility portrays itself as a premium carrier with extensive network coverage.
AT&T Mobility’s exclusive relationship with Apple Inc. for the iPhone has not hurt its growth as the overall postpaid segment shrinks. Over the past years, as the iPhone has proven, growth now comes from switching customers rather than due to organic growth. For many quarters, the iPhone activations accounted for nearly 40% of customers new to AT&T Mobility. As the handset market evolves to offer more iPhone competitors (e.g., variants powered by Google Inc.’s Android operating system), AT&T Mobility’s move to tiered smart phone plans help continue the iPhone momentum.
To be fair, AT&T Mobility’s is more than the iPhone. The overarching goal is to drive data adoption. This is especially important since the industry has experienced voice average revenues per user declines for some time. In contrast, AT&T Mobility’s data ARPU has ramped up nicely (in Q1 2010, ~32% of overall ARPU) thanks in part to the attractiveness of its handset portfolio. Beyond the iPhone, the stable of Research In Motion Ltd.’s BlackBerrys and Android-based devices feed the data hungry. However, AT&T Mobility’s heavy emphasis on quick messaging devices (QWERTY-based) over standard feature phones have stuck a nice cord with its user base, especially when data services such as web access and messaging add-ons are selected.
In prepaid, AT&T Mobility appears to be somewhat handcuffed in competing against many of the prepaid upstarts such as Sprint Nextel’s Boost Mobile division, Tracfone Wireless Inc.’s Straight Talk and even regional unlimited players MetroPCS Communications Inc. and Leap Wireless International Inc. that had been bleeding the larger carriers. With about 75% of its customer base being the more stable postpaid, AT&T Mobility is reluctant to get into a prepaid price war that threatens to cannibalize its postpaid base.
Prepaid customers make up about 8% of AT&T Mobility’s customer base and the carrier is strategic in creating services that are profitable and draw a less volatile and prepaid price sensitive audience. While the carrier’s $60 Unlimited Talk & Text offering cannot compete on price against the upstarts, it does court customers who are drawn to the brand.
Yet AT&T Mobility’s prepaid growth will be in data. While casual data plans have been around particularly with data cards and netbooks, the situation will change when new devices enter the mainstream. The Apple 3G iPad is just an early example of what may come. Customers with a notion of casual mobile broadband data use transform into heavy users as they get more utility and attached to their device.
Verizon Wireless
As the largest carrier with over 93 million customers, Verizon Wireless’ retail postpaid base is about 90%. The carrier prides itself on these customers being the most loyal as evidenced by the long history of low churn and numerous J.D. Power and Associates satisfaction awards. Verizon Wireless’ brand has been built up over the years with its undying attention to build and spread the strong and reliable network message. This allows the carrier to command premium service pricing and healthy margins.
With a well-oiled machine that continues to pump out postpaid customers quarter upon quarter, Verizon Wireless is susceptible to a shrinking postpaid pool that had slowed the growth it had enjoyed in the past. AT&T Mobility’s iPhone success has also been a factor in Verizon Wireless’ postpaid growth as well as customer defections. To that end, the carriers and other competitors have been looking for the answer(s) to the iPhone.
The availability of the Android OS have changed that dynamic as it provides device manufacturers a foundation to overlay improved user interfaces to their devices. While far from being iPhone killers, Verizon Wireless’ bet of using a variety of Android-based devices as the Motorola Inc. Droid X/HTC Corp. Droid Incredible has helped increase the attractiveness of the device portfolio, enough so to stave off churn.
Still, driving data adoption and associated revenues continues to be the carrier’s focus. As it moves neck and neck with AT&T Mobility, it stands to reason that also adopting (and matching) tiered smart phone data pricing would be logical. This allows for greater smart phone adoption, helping drive higher data ARPU and carrier stickiness.
Verizon Wireless’ prepaid strategy is encumbered by protecting its more lucrative postpaid base. Its prepaid portfolio is not as aggressive as other prepaid competitors and frankly one of the most expensive (but high margin) in the sector. Its own wholesale group may not be doing it any favors as Tracfone’s Straight Talk has been growing in part with users’ knowledge that it runs on the Verizon Wireless network. Therefore, the Verizon Wireless prepaid user is one that buys the brand and the networking message. Still the carrier has a prepaid mobile broadband play, but with premium pricing in a typically price sensitive market, it’s doubtful there will be large numbers of users flocking to it.
Sprint Nextel
Sprint Nextel’s postpaid business has signs of clawing back after many years of losses trying to repair many of the elements that were broken – brand, customer service, network performance and a flat device portfolio. While larger competitors offer premium pricing, Sprint Nextel’s approach is not to give away the store. Rather, it chooses unlimited data as its simplicity story to customers.
Sprint Nextel’s Everything plans that roll in unlimited web, messaging, and navigation attract those users who are data and value centric. Fostering data not only helps with a return on network capital investment, Sprint Nextel uses it as a differ
entiation against AT&T Mobility and Verizon Wireless.
Putting itself in pricing between the larger carriers and T-M
obile USA is an interesting place as Sprint Nextel doesn’t attract a more volatile and price sensitive base but are willing and attracted to Sprint Nextel’s data value story. To the carrier’s credit, it also embraced an Android-based approach (e.g., HTC Evo 4G and Hero) to stave off iPhone switching. With the addition of WiMAX markets, Sprint Nextel will use speed and unlimited data as a prime weapon. Yet in iDEN postpaid, the clouds have yet to part as its core demographic continues to be hard hit economically.
While Sprint Nextel’s postpaid woes are challenging, the ultra-competitive prepaid sector is where the wireless industry is seeing growth. Of the big four, Sprint Nextel by far has the clearest and most aggressive prepaid strategy. The market segmentation strategy uses four prepaid brands: Boost Mobile, Virgin Mobile, Common Cents, and Assurance Wireless to grab prepaid marketshare. In Q1 2010, the Sprint Prepaid Group accounted for a 19% share of all prepaid gross additions. Each Sprint Nextel brand targets a specific prepaid demographic. Common Cents, the seven cents per minute brand, addresses the pay-as-you-go segment. Virgin Mobile and Boost Mobile generally target the monthly/hybrid and unlimited calling segments. Assurance Wireless looks to serve the cash-constrained segment whose cause is helped by Universal Service Fund resources. The recent re-launch of the Virgin Mobile brand with more data-centric monthly plans leaves the door open for this brand to offer prepaid 4G service. It’s clear that Tracfone, a leader in prepaid is in Sprint Nextel’s crosshairs in addition to Leap and MetroPCS.
T-Mobile USA
Once a growth engine for its parent Deutsche Telekom AG, T-Mobile USA is now struggling in its postpaid business due to the economy and heavy competition. The competition and threat does not come from other postpaid carriers but mainly from the prepaid space.
A contributing factor in customer churn is T-Mobile USA’s consumer demographics who tend to be more price sensitive than other carriers. This has been fostered by T-Mobile USA’s promotion of its low-priced plans. Retooling and introducing a standard contract and contract-free portfolio (Even More and Even More Plus) has probably confused its base further. With the abundant competition in prepaid unlimited plans, price and value-sensitive customers find better alternatives.
In fighting this trend, T-Mobile USA has followed the historical price drop formula. This is evident in dropping the additional family line pricing from $10 to $5, dropping mobile broadband pricing from $50 to $40, and one time free phone promotions like on Father’s Day. To be sure, T-Mobile USA is in a precarious situation, trying to stimulate data adoption on its newly built network while shrugging off historical perceptions of poor coverage and performance. To some extent, T-Mobile USA finds itself only competing against Sprint Nextel for the data-value and data services story.
In prepaid, the lines blur as T-Mobile USA offer postpaid plans contract-free and with the quirky FlexPay feature. The standard pay as you go and $50 unlimited talk and text plans are adequate. Whether it slows competitors’ momentum that had been building for over a year remains to be seen.
As a differentiation, T-Mobile USA ’s prepaid mobile broadband is an area that is ripe for growth considering its new HSPA+ speed capability if the carrier plays its cards right.
William Ho serves as Vice President for Consumer Services. In this capacity, he is responsible for the overall management of the company’s consumer-oriented services. With over twenty years of telecom experience, Bill has held positions in marketing, network planning, product management, product development, engineering and project management positions within a number of carriers, including Verizon.
