Entries in Wireless Connections (4)


Wireless Connection Growth Accelerating; Up 10% YoY

3Q11 Connections: Wireless Connections

After three years of averaging about 6% annual growth rates (in 2008, 2009 and 2010), the wireless industry in 2011 has seen its connections growth accelerate to the fastest rate since 2006, thanks at least in part to the growing popularity of data-only devices like tablets. Through 3Q11, wireless connection growth for the public companies (which comprise the vast majority of the industry nationwide) was 10%. Back in 2005-2006 we measured growth of just under 13% (12.8% for each year); by 2007 increasing handset penetration made for a growth rate that slowed to 9.1%.

But as we’ve been writing for numerous quarters, the divide between the ‘haves’ and the ‘have nots’ continued to widen in the most recent quarter. The top-three carriers—Verizon Wireless, AT&T and Sprint Nextel—accounted for virtually all of the growth among the 13 public companies in our sample. Just 3% of the total 4.95m net new connections in the quarter came from other carriers. Notably, AT&T-target T-Mobile has lost customers year-to-date, despite a 126k net gain in 3Q11. AT&T, Verizon Wireless and Sprint posted annual growth rates of 8.6%, 15.6% and 9.4%, respectively, through 3Q11.

AT&T led in terms of net adds in the period, due at least in part to its heavily discounted iPhone 3 promotion, which offered the older model handset for just $50. In its current holiday promos, AT&T is offering that model for $0.99, which could lead to continued strong results in the fourth quarter.

Verizon Wireless saw its net growth decline substantially when compared with the prior two quarters; the nation’s largest provider added 1.4m new customers, down from 2.3m in 2Q11 and well off the 9.9m net adds it posted in 1Q11 when it introduced the iPhone for the first time.

#3 Sprint managed to improve its net adds marginally in the quarter, although it continues to draw most of its growth from lower-value prepaid subscribers while Verizon and AT&T dominate in terms of postpaid subscriber growth.

Among the smaller operators, Hawaiian Telcom’s fledgling wireless operations posted the highest increase on a percentage basis, but Shenandoah Telecom, MetroPCS and Leap Wireless were relatively impressive, with 19.2%, 16.4% and 13.1% annual growth rates, respectively. Shenandoah has benefitted this year from its reworked arrangement with Sprint which allowed it to take control of the Virgin Mobile and Boost Mobile subscribers in its markets. Shentel’s prepaid customer base has grown by 75% over the trailing twelve months.

On the down side, Cincinnati Bell, NTELOS, GCI, and United States Cellular were all net losers in the latest quarter. Also to keep in mind, the number of wholesale/resale customers in the sample fell by more than 1m customers in the second quarter due to CenturyLink’s acquisition of Qwest. CenturyLink continues to resell Verizon Wireless service, but does not report its subscriber totals. Those subscribers are, however, already included in the Verizon Wireless reported figure.



Broadband Share of ILEC Connections Nears 20%

3Q11 Connections: ILEC Connections Mix

While the publicly traded ILECs shed 10.3% of their access lines YoY in 3Q11, wireline voice subs on average still accounted for 50.1% of total connections for ILECs in the quarter. That percentage however is likely to dip below 50% in the near future as more consumers do away with their home phone and the penetration of video and Internet services continues to improve.

Within our sample of ILECs, there are two distinct groups with vastly different connection mix makeups: those with a wireless service and those without. For the seven LECs in our sample that offer wireless service, wireless subs accounted for 61% of connections on average in 3Q11. Aside from the wireless giants—AT&T (NYSE:T) and Verizon (NYSE:VZ)—the LECs experienced minimal growth or stable declines in wireless as a share of total subs over the past two years. Telephone and Data Systems (NYSE:TDS) reported the samples highest wireless percentage of 85.6%, thanks to its majority owned subsidiary US Cellular (NYSE:USM), while at the low end Cincinnati Bell’s (NYSE:CBB) wireless share was 33.4%.

For those without wireless operations, wireline voice connections continued to dominate the service mixes in 3Q11. Wireline voice accounted for a sample high 80.5% of connections at Hawaiian Telcom (Nasdaq:HCOM) followed closely by Fairpoint (Nasdaq:FRP) at 77.2%. Overall, voice connections as a share of total connections on average has slipped 8% from 3Q09 to 3Q11. NTELOS (Nasdaq:NTLS) was the outlier in the sample, expanding its share of voice connections YoY to 26% in 3Q11. The increase was the result of its FiberNet purchase, but in recent quarters its voice share has slipped.

Along with declining access lines, the other near unanimous trend for the public LECs has been their greater reliance on broadband Internet services. On average, broadband subs made up 19.2% of connections for ILECs in 3Q11, up from 18.3% in 3Q10. AT&T and Verizon were the only LECs to report YoY declines in broadband as a share of total connections in 3Q11, but only because the pair grew their wireless subs at a much faster pace. Windstream (Nasdaq:WIN) reported the highest percentage of broadband connections in its mix at 30.9% in 3Q11, followed by Warwick Valley (Nasdaq:WWVY) at 29.9%. At the low end, broadband subs accounted for only 3.9% and 5.7% of connections for TDS and NTELOS in 3Q11.

Video subs once again represented the smallest share of overall connections for the LECs in 3Q11 at 8.9% on average, but for nearly all LECs that percentage is on the rise. With the exception of Shenandoah Telecommunications, which has actually lost video subs since the beginning of the year, all LECs offering a video service reported a higher percentage of video connections in its mix YoY in 3Q11. New Ulm Telecom’s (OTC:NULM) reflected the highest percentage of video subs in its mix at 21.8% in 3Q11, while video subs at NTELOS and Cincinnati Bell represented only 0.6% and 3% of total connections.


ILEC 3Q11 Results Summary: AT&T

AT&T Riding the Mobile Broadband Wave

AT&T’s third quarter results were impressive. The company led the major wireless carriers in terms of subscriber growth—without a new iPhone launch and with no LTE coverage to speak of in the period. And now that it’s launching LTE and selling the iPhone 4S, management is extremely confident that its fourth quarter results will be even stronger. On the wireline side of the business, U-verse continues to perform well and the company now generates more than half of its revenue from broadband, video and VoIP products; voice and “other” accounted for the remainder of wireline revenue.

In the company’s conference call, Ralph de la Vega, ceo of AT&T Mobility, gushed about the progress and potential of its LTE network: “I am thrilled about what we're seeing with the LTE launch. I have been a part of many network and device transformations. And this technology quite frankly is the best I have ever seen in my career. The network technology is fantastic. The devices are fast. They're thin. They have great battery life. It's the first time that I think a network transition is going to be a home run right off the bat.”

He noted that smartphones make up 52% of the base now and opined that virtually all subscribers will be using smartphones within two or three years. He continued, “And then you add on top of that these new devices like tablets and MiFis and e-Readers and telematics. And the growth opportunity is off the charts on this. And then you add to that the cloud, the fact that all of these devices in the future are going to want connectivity to the cloud, which means they need to have great bandwidth, great data capability…And the great thing about doing all of that is that we're doing it with a technology, LTE, that provides a reduced cost per megabyte, that is we can produce the megabyte a lot cheaper on LTE, and it's also more spectrally efficient. So lower cost, lower spectrum requirements and great revenue potential. I'm very bullish on what we're seeing in data, and I think we've only seen the tip of the iceberg because customers love the devices that are coming out and they love using high-speed data.”

When one analyst questioned de la Vega on the possibility that smartphone ARPU may begin eroding as lower end customers migrate over, he disagreed, and added that the company expects to add higher tier plans down the road: “In terms of the capability to grow ARPU, I think that we're going to see customers use more data, not less. I don't see an environment going into the future where customers are going to use less data. These products are too good. There's an incredible amount of streaming content that's available. So we're going to continue to see customer data usage increase. We have not seen a decline, and I don't see it any way to decline. That's why I feel so bullish about our position of having 50% of our base already on tiered plans, and we plan to make available more tiered options for customers in the future so they can enjoy the data services that they want. So what I see is exactly the opposite of the scenario you suggested, where everybody is actually using more data. I see it across every product category we sell and that more handsets that we get into a customer's hands that are smartphones, the more data that they use, not the less.”

He added that they are seeing overage from both tiered plans, but that the overage is small today: “I can't give you an exact number, but we do have overage from both plans...like I said before, we plan to make available more options to customers that may need higher usage categories in the future, so they can feel comfortable in stepping up but not feeling that they're having to pay an exorbitant amount. We want to encourage customers to use more and incur a little more cost if that's what they want to do…The other thing that I feel so bullish about is what is happening in the tablet arena. I mean, it's very obvious to me that this tablet revolution is going to continue. I don't see anything in the horizon that stops it, and I think customers are going to want both, some smartphones and a tablet. And they're going to see their content on the tablet in ways that's going to make them use more and more data. So I think the future of tablet computing is going to be very good for our industry.”  De la Vega also said that the free iPhone 3GS, which AT&T is offering with a 2-year contract, has sold out, “We've seen a tremendous, tremendous demand for that device even though it's a generation old. And actually, we're getting more new subscribers coming on the 3GS on the average than other devices.”

AT&T also did well in the prepaid segment in the quarter, adding more than 100k net new prepaid subscribers. De la Vega noted that the new $50 GoPhone plan has been very well received and “we’re just getting started…We put in that plan some handsets that are very attractive. They're low cost, but they've been a huge hit in the marketplace, so we're seeing that business resurge for us...We have a very strong fourth quarter lineup, so I think we're going to continue to do well with GoPhone sales in the fourth quarter.”

On the wireline side of the business, cfo John Stephens was asked about margin trends given that the U-verse margins are generally lower than in the legacy business. The company has been cutting costs in an effort to strengthen wireline margins, but management said that the numerous storms as well as a technology upgrade affected the results in the quarter—adjusted for those factors the EBITDA margin for the wireline business was 32%.

AT&T has been aggressively working to move its legacy DSL customers onto U-verse. Stephens noted, “The most encouraging piece of the DSL story [is that] while our net adds for the quarter were about in the 5,000 range, we had 500,000 high-speed U-verse/IP DSLAM net adds. So we were able to convert a huge piece of our legacy DSL base into U-verse/IP DSLAM, and we saw gains in small business with that IP DSLAM product for the first time. We'll continue to focus on transforming those DSL lines into high speed. We get great speeds, great service to our customers, good ARPUs.” Stephens also noted that the company will promote its wireless broadband service, which it will deploy to 97% of the country, in those areas where it doesn’t have U-verse. “We believe that's going to be able to provide a wireless solution at a high speed, good quality, good cost, on a profitable basis for us. That's the long-term solution to the non-U-verse areas.”


2Q11 Connections: Wireless Connections

Wireless Growth in 2Q11 Fueled by Smartphones

Wireless providers added 4.4m wireless connections in 2Q11, driven again by iPhone activations and the growing popularity of tablet computers. Our sample grew wireless connections 9.6% on a weighted average basis YoY. The sustainability of these gains is a question mark as the overall wireless penetration of population now exceeds 100%, but wireless connection growth for the foreseeable future will come from data-only subs.

Shenandoah Telecommunications (Nasdaq:SHEN) reported the sample’s top annual growth on percentage basis, growing its wireless connections 46.1% YoY.  A majority of Shenandoah’s 105k net wireless gains over the past year were prepaid subs, thanks to an agreement with Sprint that allowed it to serve Virgin Mobile customers in its service areas, and also due to increased sales of Sprint Nextel’s (NYSE:S) Boost prepaid phones. 

Verizon (NYSE:VZ) added 2.3m wireless connections in 2Q11, the best quarterly gain of the quarter, but a jump lower than its 1Q11 increase which followed the February release of the Verizon iPhone. While Verizon activated 2.3m iPhones in 2Q11, it took the company only two months to activate nearly the same amount (2.2m) in 1Q11. AT&T (NYSE:T) also reported significant, but stunted wireless growth in 2Q11, gaining a net 1.1m connections in the quarter, after adding 2m in 1Q11. Weathering the competition from Verizon’s new Apple offering, AT&T managed to sell 5.6m smartphones in 2Q11, 3.6m of which were iPhones.

The demand for mobile data and the popularity of smartphones and tablets such as the iPhone, Droid, and iPad continue to drive wireless connections up. AT&T is exhibit A.  A year ago smartphone users made up 36% of its wireless postpaid subscriber base; they now make up 50% of postpaid customers. Smartphone users accounted for 36% of Verizon postpaid subs in 2Q11, but 60% of postpaid phones sold by Verizon in the quarter provided Internet connectivity.

As recently discussed in our JSI Capital Advisors’ Communications Industry Forecast, by the end of 2011 we expect every person in the U.S. will have an average of 1.1 wireless connections.  With the majority of consumers already owning cell phones, the key to wireless connection growth in future quarters: subscriptions for data-only devices like iPads and other tablets. While wireless providers currently do not break these subs out, we estimated there to be 14m data-only wireless connections as of 2010 and project this total to grow at a CAGR of 25.2% over the next ten years.