Taken individually, the latest quarterly results for three of the top US mobile operators look strong. AT&T, Verizon and T-Mobile all saw fourth-quarter subscriber growth of between 3% and 4%, and annual growth figures of between 11% and 14%. Add in Sprint’s two consecutive quarters of net subscriber losses, however, and the picture looks substantially different. Total annual subscriber growth for the top four operators dropped to 9% for 2007 – the slowest growth rate this decade. There is little doubt that Sprint is directly to blame for its own losses, but there is also something bigger going on here: a shortage of new subscribers.
2008 will mark the end of rapid mobile subscriber growth in the USA – and the beginning of a long decline. By 2012, total annual subscriber growth in the USA could fall as low as 2% per year.
Saturation shouldn’t come as a surprise to anyone in the industry. The US mobile market is finally approaching the level of market penetration (85% in 2007) reached in Europe years ago. While the USA would do well to learn from Europe’s experience, there are also fundamental differences between the two that could make the transition in the USA smoother than it was across the Atlantic.
In the UK in 2002, for example, subscriber growth slowed to 9% from 16% in 2001 (the year that penetration rates reached 85%), and since then has only exceeded 10% in one year (2004). In 2006, UK subscriber growth was just 4%. Meanwhile, ARPU fell by 24% between 2000 and 2001, a drop from which it has only recently started to show a slight recovery, thanks to the contribution of data services.
In Europe, carriers have responded to saturating markets and falling ARPUs in four ways. They have:
- moved to de-emphasise aggregate subscriber growth figures when reporting financial results
- attempted to bolster overall ARPU by increasing their portion of contract (i.e. higher-ARPU) customers
- pursued fixed–mobile substitution as a way of increasing average minutes of use per customer and thereby voice ARPU
- encouraged customers to spend more on data services as their spend on voice services has fallen.
Although the first response – to change reporting techniques – could be seen as disingenuous, it is also an honest reflection of operators’ shifting priorities. US carriers may find the second of these four strategies counterproductive, but should pursue the third, and are likely to do even better than European carriers with the fourth approach.
In the face of slowing subscriber growth and of a challenging outlook for the growth of revenue, there are several actions that US wireless carriers can take. These include:
- maximising revenue from prepaid customers, while minimising the costs of addressing this market
- protecting the revenue of high-ARPU contract customers by differentiating clearly between their contract and prepaid offerings, even using a separate brand for prepaid
- using data mining to develop a more proactive and targeted approach to customer retention incentives for contract customers
- exploring the potential for future revenue streams from femtocells
- improving the accessibility of non-voice services (particularly mobile media and entertainment services) by presenting content pricing clearly to customers
- addressing target markets beyond the youth market, which can be fickle and low-spending
- recognising and withdrawing from elements of the value chain that are better served by specialists
- seeking to make it easier for customers to discover and access services
- encouraging the growth of both on-deck and off-deck offerings (i.e. those within and outside the operator’s own portal), with smaller carriers, in particular, focusing on the latter.
We can already see that many of these actions are well underway. The contribution of non-voice services to US carriers’ ARPU is already growing strongly, and to a certain extent this has disguised the level of voice ARPU decline. We expect non-voice services to account for 17% of ARPU in the USA in 2007 (compared to 12% in 2006) and to continue growing to reach nearly 30% of ARPU in 2012. However, even with this level of growth in non-voice service revenue, overall ARPU levels could continue to decline until 2009 due to price competition, the dilution effect of adding new subscribers with lower spend than early adopters, and the effect of a growing proportion of prepaid customers, whose ARPU is well below that of contract customers.
This article first appeared as a Guest Column on GIGAOM.com on 1 February 2008 (see: http://gigaom.com/2008/02/01/sprint-mobile-losses-not-a-sign-of-recession/).
