Slowed prepaid net additions may result in market consolidation as competition increases
 

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Excerpt from TBR Commentary on Prepaid Market: In 2Q12 prepaid subscriber growth in the U.S. stalled, with net additions for the eight U.S. prepaid operators that TBR benchmarks dropping to 322,000 ...

Excerpt from TBR Commentary on Prepaid Market: In 2Q12 prepaid subscriber growth in the U.S. stalled, with net additions for the eight U.S. prepaid operators that TBR benchmarks dropping to 322,000 after six consecutive quarters of more than one
million total prepaid net additions — a 72.5% decline year-to-year. TBR believes the drop in subscriber
additions is attributable to multiple factors, including market saturation, 2H12 device launches and a
fierce competitive environment.

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Slowed prepaid net additions may result in market consolidation as competition increases Document Transcript

  • 1. TBR T E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C . TBR SPECIAL REPORT Slowed prepaid net additions may result in market consolidation as competition increases Eric Costa, Networking & Mobility Practice Research Analyst (eric.costa@tbri.com) Oct. 1, 2012In 2Q12 prepaid subscriber growth in the U.S. stalled, with net additions for the eight U.S. prepaidoperators that TBR benchmarks dropping to 322,000 after six consecutive quarters of more than onemillion total prepaid net additions — a 72.5% decline year-to-year. TBR believes the drop in subscriberadditions is attributable to multiple factors, including market saturation, 2H12 device launches and afierce competitive environment. TBR Total Benchmark Prepaid Subscriber Net Additions 2,500 2,239 Subscriber Net Additions (in Thousands) 2,000 1,676 1,545 1,576 1,512 1,500 1,439 1,260 1,116 1,176 1,000 820 737 500 291 322 - 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 SOURCE: TBR AND COMPANY DATAA significant drop in net additions will impact operator spending in 2H12 as carriers fight to attract newsubscribers. Operators will increase spending on sales and marketing to better communicate planbenefits and attract new subscribers, while absorbing increasing equipment subsidies as smartphonescontinue to become a larger proportion of operators’ subscriber bases.
  • 2. TBRTBR believes the sharp decline in net additions is an anomaly, and will be followed by more normal netadditions in 2H12. TBR projects total prepaid net additions in 3Q12 among the eight benchmarkedprepaid operators will be around 900,000.This is not the first major dip in subscriber net additions; the last major drop came in 2Q10, and theindustry quickly recovered with strong net additions just three quarters later in 1Q11. The big questionis whether prepaid subscriber growth will return or if this is a sign of the beginning of market saturation.The following analysis briefly describes what is happening in the prepaid segment in terms of slowedsubscriber growth across the U.S. wireless market. The key causes of the struggle in prepaid are:  The prepaid market is beginning to catch up to the postpaid segment in terms of market saturation as the number of new wireless entrants is decreasing.  The September launch of the iPhone 5 and the June introduction of the iPhone to select prepaid operators resulted in fewer prepaid net additions in 2Q12.  A fierce competitive environment and seasonality in the prepaid segment created a difficult 2Q12 market environment for all US operators.  Increased competition from the postpaid segment has intensified due to the introduction of shared-data bucket plans.Is the prepaid segment reaching a point of saturation?The postpaid segment continues to approach saturation as smartphone penetration climbs higher andnet additions slow as most of the U.S. population has at least one wireless device. TBR believes as theprepaid segment becomes increasingly saturated, it will result in fewer overall new subscriber netadditions to split among the carriers. However, prepaid operators will continue to add net additions byretaining their subscriber bases and enticing other operators’ prepaid customers with attractive plansand devices.Implications for the prepaid segment are inherent: the operators will see slowed revenue growth in theprepaid market, yet the operators who have been struggling with postpaid net additions, includingSprint and T-Mobile, will continue to push prepaid because it keeps their subscriber base growing. Theend result of the prepaid operators experiencing slowed prepaid revenue growth will be the need forconsolidation within the prepaid segment. There will be too many prepaid operators battling overdiminishing subscriber net additions, yielding clear winners and losers. TBR believes a larger player willacquire a smaller player to strengthen its position, similar to Sprint’s acquisition of Virgin Mobile toaugment its prepaid multibrand strategy, or two smaller operators will merge to better compete withthe prepaid leaders. This result is likely to happen by 2014, as competition will only continue to increasewith each passing quarter. TBR believes MetroPCS will likely be involved in a deal, as it continues to shoparound for a partnership or merger. MetroPCS’ likely partners are Dish, Sprint or T-Mobile. www.tbri.com
  • 3. TBR TBR 2Q12 Prepaid Subscriber Net Additions by Operator Subscriber Net Additions (in Thousands) 400 290 258 200 141 92 20 - (4) (200) (186) (289) (400) SOURCE: TBR AND COMPANY DATAPrepaid subscribers waited for upcoming launches before signing up in 2Q12,resulting in fewer net additionsVirgin Mobile and Leap Wireless both gained access to the iPhone for their prepaid subscriber basestoward the end of June, which prompted subscribers to wait until the September device launch tosubscribe. Since the second quarter was almost over by that point, the majority of the initial interest inthese plans will take effect in 2H12. The announcement likely contributed to the decline in net additionsin 2Q12 for those two operators. Sprint reported 141,000 prepaid net additions in 2Q12, compared to489,000 and 674,000 net additions in 1Q12 and 2Q11, respectively. Leap reported a net loss of 289,000in 2Q12. This decline year-to-year was due in part to seasonality, but also due to subscribers anticipatingthe release of the iPhone 5. The introduction of the iPhone to the prepaid segment may result indrawing a small portion of iPhone users from the postpaid segment. Virgin Mobile is better suited tosucceed in this strategy over Leap Wireless as the Sprint network is nationwide, as opposed to Leap,which does not meet the same coverage. Overall, the impact on postpaid will be minimal and more of along-term progression, as most subscribers are locked into two-year contracts.A shift in power occurred in the prepaid segment in 2Q12 as the pure-prepaid operators struggled, andthe Tier 1 operators all reported prepaid net additions, although they were down sequentially. Verizon,2Q12’s leader in prepaid net additions, was the exception. The operator added an industry high of290,000 net additions in 2Q12, beating out Sprint and T-Mobile, firms that typically specialize in addingcost-conscious prepaid subscribers. Verizon is continuing to see success with its $50 unlimited prepaidplan, which it launched in 2Q11, despite the availability of more competitive offerings from the smallerprepaid operators.The other reason for the prepaid shift in power is the emergence of the tablet market for the Tier 1operators. Verizon reported over one-half, or about 150,000 of its prepaid net additions were tablets, www.tbri.com
  • 4. TBRand 90% of those were LTE-capable. AT&T also reported total prepaid net additions of 92,000, yetexcluding tablets, 2Q12 traditional prepaid subscriber net additions totaled only about 37,250. The pure-prepaid operators, such as MetroPCS and Leap Wireless, along with T-Mobile, typically rely on low-income, cost-conscious customers rather than high-end tablet users, which helps explain the drop inthese operators’ net additions.The fiercely competitive environment between prepaid operators is beingintensified by postpaid offerings, resulting in prepaid subscribers churning topostpaid carriersThe prepaid segment typically has a high turnover rate, as no-contract plans allow subscribers to jumpfrom operator to operator to take advantage of better prices and increased coverage. This results in anaggressive price war in which operators undercut each other in an attempt to differentiate from thecompetition. Prepaid strategies range from low-cost plans, such as the $30 unlimited plan offered byTracfone and MetroPCS, to reliance on tablets and network coverage, as used by Verizon and AT&T todraw in net additions.Meanwhile the postpaid segment has become as much of a threat to prepaid operators as the directprepaid competition due to specific device launches and plan offerings. A device as big as the nextiPhone model impacts the postpaid segment, but can also have a ripple effect into the prepaid marketas it lures away a percentage of potential prepaid subscribers. The September launch of the iPhone 5resulted in fewer subscribers available for prepaid carriers to target, resulting in decreased netadditions.The shared data plans launched by AT&T and Verizon will also have an impact on prepaid subscribers, asthe pricing of a four-person family shared data plan at AT&T and Verizon is closer in price to MetroPCS’$50 per line prepaid unlimited data plan than the conventional postpaid tiered data plans. These planswill take time to reach their full potential, therefore they are more of a threat to prepaid than a currentcause to the slowed subscriber growth.Closing Thoughts: What will operators do to keep prepaid net additions comingthroughout 2H12?Operators need to continue to add net subscribers to stay afloat and not put themselves in a vulnerableposition that could result in an acquisition or merger. The keys to success are:  The prepaid market will bounce back after a seasonally low second quarter, resulting in higher net additions in 3Q12 across all prepaid operators; yet fierce competition will cause price wars.  The iPhone introduction to Virgin and Leap Wireless will help drive subscriber growth.  Verizon and AT&T will rely on the expanding tablet market to boost prepaid net additions.  T-Mobile will remain focused on attracting subscribers to its inexpensive prepaid offerings. www.tbri.com
  • 5. TBR  Sprint will continue to focus on retention of its prepaid iDEN subscribers while relying on its multibrand strategy to drive net additions.  Excluding tablets, TBR believes T-Mobile and Sprint will report the highest prepaid net additions in 2H12.Technology Business Research, Inc. is a leading independent technology market research and consulting firmspecializing in the business and financial analyses of hardware, software, networking equipment, wireless, portaland professional services vendors. Serving a global clientele, TBR provides timely and accurate market research andbusiness intelligence in a format that is uniquely tailored to clients’ needs. TBR analysts are available to furtheraddress client-specific issues or information needs on an inquiry or proprietary consulting basis.TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.©2012 Technology Business Research Inc. This report is based on information made available to the public by the vendor and other publicsources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable orresponsible for any decisions that are made based on this information. The information contained in this report and all other TBR products is notand should not be construed to be investment advice. TBR does not make any recommendations or provide any advice regarding the value,purchase, sale or retention of securities. This report is copyright-protected and supplied for the sole use of the recipient. Contact TechnologyBusiness Research, Inc. for permission to reproduce. www.tbri.com