Subscriber Growth Dwindles in U.S. Market: What Will Carriers Do?

There are basically two major ways mobile service providers or fixed network service providers can grow revenues: they can add more units (subscribers) or grow revenue per unit (average revenue per user).

And it is starting to look as though even mobile services, which have been the growth driver for the U.S. telecommunications industry, is facing a new era, when subscriber growth in the internal market can be propped up, near term, mostly by acquiring other firms. In other words, the internal U.S. market is approaching a zero-sum game, where one carrier can gain only by taking share from another supplier.

That is one primary reason why U.S. suppliers are so interested in machine-to-machine services, as that could add unit growth from telemetry services sold to other enterprises, rather than “humans.”

Average revenue per unit is a contest at the moment. Service providers face potential erosion of voice and text messaging revenues, though that has for the most part been a muted trend in the U.S. market, as real as it has become in some other markets, particularly in Europe.

But average revenue per unit is now driven by mobile broadband, which can grow for some time, though not indefinitely. Right now, it is unit growth that is the biggest issue.

Retail net additions (postpay and prepaid net additions) for the  three largest U.S. wireless service providers declined 23 percent on a year-over-year basis during third quarter 2012 to approximately 1.6 million, according to Fitch Ratings.

The decline is largely attributable to a 62 percent  year-over-year drop in prepaid net additions. In other words, not even a consumer shift of demand from postpaid to prepaid now is sufficient to propel revenues for some suppliers who specialize in prepaid services.

Wireless revenue growth will be driven more by usage based data pricing plans and increasing capabilities of smartphones as opposed to expanding the wireless subscriber base, Fitch Ratings says.

The leading U.S. mobile providers added 1.1 million revenue generating units during the thrid quarter of 2012, compared with approximately 3.3 million RGUs during the same period of 2011.

Smart phone penetration has reached 59.3 percent, an important figure because smart phone accounts drive mobile data revenue.

High speed data growth remains flat. Fitch estimates that approximately 542,000 new HSD subscribers were added by all large broadband service providers during third-quarter 2012, 3.1 percent  lower than the same quarter of 2011.

Perhaps surprisingly, video now seems to be driving growth for AT&T and Verizon in the fixed network segment of their businesses.

Fitch researchers also note that the largest incumbent  local-exchange carriers are successfully transforming their consumer businesses into broadband- and video-focused models, largely compensating for saturation or decline of the legacy revenue streams.

“The increasing scale of AT&T’s U-verse and Verizon’s FiOS service platforms is sufficiently
mitigating the ongoing secular and competitive pressures of their respective consumer landline
businesses and has strengthened their relative competitive position,” says Fitch.

AT&T U-verse revenues increased 38.3 percent during  third-quarter 2012 when compared with the same period last year. The revenue growth is driven by higher service penetration rates along with  higher levels of customers taking triple or quad play service plans.

AT&T estimates that three fourths of its U-verse TV subscribers have triple or quad play service with the company. U-verse triple play subscribers generate $170 of ARPU.

Verizon’s  FiOS  service accounts for 66 percent of wireline consumer revenues. Verizon’s consumer ARPU accelerated to 10.3 percent over the same quarter of 2011. Triple play customer ARPU is  $150 a month.

Still, even Verizon and AT&T have to now be looking at how to sustain revenue growth when the underlying fundamentals are shifting. Subscriber growth has become a zero-sum game, though revenue growth can continue for some time, lead by mobile broadband growth.

What to do after that revenue segment slows is the current issue. As a practical matter, none of the developing new lines of business are going to contribute sizable immediate revenue. That suggests a wave of acquisitions is going to happen, as that is the most tangible way of growing subscribers.

ARPU, in that sense, will be a secondary growth driver, once mobile broadband becomes ubiquitous.