Will Prepaid Conversions to Postpaid, or Tablets, Drive Growth?

At the moment, it is hard to say whether tablets or phone accounts will drive postpaid net additions for the leading U.S. mobile service providers over the next several years.

It is possible that T-Mobile US will be phone-driven, while AT&T and Verizon are tablet-driven. What might happen at Sprint is not clear.

Nor is it so clear whether the steady growth of prepaid accounts will continue so clearly, either. Prepaid accounts have grown steadily as a percentage of total accounts, over the past decade.  

In fact, most observers likely would bet that U.S. prepaid accounts would continue to grow, as a percentage of total mobile accounts.

As of the end of the second quarter of 2014, there were about 74 million prepaid subscribers in the United States. Some might estimate the total as high as 100 million. The point is that prepaid subscribers have grown steadily for quite some time.

That does not mean the largest four U.S. mobile service providers have grown in the same way.

Although prepaid is a mainstay of many regional service providers or prepaid specialists, where gross additions are dominated by prepaid, postpaid continues to be the mainstay for AT&T and Verizon. Prepaid is more important for Sprint and T-Mobile, some might argue, but not the main driver of subscription account growth.

The new twist is that Sprint seems to have made a decision to try and convert more prepaid accounts to postpaid. By extension, some might argue, T-Mobile US phone account growth is driven, at least in part, by former prepaid users opting for postpaid service.

The new potential issue is whether tablets or prepaid conversions will represent the bulk of postpaid account revenue growth for the largest-four mobile service providers over the next several years.

That potential trend already can be seen in the highly-competitive Western Europe mobile market as well.

Since at least 2008, mobile operators in Western Europe have tried to shift subscribers from prepaid to postpaid plans.

The number of contract subscribers in the region increased by an average of 7.7 percent annually between 2007 and 2010, rising from 41.5 percent to 47.4 percent of total connections.

In contrast, prepaid connections dropped by an average of 0.5 percent a year over the same period, according to the GSMA.

Of 89 operators in Western Europe studied by GSMA between 2007 and 2010, some 73 percent increased their ratio of contract-to-prepaid connections during the period, many would argue, because the gross revenue difference between postpaid and prepaid accounts narrowed so much.

So the potential coming issue is whether the U.S. market might also shift in a similar way.

In 2011, the U.S. prepaid market still was growing. By 2012, U.S. prepaid subscribers might have hit a peak, even if analysts virtually universally predicted continued growth of prepaid plans.

But Ericsson argues the distinction between postpaid and prepaid is becoming less relevant.

At the same time, tablet additions have driven growth for AT&T, Verizon and Sprint in recent quarters.

Strategy Analytics, for example, estimates that 50 million tablet subscriptions will be added between 2014 and 2018. That might be the volume driver for AT&T and Verizon.

On the other hand, many would note a developing trend of conversion of prepaid accounts to postpaid, at least at some leading U.S. mobile service provider companies. That is more likely to affect or help T-Mobile US and Sprint.

And any trend where prepaid accounts are shifted to postpaid should affect growth rates for the prepaid specialists.

That would reverse a decade or more of thinking that prepaid was destined to take a larger share of overall subscriptions, and also create a situation where it is not so clear whether prepaid conversions or tablet additions are the growth driver for the top four service providers.

Tablets with mobile Internet subscriptions using 3G and 4G LTE will grow more than five times in the next five years to reach nearly 250 million in 2018 at a global level, according to the Strategy Analytics.

Strategy Analytics predicts there will be 247 million tablet subscriptions by 2018, up from 45 million in 2013.

Verizon Wireless, Sprint and AT&T combined added nearly 1.5 million tablet subscriptions in the first quarter of 2014, for example.

That implies a growth rate of about 25 percent a year.

T-Mobile US is the clear outlier at the moment. T-Mobile US reported its “biggest growth quarter” ever in the third quarter of 2014, adding 1.4 million branded postpaid net new accounts, of which 1.2 million were phone accounts.

Consider those results with AT&T and Verizon in the third quarter. AT&T, in the same quarter, added about two million net new accounts. About 1.27 million of those connections were tablets. So AT&T added about 730,000 net new phone accounts.

So T-Mobile is adding phone accounts, AT&T mostly tablet accounts, on a net basis.

Verizon added 1.53 million retail net connections, but only 457,000 phone accounts. The other 1.1 million net additions were tablet connections.

Whatever else you might say, T-Mobile US is adding the most net new phone accounts, assuming Sprint third quarter net adds are about as expected.

The shift of subscriber growth to tablets is significant. In part, that shift reflects deliberate marketing efforts by AT&T and Verizon to encourage phone customers to add mobile connectivity for their tablets.

But that same logic might hold for Sprint, which wants to convert more prepaid accounts to postpaid accounts. T-Mobile US arguably benefits less directly, to the extent it markets postpaid service similar in price to prepaid.

More important, the shift to tablet net additions is one more sign of maturity in the U.S. mobile market: almost everyone who wants a phone already has one.

In another sense, the shift to tablet connections (“connected devices”) represents another probable trend. As the mobile industry, over time, starts to sell more sensor connections (for Internet of Things or machine-to-machine applications), average revenue per device is likely to fall.

Already, where a phone account might represent $40 to $80 of monthly revenue, a tablet might represent about $10 a month revenue. In today’s market, a single sensor connection might represent $3 per month revenue.  dri