Smartphones Do Not Drive Mobile Subscriptions Anymore

It is unquestioned wisdom in the mobile industry that the correlation between smartphone sales growth and mobile subscription growth is positive. But that correlation is not necessarily “causation.” For example, mobile subscriptions grew at high rates before smartphones were available. 

Once smartphone adoption reaches saturation levels, sales are mostly for replacement of older devices, and do not directly influence subscription figures overall, though such replacement sales are, to some extent, correlated with choosing different mobile service suppliers. 

In 2023, perhaps 75 percent to 80 percent of smartphone sales are of the “replace an existing smartphone” type. Counterpoint Research estimates 75 percent of smartphone sales are replacements of existing devices, while IDC estimates as much as 80 percent of such sales are for replacement. 

And although not all new mobile subscriptions use smartphones, most new devices sold are in this category. According to IDC, about 98 percent of new devices sold are smartphones. 

Year	Smartphone sales growth (%)	Mobile subscription growth (%)
2000	N/A	19.8%
2001	N/A	13.2%
2002	N/A	11.3%
2003	N/A	9.7%
2004	80.9%	10.2%
2005	45.2%	8.7%
2006	27.9%	7.5%
2007	32.6%	6.1%
2008	24.7%	4.6%
2009	-10.6%	2.5%
2010	49.4%	6.3%
2011	39.7%	5.1%
2012	15.9%	3.7%
2013	13.3%	3.2%
2014	12.6%	3%
2015	7.3%	2.8%
2016	4.3%	2.5%
2017	3.2%	2.2%
2018	2.3%	1.9%
2019	1.4%	1.7%
2020	-11.0%	0.7%
2021	9.5%	5.6%
2022	2.5%	3.9%

The point is that although it often is axiomatic that smartphone sales drive mobile subscriptions, that increasingly is not the case. 

"Free Riding" by Hyperscale App Providers?

To hear some connectivity service providers, the industry is in dire straits because of a “free riding” problem. Free riding is a situation where an entity or person benefits from something without paying for it. And that is essentially what some telcos allege happens when a few hyperscale app providers use internet access networks. 

The argument always is that a few hyperscalers represent a disproportionate amount of internet access demand, “forcing” internet service providers to invest in their networks without compensation. 

Among the key arguments:

• ISP profit margins are far below those of the hyperscale app providers

• This is somehow “unfair”

• A few hyperscalers represent a majority of traffic load

• ISPs will not be able to afford continued investment without compensation

Some might point to low research and development spending on the part of telcos, with such work as does occur having been essentially outsourced to third parties, principally the industry infrastructure supplier base. 

Other arguments against such “fair share” arguments include:

• Current infra investments by hyperscalers

• Violation of network neutrality principles

• Negative impact on app and content innovation, quality and prices

• Source of demand is ISP customer behavior, to which hyperscalers respond. 

On any number of financial metrics, though, it can be argued that ISPs and telcos are in the broad middle of all industries where it comes to financial performance. Profit margins and other measures of financial performance vary across industries, and telcos do not seem particularly disadvantaged on most of those metrics. 

Consider the price/sales ratio, which compares a company's market capitalization to its annual revenue. It is calculated by dividing the company's stock price by its sales per share. 

A high P/S ratio means that the market is willing to pay a high price for each dollar of the company's sales, typically because the company is expected to grow rapidly in the future, or because it has a strong competitive advantage.

 A low P/S ratio typically means a company or industry is not expected to grow rapidly, or because it has a weaker competitive advantage. Telco executives might emphasize the latter; others the former. 

Industry	P/S Ratio
Biotechnology	5.78
Pharmaceutical	4.38
Software & IT Services	3.67
Cloud Computing	3.41
Consumer Discretionary	2.80
Retailing	2.67
Technology Hardware & Equipment	2.52
Media & Entertainment	2.47
Telecommunications Services	2.45
Financial Services	2.18
Industrials	2.14
Energy	1.86
Materials	1.76
Agriculture	1.69
Utilities	1.66
Consumer Staples	1.65
Transportation	1.59

But telecom has never been a high-growth industry. It is akin to other industries with a “utility” or “natural monopoly” character. And such industries tend to have lower P/S ratios. In other words, “unfair” share of ecosystem or value chain revenue or profits is not the issue. 

Access networks are utilities, with utility-type valuations. “Unfairness” is not the issue.

How Much Does Wi-Fi Lower Mobile Operator Capex?

Offload of mobile network data traffic to Wi-Fi has alleviated a significant amount of mobile network capital investment, one might argue. By some estimates, between 24 percent and 65 percent of mobile data traffic often is offloaded to Wi-Fi. 

Though the reduction in capital investment requirements is not linear, mobile operators obviously must acquire less spectrum, use fewer radios and capacity to support their current customers because Wi-Fi offload exists. 

In addition to the savings in capital investment, Wi-Fi offload can also lead to other benefits for mobile operators, such as reduced operating costs; improved customer experience; increased network capacity and reduced congestion. 

Research Firm	Year	Percentage of Mobile Data Traffic Offloaded to Wi-Fi	Stationary/Indoors	Mobile/Outdoors
Cisco	2022	54%	70%	30%
Opensignal	2022	24%	60%	40%
Ericsson	2023	59%	75%	25%
ABI Research	2025	65%	80%	20%

The value of offload also can vary by mobile provider, as some firms have less spectrum per account than others, making offload an arguably more-important tool. Some mobile operators also own more fixed network assets, and relatively scant mobile spectrum assets, which can also affect the value of such offload operations. 

U.S. cable operators, for example, rely on Wi-Fi offload to lessen the amount of wholesale capacity they must purchase from their suppliers. 

Company	Total Accounts (millions)	Revenue per Account ($)	Total Spectrum Holdings (MHz)	Spectrum Currently Deployed (MHz)	Spectrum per Customer Account (MHz)
AT&T	130	45	1,215	750	2.5
Verizon	120	48	1,340	1,000	3.3
T-Mobile	95	40	1,200	700	4.0