Recent estimates by the Kantar Group, a market research and analytics firm, show that Verizon Communications Inc. (VZ) was leading wireless telecom companies in smartphone sales for the three months ending August 2013. According to Kantar’s estimates, Verizon sold almost 37% of all devices sold in the US market during that period, while its main competitor, AT&T Inc. (T), lost market share.
Changes in market shares of smartphone sales can have major implications for wireless carriers, who are operating in an already saturated market with limited growth options. Smartphones are the largest growth drivers for the wireless industry and their owners use more data and therefore have higher data ARPUs, which is the fastest growing revenue stream for the industry.
AT&T was given exclusive rights to market the iPhone when Apple Inc. (AAPL) released it for the first time in 2007. This was an important privilege for AT&T, as it became the only company authorized to sell and distribute a revolutionary new product that was an instant hit with customers. It was not until February 2011 that Verizon starting selling iPhones on its network, and the device was introduced to Sprint and T-Mobile customers even later than that.
Smartphones revolutionized communication; and the increased adoption of smartphones – and later, data-enabled tablets – created a huge market for data-driven communication. This growing market has set the future trends for the industry: according to Ericsson Research, data usage is expected to account for 95% of all mobile revenues by 2015. The Average Revenue per User (ARPU) for wireless data is increasing at a five-year CAGR* of 16%, whereas wireless voice ARPU has declined by 7.8% over the same period. Competition over these two different revenue streams has led to intense rivalries among the big four cellphone carriers in the US.
Wireless providers are becoming increasingly possessive about smartphone customers. They are specifically targeting customers who subscribe to postpaid plans, because postpaid users have higher ARPU and lower churn rates* than other customer categories.
Postpaid users typically subscribe for services under a two-year contract with carriers, who, in return, subsidize smartphones heavily to gain market share. Because these users are bound to their contracts, they represent a recurring revenue stream for carriers. AT&T is currently leading the market with 107 million wireless subscribers, out of which almost 73% are smartphone users. Out of Verizon’s 98 million subscribers, almost 65% use its services on smartphones. In terms of postpaid subscribers, however, Verizon leads the telecom industry with 93 million users, which form its most profitable subscriber base.
AT&T and Verizon recognize the value of data-driven revenues. They have invested heavily in 4G LTE networks that will allow for faster, widely available and on-demand content on-the-go. While both companies have done well in selling new phones, Verizon has outsold AT&T by four million units over the eight quarters ending in the first quarter of fiscal year 2013.
Verizon’s higher smartphones sales and greater net additions to its subscriber base have translated into revenue CAGR of almost 32%, compared to AT&T’s 25% during 2008-2013.
Verizon was able to overcome the strategic advantage enjoyed by AT&T in terms of exclusive control over iPhone distribution by becoming the first company to deploy its 4G LTE network earlier than any other service provider. Doing that prevented Verizon from losing market share to AT&T. Now that the iPhone is available with nearly every major carrier, we can see that Verizon’s position in the industry will allow it to easily absorb the greater demand for data from new devices by providing better quality 4G LTE service.
Both companies are now operating on a level playing field, but Verizon has positioned itself better to take advantage of the boom in data revenues. This boom is expected to continue and grow, not only due to the adoption of smartphones, but by the proliferation of tablets as well. Subscribers usually tend to stay with providers that are familiar and provide reliable services; given that Verizon has a strong subscriber base and a strong suite of wireless services, we don not see how AT&T will be able tilt the balance in its favor.
*Compound Annual Growth Rate
**The churn rate is a measure of how many subscribers discontinue their relationship with a carrier.