A New Verizon - Embracing Prepaid with a Tracfone Acquisition

Verizon announced its intention to acquire America Movil's US Tracfone property which includes not only the Tracfone brand but also nine other prepaid brands.  The Tracfone property brings ~21M subscribers, 90K distribution doors and 850 employees.  

The transaction will include $3.125 billion in cash and $3.125 billion in Verizon common stock and also includes up to an additional $650 million in future cash consideration related to the achievement of certain performance measures and other commercial arrangements.  Expected deal close is 2H21.

Why It Matters

The old Verizon of old is gone in which it eschewed or minimized its prepaid operations for the chase of higher ARPU bearing postpaid users.  Surprisingly after 10 quarters of net prepaid losses, 2Q20 showed a positive net adds. 

As of 2Q20, prepaid only accounted for ~4M users (~4%) of the ~94M retail base. Tracfone by far has been the largest prepaid player and (if closed by 2H21), Verizon will be the largest prepaid player with ~25M subs. As of 2Q20, competitors' prepaid bases:

• AT&T (~18M)  
• T-Mobile (~11+M) 
• DISH (~9M)   

Moreover, the Tracfone unit reported >$8B in revenue which helps to provide a purely wireless growth story even when the other strategic bets didn't pan out (e.g., Yahoo/AOL, Oath, Terremark, etc). But Verizon could be in the driver's seat as Tracfone's America Movil parent has been absorbing years of net losses with the only bright spot in 2Q20 in which the unit beat out its competitors in net adds with 214K.

Looking Ahead

Verizon could work the new acquisition in ARPU to drive greater revenue as Tracfone's ARPU has been steadily increasing to $28 partly due to the strength of Straight Talk. There is room to grow with peers' prepaid ARPU in the mid to high $30s.  Going forward, it remains to be seen in 2H21 what Verizon will do with the multitude of value brands, whether to shrink and focus or leave under the notion that each value segment is important.  My bet is consolidation as 10 brands on to of Verizon Prepaid, Visible and Yahoo Mobile is quite the stuffed portfolio.   

T-Mobile Sprint Deal Done – Integration

Now that the T-Mobile acquisition of Sprint has been blessed, when will integration start? As we all know it’s been a lengthy journey since the $26B deal’s announcement in April 2018.  In September 2018, T-Mobile announced Sunit Patel to head merger and integration efforts.

Flash forward to February 2020, while T-Mobile and Sprint could not work closely on integration efforts, they’ve had a long runway in planning. Here are the key integration areas in my view:

1.     Executives and employees:  Like in most mergers and acquisitions, people are the first to come to mind. It’s almost certain that the acquiring company will win out in the executive suites. Overlapping areas such as human resources, marketing, engineering, operations and retail are likely to have been gamed out already, with few refinements.   The big if is making good on the promise that the acquisition/merger will be job accretive.

2.     Physical headquarters: It’s no secret that T-Mobile has expanded and updated their Bellevue spaces while Sprint’s offices, including the Overland Park campus has contracted.  Similar to competitors AT&T and Verizon, key executives will be expected to relocate to the Bellevue power center.

3.     Suppliers: Mergers always take a toll on suppliers. That is if they sold to two, now they’ll sell to one.  Invariably, that is part of the synergies calculation – suppliers may see reduced revenue because the new company will have better buying scale (on top of Softbank and DT added to the equation). However, since Sprint was cost cutting, there could be some spending bumps down the line.

4.     Infrastructure: T-Mobile has always highlighted the faster than usual of MetroPCS.  That is the decommissioning of their CDMA, repurposing the spectrum and lowering overlapping operational costs.   Indeed, Sprint is still on CDMA and it’s a strategic imperative to move those users (direct subs & wholesale partners) off so they may take advantage of PCS and move the 800 to DISH. 

5.     Distribution: While Sprint has been contracting their distribution, T-Mobile made commitment to expanding its doors.  Where there is overlap (i.e., T-Mobile and Sprint retail within a block or two), those retail shops could be sold to DISH as they will need to have postpaid retail presence beyond its prepaid Boost locations.   

I’m going to go out on a limb and guess the new T-Mobile integration will hit the ground running this week as the plans have already been put in place.  I’d expect some of the areas I touched on above (e.g., headcount/org chart/exit packages) will be announced within a week or week and a half, if not sooner.  

2Q19 America Movil Prepaid - Still Bleeding but Moving Some KPIs

For eleven quarters now, America Movil USA has been losing subscribers.  For 2Q19, it was 164,0000.  To be sure that is a big number and with a half glass full view, it's better than the same quarter a year ago with 635,000 losses.  As usual, its Safelink brand brought the most headache with 95,000 followed by 42,000 at the other brands. Surprisingly, the positive Straight Talk growth engine lost 30,000. This speaks to the competitive environment within the prepaid segment.

Still, the company's subscriber base is still formidable with 21.4 million subscribers but T-Mobile with 21.3 million will likely surpass America Movil as the largest US prepaid provider next quarter or the following. For those who are keeping track, AT&T is less than 4 million behind T-Mobile. 

One can argue these new losses have shrunk relative to the massive numbers in 2017 and 2018. Yet to the company's credit, there some some positive key performance indicators (KPI), churn and ARPU.  Churn has moved from mid-4% to a decent 3.7% level this quarter. ARPU has risen to $26 now from $20 at EOY '15, $24 at EOY '17 and somewhat stable at $26 at EOY '18.  Overall quarterly revenue has wavered slightly above and below the $2B mark.  

Why It Matters

It's clear that the big, no huge, loss quarters are slowly going away but Safelink continues to be an albatross around the company's neck. Straight Talk growth to offset some loss isn't assured as prepaid competition continues to be a two horse race between T-Mobile and AT&T. Based on trends, America Movil USA will cede its position as the 2nd largest US prepaid player. 

The company may be allowing the shedding of customers to trade for ARPU and revenue lift by focusing on its flagship Straight Talk brand. Looking ahead as a '19 goal, crossing from negative to positive growth would be a momentous milestone. 

AT&T's Prepaid Growth Story

If one looks at the last couple of quarters of net add performance, the prepaid market seems to be flattening. Powerhouses Metro by T-Mobile and Cricket which had dominated with large net additions have dropped from their high go-go growth past days.  Prepaid competition has always been tough and will certainly continue.  The drama in the T-Mobile/Sprint deal where uncertainty and change has brought concern to the dealer networks and employee bases, AT&T is standing out as the stable ship.  

To appreciate the AT&T's prepaid growth story, it began with the Leap acquisition announced in July of '13 and closed in March of '14.  Between the acquisition announcement and the close, Leap's subscriber base shrunk from about 5 million to over 4.5 million.  With Leap, AT&T's prepaid base moved to about 10 million subscribers at the close.  The Leap brand, Cricket, though known was declining and had an impact on AT&T's results in 2014. However, with brand expansion beyond Leap's regional footprint and AT&T's national coverage, the new Cricket began its growth story.   Increasing the 'doors' or distribution was central in this effort. This included expanding its dealer network and big box retail.

From 2015 to 2018, the AT&T prepaid net add annual run tallied over a million subscribers, negating 2014's growing pains which included decommissioning the Leap CDMA network and subscriber device migration.  

As prepaid evolved, it's still attracting a price sensitive segment but low plan price and free/discounted phones are just but several buying considerations. Embedding value is now mirroring postpaid plans. For example, Metro by T-Mobile is including mobile hotspot capability, music, generous Google storage and even Amazon Prime in higher tier plans. For Cricket's part, because of AT&T's Mexican network assets and Canadian roaming agreements, unlimited plan users can roam without charge in those countries.     

Recently, I had the opportunity to chat with John Dwyer, President of AT&T Prepaid on the state of his business.  A couple of Cricket highlights came up namely in the area of customer satisfaction triggered by comments made on the 1Q19 earnings call.  Though these were selected for the best PR, Chairman Stephenson revealed some important data points: 1) churn was under 3% and 2) Cricket subscribers accounted for 10 of the 17 million base, and had more than doubled since the Leap acquisition close.

Low churn is a key indicator of customer satisfaction and John reinforced that notion with JD Power wins in purchasing experience and customer satisfaction. As the former head of customer experience, he said that Cricket's net promoter score (NPS) moved from a -7 to now 43. By the way, NPS ranges from -100 to 100.  The 10 million Cricket subs suggest that there are 7 million prepaid subs to be share between branded prepaid and prepaid IoT.             

Branded prepaid took a shellacking in 4Q18 negating most of Cricket's 240K net adds. Observers checking the AT&T branded plans would note a double data promotion on its $50 ($40 with autopay) that runs until the end of July that suspiciously counters a similar promotion at Verizon, which isn't a surprise as each company have been longtime postpaid rivals for the same demographic.  This should hold true for each's branded prepaid offerings.

Back to the growth story - the last two quarters are shockingly lower than the previous 14 quarters.  The question is has the growth engine stalled because of overall market trends? Indeed, competitors' previous quarter net addition numbers were comparably lower.  One possibility could be on the coat tails of the FirstNet buildout wherein AT&T claims a positive trajectory for postpaid growth.  While they cite promotional activity for FirstNet accounts to include families, FirstNet is also going to rural communities in which AT&T has planned on new distribution. While the focus is on postpaid growth, it's logical that prepaid distribution would also follow. It's unclear whether we'll see 300K+ net additions but at least there is a runway.  A caveat is that with T-Mobile's 600 MHz expansion, their rural coverage will also increase and prepaid could also follow in increasing distribution, if there is commitment from Seattle (the new power center) versus formerly the MetroPCS HQ of Dallas.  In the next year, we'll see how the AT&T prepaid growth engine performs, firing on all cylinders or sputtering.         

CY 1Q19 Sprint Prepaid: Another Down Quarter & Stealing for Postpaid

Sprint prepaid has recovered from the previous quarter's 173,000 net losses with only 14,000 losses in CY1Q19. Statistically, they seem to be on the mend.  Sprint management has continually citing Boost Mobile's performance and doing heavy competitive lifting against stronger competitors Metro by T-Mobile and AT&T's Cricket.  It's no surprise that some T-Mobile and AT&T's net gains came from Sprint prepaid losses.  

However, this is disingenuous as Sprint's prepaid numbers should have formally shown better results.  There has been an on-going assignment of better performing (stable paying) subs to Sprint's non-branded postpaid category, thereby enhancing the postpaid number count. For CY1Q19, prepaid to postpaid migrations totaled 129,000.  On the postpaid side,  the company lost 189,000 phone subs. Without that 'help' from prepaid, the postpaid optics would have worse. Back in CY4Q18, with 173,000 prepaid losses, 107,000 migrated to the postpaid bucket. Then, Sprint posted 26,000 postpaid phone net losses. So the take away is that while prepaid performance is bad, postpaid is in rougher shape without its prepaid unit. 

By no means is Sprint the only carrier using prepaid to postpaid migration accounting to help its postpaid optics. T-Mobile is also expanding its postpaid numbers with this approach, piling onto the string of phenomenal postpaid growth quarters.  For 1Q19, 120,000 prepaid migrated to postpaid. What's important here is that they would have beaten AT&T for the 1Q19 prepaid title if they didn't do the migration. These migrations allowed T-Mobile to report 656,000 net phone adds. In 4Q18, there were 160,000 prepaid to postpaid which allowed T-Mobile to break one million phone net add mark.  Optics is everything in pushing your message.

Looking at churn, Sprints low 4% churn is highest of the big four prepaid competitors. T-Mobile is at 3.85% and America Movil is at 3.7% in the quarter and AT&T's Cricket reported to be sub 3%. On the other end of the spectrum, the non-competitive Verizon prepaid unit has continually lost prepaid subs and doesn't report its churn.  Churn has a lot to do with volatility or stability of the operating unit.   

Why it matters:  Without prepaid to postpaid migration accounting, Sprint prepaid appears to be staying somewhat lockstep against competitors in acquiring customers.  Since this accounting practice has been in place for many quarters, it's likely that prepaid numbers will continue to assist any Sprint postpaid 'recovery.'

There has been continuous talk about T-Mobile and Sprint shedding its prepaid assets as one or one of several conditions of regulatory approval.  It's no surprise, if that is the case, that Boost is the sacrificial lamb with its 8.8 million subs versus the more successful T-Mobile's 21.2 million.  T-Mobile can argue that they can keep its own prepaid unit as a counterweight to America Movil's 21.6 million count.  America Movil management has also publicly stated that they'd be willing to look at adding subs from any merger shedding. However, that would put them squarely ahead as the prepaid giant with close to 30 million subs.  How well would those optics look?  Yet with all this conjecture, we won't know until a decision happens in June or July.

   

1Q19 America Movil USA Prepaid – Recovering and Shifting

America Movil with over 21.6 million subscribers is the largest US prepaid player in 1Q19, closely followed by T-Mobile (21.2M), AT&T (17.2M), Sprint ([CY 4Q18] 8.9M) and finally Verizon (4.48M). With many prepaid operating brands absorbed throughout the years and the backing of its Mexican-based parent, the company is still a prepaid force but has ceded prepaid leadership to AT&T and T-Mobile.   To put it in perspective, America Movil USA reached its corporate high of over 26 million subscribers in 4Q14.

Similar to Sprint, its bet on lifeline services (SafeLink) has punished its subscriber base count with continued losses.  Partially offsetting this downward pressure has been the shift from non-recurring plans, such as pay as you go, to higher ARPU bearing monthly plans.  Chiefly, Straight Talk (available at Walmart  and ~43% of its overall base) has been its growth engine for many quarters while the other brands have declined. To understand the significance of Straight Talk and SafeLink, the two are highlighted in quarterly earnings reports along with an Other Brands category (~44% of the base).  

For the quarter, there seems to be a recovery of sorts, relative to the big losses in 2017 and 1H18.  With only 89,000 net losses, the company contrasts that to 1Q18's 371,000 losses and 1Q17's 1.3 million. The focus on the higher-ARPU bearing Straight Talk with 175,000 additions has helped its ARPU rise for the quarter to $26, contrasting to 1Q18's $24, 1Q17's $23 and 1Q16's $21.  Another provided metric, churn is now at 3.7% where in previous quarters were north of 4%.

Why it Matters: From the above chart, the truly bad days seem to be behind the company but SafeLink will likely continue to contribute to the losses. Though losses are less for the quarter, the US business unit's EBITDA margins is a measly 6.2% compared to the high 20s to low 40s of other America Movil's business units. Also, rewinding four years, the US business unit's 1Q15's EBITDA margin was 11.7%.  This suggests that it's been a truly competitive prepaid environment and the biggest MVNO is just getting by. 

There have been suggestions that America Movil may be in a position to acquire a spun off Sprint prepaid unit as a possible condition of a T-Mobile/Sprint go-ahead. America Movil management has indicated receptiveness to that as buying companies to increase the US opportunity has always been in the playbook. By no means are they the default winner as there are other parties vying for a parted out Sprint prepaid unit, if the occasion arises. We'll know in June/July?

1Q19 T-Mobile Prepaid -– Slipping and Sliding in the Postpaid Shadow

T-Mobile has outperformed its rivals for many quarters. Postpaid growth has been its consistent flagship that many focus on. To complement the postpaid rocket ship, MetroPCS’ expansion perhaps put the cherry on top. Today, postpaid is still growing but prepaid has been slipping since 2Q17, when AT&T prepaid pushed ahead. Throughout the quarters, questions were asked about why prepaid has slowed. Many times, the corporate answer is that the lines are blurring between prepaid and postpaid. However, T-Mobile had made it easier for those who were deemed less than prime customers to access postpaid plans, thereby adding them to the postpaid count.  Those prepaid to postpaid migrations have been highlighted consistently for many quarters. We all get it, postpaid customers bear higher revenue, they tend to churn less and more are more stable.  To be sure, the goodies of T-Mobile Tuesdays and free Netflix are also nice value draws.

Still, prepaid to postpaid migration takes away from the Metro by T-Mobile subscriber base and its posted revenues.  With this, there has to be tension between Dallas-based Metro (and its dealers) and corporate in Seattle.  The halcyon monster growth quarters from 2Q15 to 1Q17 are over while postpaid continues its march. In 1Q16, the prepaid group posted a record high 807,000 net adds but in 3Q18, it had dropped to a low of 35,000.  By the way, at the end of that quarter, Metro by T-Mobile rebranding was rolled out.   Perhaps reinforcing MetroPCS was T-Mobile would help.    4Q18 was ‘okay’ but 1Q19’s 69,000 contrasted starkly against 1M+ postpaid net adds. To add salt to the wounds, 120,000 net prepaid customers migrated to branded postpaid.

Is the prepaid group slipping?  From the growth view, yes. Yet the argument in a decreasing churn trend could be pointed as progress. In the last 4 quarters, the highest churn at 4.12% (3Q18) has dropped to 3.85%, lower sequentially (3.99%) and even YoY (3.94%).  That’s progress, right? BUT, AT&T’s Cricket Wireless is sub 3%, an astounding feat for prepaid. 

However, ARPU has slipped to $37.65 from $38.90 YoY and also sequentially.  Some can argue this is inconsequential yet from an overall prepaid revenue contribution, 1Q19’s $2.38B contrasts with 1Q18s $2.4B.  But postpaid continues to deliver with upward trends in net additions, revenue and low churn. 

Why it matters:  Perhaps the company is paying attention.  There is that thorny prepaid group integration task if and when the Sprint acquisition happens. To that end, longtime MetroPCS head Tom Keys is moving out of that role to work on the integration and transition task. After that, Mr. Keys will be retiring (likely with a non-compete).      Metro staff will have  new corporate EVP bosses in the form of Jon Frier (sales) and Matt Staneff (marketing) based in Seattle.  This is a rub for dealers as they’ve had deep and trusting relationships with the Dallas-based Keys.  How will their voices be heard when these EVPs have a bigger ball of wax to run, given the corporate focus on postpaid?   

Dealer performance and happiness in the end affects T-Mobile’s prepaid numbers.  T-Mobile corporate will have to navigate their distribution’s discontent and concern in making or losing money.  Presumably Mr. Keys will advocate for the brand that he has helped built and we shall see what develops.  Will Seattle drive new prepaid (non-loss leader) promotions to bring the prepaid group back?  We shall see. 

Afterthought: What if the Sprint deal fails? What will Tom Keys do and will the Dallas to Seattle reporting and control structure remain in place?

1Q19 AT&T Prepaid Returns to the Pole Position

Last quarter, AT&T ceded its prepaid net add position to T-Mobile. AT&T had led five out of the last eight quarters.  With the acquisition Leap Wireless and its Cricket brand, AT&T slowed the MetroPCS juggernaut that had been dominating the prepaid sector since T-Mobile bought them. Both companies had a similar playbook, de-commission the old CDMA network and expand brand and distribution beyond the old regional footprints.  For people playing wireless industry Trivial Pursuit, MetroPCS’ kickoff expansion was coined “Apollo 15.”  To put it in a competitive context, from 1Q15-4Q18, AT&T and T-Mobile accounted for over 10 million net additions while competitors were in negative territory.  

Company	Prepaid Net Additions / Losses
AT&T	5.24M
T-Mobile	5.14M
Sprint	-1.66M
Verizon	-1.48M
America Movil	-4.33M

Fast forward to 1Q19 results, we find that even with 96,000 net adds (85,000 were phone net adds), AT&T won out against T-Mobile’s 69,000.  This is a recovery of sorts against a shocking 4Q18 in which AT&T seemed to have lost its growth mojo. 

Looking at the drop in growth seems somehow disturbing after so many go-go quarters.  Is prepaid plateauing, especially since all other prepaid competitors have loss subscribers (Sprint hasn’t reported yet as of this writing)?  It may be but there are some silver linings: 1) Some solace for the prepaid group as their 85,000 phone adds beat their postpaid brethren.

2) In his prepared remarks, Chairman Stephenson reiterated the company’s strategy to focus on the high-value prepaid segment but divulged (for the first time in my recollection) that Cricket “had its lowest ever quarterly churn rate of less than 3%, down more than 60 basis points year-over-year. Prepaid revenue growth was solid, up more than 6%. We now have more than 10 million Cricket subscribers, double what we had when we acquired the company in 2014 with more than 17 million total prepaid customers under the umbrella of AT&T.”

Why it matters:  Chairman Stephenson’s unveiling of prepaid metrics (prepaid churn and ARPU are not publicly available metrics) suggest tremendous stability in the Cricket base.  For long-time industry watchers, prepaid churn ranged in the mid 4% to 5%. Therefore, churn less than 3% is a tremendous achievement. Moreover, stating there are over 10 million Cricket subscribers since the 2014 acquisition, out of the over 17 million prepaid base gives context on Cricket’s explosive performance.

Growth and acquiring switchers is an expensive game. For 4Q18 earnings, AT&T cited a competitor’s loss-leading handset promotion which took a toll on its branded prepaid. With its debt paydown targets from the Time-Warner acquisition, the company is unlikely to respond to any loss-leading promotion. This has been articulated in both the prepaid and postpaid side. As a result, explosive growth may not be on the horizon in the near term, barring extreme competitive circumstances. 

Caveat: If postpaid distribution will expand under FirstNet, prepaid may ride its coat tails.

1Q19 Verizon Prepaid – Sustained Losses but It’s OK?

It’s almost like a broken record that the Verizon prepaid group continues to lose subscribers quarter after quarter. In fact,  the company has lost subscribers for the last six quarters. In tracking over 17 quarters, 14 have been losses.  

Here’s the breakdown for year ending:

2015 – 551,000

2016 – 133,000

2017 – 43,000

2018 – 757,000

These for years total over 1.48 million lost subscribers.  Add 1Q19’s 176,000 losses and the tally is over 1.6M. In late January, following the Verizon earnings call, I noted these continued losses and CFO Ellis then paid lip service to note that they’re going to evolve their offerings over time. For this quarter, CFO Ellis noted that the quarter’s losses were better than 1Q18’s -355,000, seemingly putting a "it's not that bad" spin on things.  The party line had always been allowing the shedding of low (profit) and price sensitive customers with the retention of high-value monthly plan subscribers who don’t mind paying premium for the Verizon brand/coverage.  That thought is also goes hand in hand with migrating the voice/text phone-only people off or help transition them to smartphone plans.

Why it still doesn’t matter: Verizon is first and foremost a postpaid company with marketing and retention dollars better served on the postpaid side. Prepaid is highly contested as two  players have dominated prepaid over last 3 years years, AT&T (Cricket) and T-Mobile (Metro by T-Mobile). The two have taken the lion’s share of the prepaid net additions and they will continue to do so as their distribution into non-urban areas expand.    At the end of 1Q19, Verizon’s retail base was close to crossing 118M.  The 4.48M prepaid count is just 3.8% overall. Then there’s the revenue.  If Verizon’s prepaid ARPU is in mid-high 30s and its postpaid ARPA in the $130s (no apples-to-apples, I know), one can see why prepaid just isn’t a huge priority.     

2019 Prepaid - What Do Trends From Previous Years Say?

1Q19 Earnings season is about a month away.  Postpaid gets much of the focus because it brings in revenues and because it's a big chunk of the bread and butter revenue of many carriers.  However, though prepaid is a minor asterisk on many carriers, it doesn't mean that competition isn't just as formidable.

Trends could be a good predictor of future performance.  For every earnings call, I try to display a couple of years worth of net additions or losses on Twitter and occasionally, I write a blog or two. Let's look at the previous years' aggregate results and see if anything is interesting.

2017

It's clear the biggest loser was America Movil (Tracfone) as a huge loss factor was the lifeline brand, Safelink.  Tracfone was once a huge prepaid force to be reckoned with and to be fair it still is.  At the end of 2017, it had over 23 million customers.

Verizon didn't have a bad 2017. As the company is over 90 some odd percent postpaid. It didn't seem like a huge impact, as the carrier stated its intent to move feature phone subs off its 3G network and onto higher ARPU bearing smartphone plans.

Sprint looked like it was recovering and turned the corner from abysmal years '15 and '16 due to Assurance Wireless losses, their lifeline brand.  The Sprint prepaid group's flagship Boost Mobile continued to contribute as Virgin Mobile seemingly didn't help the cause.

Lastly, the T-Mobile and AT&T fight was the most competitive.  The real story behind those two companies' momentum is the respective purchases of regional players MetroPCS and Leap Wireless (Cricket).  T-Mobile dominated all of '15 and '16 as it expanded its distribution doors beyond the MetroPCS footprint.   AT&T used the same playbook in revamping and expanding Cricket's distribution nationally. Within the weeds, 2Q17 was the inflection point in which AT&T led for the remainder of the year.   This is important as AT&T and T-Mobile are emerging as the dominant prepaid forces.

2018

America Movil continued to lose!  Persistent blame was cast on its lifeline brand.  Corporately, it appeared an underlying industry strategy was to embrace the higher ARPU bearing and flagship Straight Talk brand for sub growth and revenue.  Straight Talk now makes up ~9.1 million out of its overall 21.7 million base.  The higher ARPU strategy yielded positives as its overall corporate end of year ARPU hit $26 vs '17's $24 vs '16's $23.  In addition, the overall corporate churn trend continues to improve.

While Verizon '17 prepaid looked encouraging, '18 saw significant prepaid losses.  Its sub base is barely 4 million and while there are some who point to the semi-linked Visible brand to address its prepaid ambition, it's a tough and price sensitive market.    

Sprint was supposed to have turned the corner in '17 but you would have been wrong for '18. 1Q18 saw some good momentum but in the end, 4Q18 tanked.  Clearly Sprint is more focus on good postpaid numbers, as it even categorized some Boost Mobile users with a good payment record and moving them into the overall postpaid count.

Again, the AT&T and T-Mobile dynamic proved to show the most interesting outcomes, as the two continue to battle it out for growth. Throughout '18 prepaid adds slowed with T-Mobile claiming that the prepaid-postpaid lines have blurred significantly.  There are a combination of factors perhaps, like any competitor, the carrier would rather spend its resources into higher-ARPU bearing postpaid users AND AT&T's Cricket has put the competitive screws on Metro by T-Mobile.  The big BUT is in 4Q18 where unexpectedly, T-Mobile came roaring back, besting AT&T. With its positive momentum, AT&T should have dominated 4Q18 but its branded prepaid tanked the numbers.    Still, overall in '18 AT&T was the net prepaid winner.

2019?

With abundant losses behind it, America Movil may cross into positive territory in 2019 as its losses were ~100K in 4Q18.  The first quarter trend for each year typically carries over some of the 4Q momentum.  If that is true, then American Movil may potentially see '19 as a turnaround year, barring overwhelming competition.  The increasing ARPU trend should continue as it's likely the company will add more resources into getting more Straight Talk traction.

Though Verizon 4Q18 losses only amounted to 90K, nearly 600K of its overall '18 losses happened in 1H18. Seemingly, it could be on the upswing.  Yet, the jury is still be out as Verizon doesn't really seem to address its offerings competitiveness to grow or retain its prepaid base.

Sprint is a big unknown.  Through earnings calls, filings and market looks, Boost Mobile seems to be holding its own while Virgin Mobile is a non-contributor.  The trend is negative as Sprint, which once was a significant prepaid player is inconsequential as far as marketshare.  All the indicators are going in the wrong direction, their churn is up and their prepaid ARPU is declining.

The growth money still in on AT&T's side as its prepaid momentum is greater than T-Mobile's.  If one extracts the 4Q18 glitch, AT&T continues to be the growth leader, barring additional AT&T branded prepaid losses.  The bottom line is that both companies would continue to shape 2019 prepaid growth.

Finally, here's how the prepaid business units shape up versus the overall branded base to note who is shrinking and contracting.

       

4Q18 T-Mobile Prepaid Recovers A Bit

T-Mobile took back net additions leadership for the quarter amid a slowdown in 2017 and 2018 from monstrous growth in 2015 and 2016.  With 135K adds, the company beats continued prepaid nemesis AT&T which posted 26K but only 13K phone net additions. 

Why it Matters: 

T-Mobile needed to slow the AT&T prepaid momentum a bit as it has been moving towards prepaid leadership in terms of additions since 2Q17.  Were it not for AT&T branded prepaid losses, Cricket's 240K net adds would have continued AT&T's domination.  A quarterly win is a nice reversal of 2018 fortune.

It's no secret that postpaid has better revenue upside than prepaid and in the 3Q18 earnings call, President Mike Sievert explained that their focus had been converting competitors' prepaid users to T-Mobile postpaid.   Data point: Prepaid makes up 33% of its branded base and 30% of the revenue.

Despite how the company and others in the industry have been stating that the prepaid/postpaid plan lines have blurred, T-Mobile postpaid hovers at ~$46 while its prepaid ARPU is in the mid $38 range. So Mike's argument holds water. What is unique is that in 4Q, T-Mobile admitted that its gains were from lower churn but also plan and handset promotions.  The promotions are a sharp contrast to not responding to 3Q AT&T promotions.  Will T-Mobile by Metro continue its  promotional run or is the AT&T branded prepaid losses a quarterly anomaly? Though with the 4Q win, AT&T safely won the 2018 leadership. What will '19 look like?   

4Q18 Sprint Prepaid Tanks

Just when you thought Sprint prepaid turned the loss corner in 2017, it started sputtering in 2Q18 and then totally tanked in 4Q19 with 174K net losses.  Sprint bet big on prepaid in the Dan Hesse days and embarked on a multi-brand strategy.  Then, Assurance, a lifeline brand created to counter America Movil's Safelink greatly added to the prepaid base. Then with the fallout of lifeline investigations, those numbers quickly went away. Meanwhile in 2017, under then CEO Claure, Sprint announced the re-launch of its limbo brand, Virgin Mobile.  The new Virgin Mobile was supposed to be an "industry game-changer" with an iPhone only bent. It hasn't moved the needle in prepaid competition.

Why it matters: Essentially, Sprint prepaid is a one brand pony - Boost.  In the CY4Q18 earnings call and material, Sprint noted that Boost continues to be a strong contender. In the previous quarter, Boost accounted for <200K net additions. For this quarter, rather than provide a definitive number, Sprint CEO Combes only stated that Boost delivered eight consecutive quarters before "migration."

Migration? What's that? In a nutshell, Sprint has identified high-value and stable Boost or Virgin Mobile subscribers and offer them a non-branded Sprint postpaid plan and device financing.  For this quarter they totaled 100K, which also classified them in the Sprint postpaid subscriber base.  

In CY3Q18, Combes managed expectations that this quarter would be negative.  One can only assume that Virgin Mobile is the brand that is in a freefall since Sprint no longer reports Lifeline (Assurance) subs due to regulatory constraints. However, Sprint expects a return to growth in CY1Q19/FY4Q18. Even if Sprint prepaid bounces back, it will be a while before it matches the momentum of AT&T Cricket or Metro by T-Mobile.

4Q18 AT&T Prepaid Momentum Stunted but Cricket is OK

After a monster run at huge net additions, the prepaid group somehow fell off a cliff. It's not a pretty sight, is it?  After its Leap Wireless acquisition, the company completed the acquisition in 1Q14, the company began to ramp up to expand the Cricket brand beyond the legacy region footprint.  T-Mobile's MetroPCS had a similar ramp in growth from 1Q15 to 1Q17.  By 2Q17, AT&T prepaid started taking the industry prepaid net add leader.  Therefore, AT&T 4Q18 prepaid numbers were a jaw dropper.

What happened:  Many industry watchers have become accustomed to Cricket as the net addition driving force.  However in the traditional cut-throat holiday selling quarter, promotions abounded.  Detailed in the earnings call Q&A, Chairman Randall Stephenson assured analysts that Cricket still had growth momentum with 240K net adds but the branded prepaid side suffered these losses. He pointed to two factors: 1) Branded prepaid subs were moving to competitors' postpaid and 2) AT&T did not want to counter a loss leading handset promotion (A $250 device was offered at $100).  As a result the prepaid phone net adds only amounted to 13K.  

Why it Matters:  While AT&T has been disciplined about not getting into promotions that hurt margin, it does impact the view that growth and competition is hurting them in the very visible net addition metric. It's likely that the AT&T branded prepaid loss could factor in the gains at T-Mobile, perhaps both pre and postpaid.  Unless the competition can sustain a loss leader strategy and Cricket growth stagnates, AT&T 1Q19 prepaid net additions should climb out of that cliff. Stephenson has noted glowingly in the past about Cricket's ARPU (~$35) being close to postpaid.  Prepaid has been a bright spot over the last two years of growth and revenue contribution, offsetting the declining and handcuffed postpaid side. With more of the same postpaid performance anticipated in '19, prepaid needs to get its mojo back.  

MetroPCS to Metro by T-Mobile & Plan Changes

T-Mobile is rebranding its MetroPCS prepaid business unit with the new moniker Metro by T-Mobile. Honestly, it's time or should have been done maybe two years after the MetroPCS was acquired at the end of 2012 and closed in early 2013. The PCS part of the brand harkens back to the PCS spectrum the company was operating. Quite frankly, the industry shortcut nomenclature was always Metro, so BFT.

How we got here: T-Mobile CEO John Legere teased a series of Twitter posts last Friday, the 21st.

With T-Mobile and Legere promoting a "LegereForBatman" campaign, you'd think maybe another T-Mobile executive could have been the Riddler as a stretch joke. 

But long-time industry observers may have noted the Legere tweet's question marks were the MetroPCS colors. Even T-Mobile CFO (also ex-MetroPCS CFO) Braxton Carter weighed in on John's tweet:

Plan Changes

Aside from the Metro rebrand, the other announcement component is the revised plans.  The new $50 and $60 plans are more competitive not just for the additional hotspot data ($50 from 0 -> 5GB and $60 from 10 -> 15GB) but it's notable that marquee external partner value has been to the prepaid segment.  The inclusion of Google One storage and Amazon Prime membership in a plan is something out of a postpaid plan playbook.

But that's the point that T-Mobile is making; the lines between postpaid and prepaid are getting blurred. However, that's not entirely true. The fine print says that Metro subscribers will get throttled when there is congestion so that T-Mobile One (postpaid) users have data priority.  Still, the new plans validate a long standing effort to boost the prepaid average revenue per user by focusing higher plan price points.  Moreover, another trend is to promote family lines. The value proposition here, similar to postpaid, is that family plans decrease churn. Churn is especially critical in the prepaid sector, where the price sensitive customer has a tendency to jump providers for the best deal.  So the introduction of Google One and Amazon Prime membership are more anti-churn value components to sweeten the pot and to move the conversation away from the traditional lowest monthly cost mindset.

Big Picture

Step back and look at the macro view.  After blistering growth since integration, T-Mobile prepaid (predominantly MetroPCS) has cooled since 2Q17.  While Metro has slowed, arch rival AT&T's Cricket side has greater growth momentum than Metro.

Meanwhile, Sprint's and American Movil's Tracfone prepaid units continue to recover from staggering losses due to its earlier bets on the lifeline segment (Assurance and SafeLink).  In the near term, it's looking like a two carrier race.  We'll see what happens in 4Q if these plans can make an impact. The yea's not done yet; competitors may also get into the value race as holiday sales take shape.



       

AT&T Prepaid - 4Q17, A Strong 2017

AT&T's reinvigorated prepaid group has been plugging away after the Leap Wireless (Cricket) acquisition and integration in 2014. Rather than keep the then AT&T Aio flanker brand, Cricket's name had better traction in the prepaid sector.  While AT&T is more than just the Cricket brand (remember GoPhone?), Cricket brings in the lion's share of the additions.

Overall, the Cricket unit has been a positive development, adding over 1.3 million (M) subs in 2015 and over 1.5M in 2016.  Its playbook mirrors its chief rival, MetroPCS which was acquired in 2012. The regionally limited MetroPCS brand expanded along with the T-Mobile national footprint, increasing the brand's distribution reach.  This has also been the case as Cricket increased its footprint and distribution.  With about a 1.5 to 2 year head start, MetroPCS has been the industry prepaid net add leader, with more than 1.3M in 2015 and over 2.3M in 2016.  Given this trajectory, one would expect them to lead in 2017.  However, for 2017, the overall prepaid net add leader is AT&T with just over 1M net adds to T-Mobile's 855 thousand.  



The overall trend, based on the leaders' numbers, is that prepaid isn't growing as hot as it was several years ago.  4Q17's numbers for both companies seem anemic in a Year over Year comparison.  Yet more confounding for industry watchers, AT&T has incorporated prepaid IoT (they say vehicle connectivity) into its 3 and 4Q17 numbers. Those account for 152 thousand additions. If we remove those numbers, AT&T still wins 2017 with 861 thousand, barely edging out T-Mobile's prepaid group.

Looking ahead to 2018, there are two things I'm looking for in the near term:

1. 1Q18 net add numbers: Generally, carriers' 1Q numbers have been the year's strongest. Will these numbers be 2016 or 2017 levels? As of this writing, Boost, Cricket and MetroPCS's lead offer are similar - 4 lines for $100. 
2. AT&T Prepaid IoT ramp:  AT&T has been building IoT connected vehicle business with auto manufacturers for several years now with the fruit of embedded connections for every vehicle. As new models and more manufacturers get online, the prepaid IoT numbers should increase. Churn and ARPU for this segment should be interesting if broken out (ideally).        

Verizon Prepaid - 4Q17 (More Cowbell, er ARPA!)

Verizon's prepaid group is going through a roller coaster ride.   For many quarters, the company's prepaid group had been losing subscribers at an alarming rate. From 1Q15 to 2Q16, the losses totaled 758,000! A momentary hike of 83,000 net additions in 3Q16 reversed in the next two quarters of a low 26,000 losses. It seemed that with new plans, the prepaid group was going to be on the upswing with positive growth in 2Q and 3Q17.  However, 4Q17 saw subscriber losses again.




To be fair, Verizon's retail wireless business is predominantly postpaid. Prepaid only accounts for less than 5% of the company's retail subscribers.  However for 4Q17, Verizon stated that its 184,000 prepaid sub losses were predominantly basic phone subscribers as it "deliberately reduced" focus in this area.  This makes sense as it's been the overall prepaid sector trend to cater to higher-ARPU bearing smartphone plans.  Some can argue that it took too for Verizon to come around to switch its tactics, in order to address an increasingly lucrative prepaid sector.  AT&T and others have long argued that given the no-contracts postpaid environment, prepaid and postpaid ARPUs were somewhat converging.  

As evident by Verizon's prepaid plans, they are indeed trying to boost ARPU.  Though the minimum single line monthly is $40, the important point is that the company is emphasizing additional lines (as with competitors) to increase ARPA. It's clear that Verizon is not going to be the least cost provider but as wireless veteran observers know, that's not their strategy.  As with postpaid, the company conveys to the market that it is a premium provider with a formidable network.




What will 2018 hold for the Verizon prepaid group? I have to think that there will continue to be basic phone losses but when will the smartphone plan additions outweigh the losses?  The prepaid subscriber base currently sits as about 5.4M, does the company care about increasing the sub count or keeping it level while trading it for newer subs that boost overall revenue? I suspect the latter.

T-Mobile Goes 5G, It's Expected Except with its 600 MHz

The wireless path for all wireless carriers beyond LTE is 5G. Everyone in the industry knows this.  Conventionally, the spectrum associated with 5G talk has been in the millimeter wave (mmW) realm.  That's why Verizon purchased XO because they had 28 and 39 GHz.  That also can be said with AT&T's purchase of FiberTower (24 and 39 GHz) and its interest in StraightPath (28 & 39 GHz).  There are many on-going trials on the vendor side and carrier side as well in mmW bands.   The width of the mmW spectrum availability is in the order of hundreds of GHz rather than the tens of MHz in each that carriers have today.

T-Mobile has also pursued mmW 5G trials. In September '16, Ericsson announced it achieved 12 Gbps   with T-Mobile in the 28 GHz band.  So with T-Mobile's announcement that it seeks to deploy 5G in the newly acquired 600 MHz spectrum (31 MHz covering 325M POPs) is a true departure from the conventional 5G talk and norm.  Why?

While 5G is the front and center of the announcement, what is lost is that T-Mobile seeks to use some of that spectrum for LTE deployment.   In the 1Q17 earnings call, Neville Ray (CTO) touted that the company wanted to put the spectrum to use quickly, with buildout ready by end of year 2017 along with handset support (Samsung & another vendor).  Two points that T-Mobile have shrugged off:

1) The spectrum needs to be cleared.  T-Mobile's initial 600 buildout will be where there are no clearance issues. It's also the geography where their 700 doesn't cover, so apparently it's a win.  The implication is that it's closing the coverage holes and getting to network and geographic parity with AT&T and Verizon, negating the "Verizon map" marketing advantage.

2) 600 ecosystem cost and support is costly.  It's clear that T-Mobile will be the first mover in 600 LTE and they painted similarities to delving into AWS spectrum.  They claim it's no different.  However, T-Mobile's modus operandi is and has always been pushing the technical and marketing envelope.  It has a good track record.

So the conventional playbook says that 600 will bring geographic and network parity against AT&T and Verizon.  More importantly, it will expand T-Mobile's sales and distribution footprint to greenfield markets traditionally served by AT&T and Verizon because they were the only game in town.

BACK TO 5G

To T-Mobile's credit, they're not ahead of the market as they anticipate buildout in 2019 with commercial service ready in 2020 along with a national footprint.  This is not aggressive but along the conventional standards and industry timeline.  Again, what is unconventional is its use of 600 MHz, unexpected in many tech circles.

The problem with this and conventional 5G talk is from a speed perspective is that it won't make the multi-Gbps targets as so many trials have demonstrated.  Moreover, 31 MHz is going to be divided with its earlier 600 LTE implementation.  This 5G implementation will likely pick up more spectral efficiency in delivering speed relative to LTE but again, as standalone 5G, the operating bandwidth is limited.  So what's the play?  There are two for now.

1) In a conference call with industry analysts, Neville and his network execs talked up rural IoT.  The argument goes that standard 5G mmW IoT is limited by the spectrum and really a play in urban areas due to the propagation characteristics.  While it's out of character with over three years of direct consumer wins, this feels more like a business play.  To be sure, T-Mobile has kicked off its IoT effort in January 2017 and it shouldn't end with 3G and LTE (NB).  IoT connected numbers in the billions and  every carrier wants a piece of the pie. With low or no per unit acquisition costs along with sustained recurring revenue, each connection has an excellent (industry term) customer lifetime value.  The money potential will preset itself in 2020 and beyond but for now, the announcement gives T-Mobile business and IoT force some roadmap to present compared to AT&T and Verizon, which have a substantial lead.

2) T-Mobile's 2020 national 5G network target is a pure marketing win. Again with conventional 5G talk with mmW, this conventional implementation will not have a 5G national footprint. While that is true, competitors can claim greater 5G speed compared to T-Mobile's 600 5G speeds.  The only caveat is that T-Mobile is likely going into mmW 5G as well.  So looking ahead, another related component will be the ongoing mmW spectrum acquisition race.

In closing, all the industry talk, other spectrum bands are likely to be refarmed into 5G.  I'm counting on Sprint to announce its 5G foray using its 2.5 GHz resources soon.