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.   

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?   

2017 Prepaid Roundup - Winners and Losers

Yes, it's true. 2017 is two months behind us and the wireless industry is talking about the up and coming 5G.  While the US carrier sector focuses on the higher revenue and lower churn bearing postpaid segment, prepaid is often overlooked. Though prepaid experiences lower average revenue per user and higher churn, prepaid revenue and subs are still a formidable wireless segment.

The big 5 prepaid players, some with flanker brands, dominate the net addition or loss numbers. Therefore, the focus will be on AT&T, Sprint, T-Mobile, Verizon and America Movil.

Losers

It's pretty obvious from the above chart which company is the year's biggest loser. America Movil lost over 2.9M subscribers. According to the company, the dominant contributor was Safelink (government subsidized lifeline program) disconnects. America Movil wasn't the only company that bet big on the government program. Sprint's Assurance Wireless brand targeted the same segment and also suffered previous losses in its prepaid base.

The second loser was Verizon prepaid. After what looked like an upward trend in 2Q and 3Q, the company crashed with 184K losses, mostly with prepaid basic phones. Verizon and America Movil are moving to increase revenue with smartphone subscribers, in essence deemphasizing the classic pay as you go customer.  These two companies are somewhat late to the party as that's been the strategy for T-Mobile's MetroPCS and AT&T's Cricket for several years.

Winners

The clear winner in terms of sub adds is clearly AT&T's Cricket.  This flanker brand has been the steady growth catalyst since 2015.  What's important for AT&T is the momentum shift from 2016 in which T-Mobile (MetroPCS) dominated with over 2.5M adds versus AT&T's ~1.6M. It's likely the two company rivalry will continue. Despite losing the overall 2017 growth title, T-Mobile is a winner. Last but not least is Sprint with its major brands Boost Mobile and Virgin Mobile. Though Sprint came out 373K subs in the positive and paled in comparison to AT&T and T-Mobile, one needs context.  In 2016, Sprint lost about 500K subs and in 2015 the loss number was over 1.5M.  So 2017 was a win for Sprint in my book  

2018  

Coming out of 2017, each player is focused on growing subscribers using the multi-line strategy. While the revenue per user part is less than a single line, the playbook is decidedly reminiscent of postpaid. Remember the old voice days when the financial community were shortsightedly concerned that carriers were leaving money on the table with meager $10/month add-a-lines?  The tradeoff obviously is in lower churn. More lines equals the less likelihood to churn.  The equation changes a bit with prepaid as price is also a main consideration.   At the end of '17 and also now, competitors are moving to the 4 lines for $100/month.   As this is tax 'refund' season (for some), competitors are throwing in the free phone promotion here or there.  But Cricket has somewhat escalated a price war with a $40/month unlimited single line price. The promo duration ends on April 12th. The fine print is that the plan price is only for one year.

Surprisingly, competitors haven't matched as the equivalent plan is still $50.  Historically, the sub activity has  usually occurred in the 1st and 3rd quarters.  It's hard to say whether each competitor will be the instigator for more plan action but there is a balance between acquiring more subscribers while showing higher ARPU/ARPA/ABPU trends and increasing margin AND decrease churn. It's a tall order.

Distribution will define further growth opportunities. MetroPCS can certainly ride the T-Mobile postpaid's coat tails as the company expands into the hinterlands with its 600 MHz spectrum.  Similarly, Cricket can expand its national brand footprint as it gains more dealers.  It's likely that AT&T and T-Mobile will dominate the prepaid scene as Verizon's focus has always been the more lucrative postpaid.  Sprint's tight corporate budget also suggests that its acquisition money should heavily favor postpaid to further its turnaround story (I'm still waiting for Virgin Mobile's 'game-changing' contribution.  Lastly, America Movil will likely continue to shed lifeline customers with incremental growth in the Walmart exclusive Straight Talk.  Let's see what happens.  

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).        

Talking About Sprint Since Marcelo Claure's On-Boarding

Dan Meyer from RCR Wireless and I discuss Sprint's CY1Q16 results but revisit where Sprint is since Marcelo Claure has taken over as CEO.  We look at his priorities when he took over in August 2014 in the areas of:

• The executive team - who is in, who left, how the company is organizing
• Network - CapEx
• Cost containment including leasing companies, layoffs and $2.5B savings target
• Stabilizing revenue, the postpaid subscriber base and being the Value carrier

In the back half of the video, we talk about Glenlivet 12.

Handset Promos - BOGO from the US carriers + Scotch Second Take

In early 1Q16, the US carrier community pushed Buy One Get One (Free or 1/2 price) BOGOs hard in an effort to retain existing subscribers with an upsell of an additional line.  In parallel with this effort was the availability of the Samsung Galaxy S7, announced in February at Mobile World Congress.

Secondarily, it has to be that Samsung continues its marketing push to retain its loyal Galaxy customers to push them to the next iteration, whether they're Galaxy S4, S5 or S6 customers.

All these BOGOs are yet continuous carrier efforts to trot out the latest hardware. But BOGOs are not new and have been used for years. Unfortunately, the era of contract free plans and equipment financing have cut into upgrade rates.  In the old days, additional upgrades help retain/lock customers longer with low subsidized values. Given the sobering price tag of new devices and long term financing (24-30 months), that desire to upgrade has trended downward as more subscribers are keeping their handsets longer. Don't get me wrong, the early adopters will always have a place but the mainstream upgrade trend is slowing.  Caveat: We'll see how the public en masse embraces the next generation of iPhone (7).



For those scotch watchers, Dan Meyer and I talk a bit about the scotches we're currently drinking for the webcast here. We are self-admitted newbies and don't go in-depth as dedicated scotch YouTubers do but we share our likes and other scotch thoughts.

2015 Holiday Promos & 2016 US Carrier Outlook

Talking with Dan Meyer from RCR Wireless about holiday promotions and 2016 carrier outlook.

Video: Key Points in Q2 2014 Tier 1 Carrier Results

Once again, I get together with Dan Meyer, Editor-in-Chief of RCR Wireless to talk about Q2 2014 carrier performance and key take aways from their earnings calls.

Bullet Point Analysis: Boost Mobile Moves Defensive - The Battleground 40, 50, 60 Price Points

WHAT IS IT?

On May 6, Boost Mobile replaced its old monthly plan portfolio with a new Unlimited Select plans at three price points and specific data thresholds.

ANALYSIS

The prepaid sector is often characterized by high churn profiles and low credit scores. However, it is also a sector with high revenue and subscriber growth potential, courting feature phone upgraders (either prepaid customers or postpaid users looking for better deals in prepaid).  Sprint has made big bets on prepaid as a corporate growth engine. Prepaid subs represents 28% of the overall Sprint customer base.  Various sub brands (Assurance, Boost Mobile, Virgin Mobile) address specific prepaid demographics.  Yet 1Q14 was a bad quarter for prepaid with 465K losses, most of it blamed on Assurance brand losses. Boost's unlimited plans (along with Virgin Mobile's Beyond Talk plans) that garner higher monthly ARPU is clearly an important revenue component to Sprint's prepaid strategy and needs to be protected.  

Now with Boost's new plans at $40, $50 and $60, these numbers are the magic competitive price points to wage the prepaid war in mid to late 2014.  Boost Mobile is merely catching up defensively to rivals that already presented those price points and sometimes the same data thresholds.  

• AT&T's flanker brands Aio/Cricket is in integration mode but Aio's price points and data thresholds match directly with the new Boost plans.  AT&T has been very vocal about being aggressive in attaining growth at the 'low end' using Cricket and will be a threat Boost.   Tactically, it's likely that the unified Cricket portfolio will come out with the added lower $40 price point (Currently $50-$70).  Moreover, AT&T's mid-April GoPhone plan action added a $40/500 MB plan to match T-Mobile's $40 Simple Starter launched earlier 10 days earlier.

• T-Mobile's MetroPCS plan portfolio already has the same price points and always has been a strong competitor to Boost. By T-Mobile's 1Q14 prepaid earnings metrics, MetroPCS is doing well and though T-Mobile doesn't break out its contribution, the company added 465K prepaid users.  T-Mobile's internal code word in launching new markets is Apollo. The company is up to 30 new markets and continuing.  This Metro expansion has not only eaten into Cricket marketshare, it certainly has impacted Boost.    

COMPETITIVE IMPACT?

Every competitor has its own differentiation despite the same price points. The challenge is to communicate this to the target audience and cut through the usual selection criteria of device and plan pricing.

• AT&T's GoPhone portfolio has the advantage of built-in international calling and messaging while rivals MetroPCS and Boost need international package add-ons.  
• The new Cricket has high hopes and promise for its parent. Its primary focus is to recapture lost ground from MetroPCS and Boost will be impacted in the mix. It's uncertain if Muve music, which was an apparent differentiator, will continue to be promoted.  UPDATE: Muve Music is said to be on the auction block. Certainly, at a minimum, the expanded underlying AT&T LTE footprint and perhaps speed will be touted.
• MetroPCS continues to expand in an effort to migrate its legacy CDMA users (featurephone) to new LTE handsets on top of expanding its distribution to grab marketshare in new markets.  Boost's plans again are catching up to MetroPCS.

Boost Mobile needed to make its latest portfolio change to keep up with its main competitors.  There aren't any features in the new Unlimited Select plans that stand out against competitors. Boost Shrinkage discount approach is unique but how well does that retain a fickle customer segment?  Cricket and AT&T plans stand out as unlimited international texting (and limited international calling for GoPhone) are baked in.  Metro and Boost need to figure out if these features are competitively substantial in winning prepaid monthly adds.   
     

Bullet Point Analysis: AT&T GoPhone Adjustments, Defensive & Offensive

WHAT IS IT?

On April 18, AT&T announced two smartphone GoPhone prepaid plan adjustments and introduced a Wal-Mart specific plan:

• The $60 plan increased data from 2 to 2.5 GB + enabled Wi-Fi hotspot capability + unlimited talk 

• The $40 plan increased data from 200 to 500MB + 500 minutes of talk 

• Available at Wal-Mart stores nationwide, a new plan with 1GB of data for $45 a month + unlimited talk

Existing $40/$60 plan customers will automatically receive these increase data levels.  Moreover, not announced, the smartphone $50 unlimited calling and texting plan with WiFi-only (no data allotment) is no longer available. Though the plans are supposed to kick off on April 25, the changes are already available online.

ANALYSIS

The plan action with three components are a mix of defensive and offensive moves.  Anytime a company makes a change, there are clearly causes and effects.  

• As I wrote in my previous post on T-Mobile's newly launched $40 Simple Starter, that plan threatened prepaid competitors.  Eight days later, AT&T shored up its entry $40 GoPhone plan seemingly in a defensive move to match Simple Starter data threshold of 500 MB.  On the surface, it's merely a match but AT&T provides a differentiation for a specific segment of prepaid audience, those who text internationally. Still, Simple Starter addresses the needs of the talker as the plan offers unlimited calling; AT&T only provides 500 anytime minutes.  Against Verizon's $45 ALLSET, $40 price point comes out ahead for the price sensitive though Verizon's add-on data options offer better value. 

While the $40's nemesis was T-Mobile, the $60 GoPhone plan goes up against the Sprint's prepaid SmartPlus unlimited plan at the same price point with the same 2.5 GB threshold (throttled to 3G afterwards).  Sprint's other prepaid brands Boost and Virgin Mobile match other competitors such as MetroPCS and Cricket best.

• Finally, the tell tale sign of an offensive against Tracfone's Straight Talk is a Wal-Mart only plan. The $45/1GB plan matches the price point exactly though StraightTalk is unlimited and throttled after 2.5GB. The AT&T brand, WiFi hotspot tethering, as well as LTE access could be a differentiation but traditional value Wal-Mart shoppers may simplistically look at more data.  

• The ace in the hole for GoPhone is international messaging that competitors do not offer for the respective price points. This will appeal stronger to a specific subscriber demographic.  Provided that AT&T heavily markets this either in niche advertising or social channels, it may be lost.

AT&T's prepaid moves should be construed as urgent since it has lost prepaid subs for the last two quarters ( -32K 4Q2013 & -50K 1Q14).  Though the year-over-year view (-166 4Q12 & -184K 1Q13) looks better, the long and short of it is AT&T lost subs. By contrast, Verizon Wireless has had positive prepaid growth for the last eight quarters, decent for a primarily postpaid company whose prepaid subs are less than 6% of the retail/branded customer base.

COMPETITIVE IMPACT?

• AT&T's GoPhone move is just one component of a reversing prepaid strategy which mainly hangs it hat on the new Cricket market expansion. T-Mobile's MetroPCS brand had been targeting AT&T and Cricket heavily with the 'Apollo' market launches.  In the 1Q14 earnings call, AT&T said that the new Cricket will re-launch at the end of 2Q14, likely targeting T-Mobile and MetroPCS trying to reacquire lost subs. T-Mobile's entry plan featurephone switching growth may be blunt if AT&T markets heavily against that segment.

• Sprint overall needs to consider international messaging for postpaid and SmartPlus given this AT&T action. It may be too early to see how Sprint branded prepaid performs since Sprint doesn't specifically break out brand performance. 

• Verizon's ALLSET plan's $45 price point doesn't match well but it may be unlikely that a plan change is unnecessary unless AT&T makes inroads for a couple of quarters and attains notable marketshare.