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. 

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 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.  

4Q18 Verizon Prepaid Continues Decline

Verizon prepaid has steadily lost subscribers over the many quarters. For 4Q18 the carrier lost 90,000 subscribers, 3K more than last quarter. This performance, on the surface, is disturbing for any student of business. In the 3Q18 earnings call, CFO Ellis stated, "..prepaid is certainly a small part of our business. And we will continue to evolve and adapt the product offering there over time."  The company was to focus the prepaid offerings on value-added segments. The 4Q18 results suggest it's either not working or still a work in process into 2019.

Why it doesn't matter: Verizon's retail subscriber base is now nearly 118 million subscribers of which the prepaid base is about 4.6 million. That's less than 4% of the overall retail subscribers.  Even though the prepaid group had been north of 5 million, the postpaid side is where the money is at.  In contrast, the postpaid subscriber net additions exceeded 1.2 million.  In the end for prepaid competition, Verizon as a brand, while strong force in postpaid is a non-contender in prepaid.    

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).        

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.

Bullet Point Analysis: Sprint's RadioShack Store Deal - A Lot of Positives

What is it?

RadioShack's bankruptcy allowed Sprint to partner with General Wireless Inc., a subsidiary of Standard General LP, RadioShack’s largest shareholder (a hedge fund), to increase Sprint branded retail distribution by approximately 1,750 stores, more than doubling Sprint's current 1,100 company store count. The transaction is subject to approval by the bankruptcy court.

The plan at that point will be to establish co-branded (Sprint and RadioShack) stores where Sprint and RadioShack would sell their separate services. 

Analysis

Although it didn't make company's FY3Q14 earnings call deck, it's better late than never.  

The deal has many wins for Sprint since:

• Above all, the company expands their distribution base to help with gross additions (postpaid and prepaid brands) and get potential subscribers in the door interested in the much campaigned "Cut Your Bill in Half Event" that will continue into 2015.

• Distribution count will exceed surging rival T-Mobile. In the FY3Q14 earnings call, CEO Claure stated that Sprint was 500-600 less than T-Mobile. With the new stores, gets T-Mobile's count in one swoop, bringing the total Sprint count to over 2,800 retail points of distribution.  

• Those 1,750 stores have been cherry picked.  Logically, these new stores would not cannibalize existing Sprint retail traffic, and serve the right Sprint target demographic - Verizon and AT&T prime customers.

• The stores will be co-branded but Sprint is the primary brand. Sprint and RadioShack says that each brand's customers may be cross-marketed to but the ability to share lease space costs should not be overlooked. Sprint will only occupy a third of the store space so relative to operating a full store, Sprint in theory has lower costs.

• With all the negativity of a declining brand and controlling costs, headcount cuts have been an unfortunate tool. However, Sprint will need employees to operate these stores. RadioShack employees who are already trained at selling mobile devices and plans are logical candidates. In theory, it's an easy transition as reps will only need to focus on Sprint plans versus the many prepaid MVNO options and those of Verizon and AT&T. In fact, because of the breadth of knowledge, these reps will know what competitors' plan weak points may be. 

Yet there are questions. 

• Like many deals, the financial and commitment terms were not divulged so it's undetermined how good of a long term financial deal this is.  

• The deal needs the blessing of the bankruptcy court and if that is given in short order, this doesn't mean that Sprint can move in immediately.  The store rep human resources process will need to be address, planning the look and buildout of a third of every store will need to be done.  Given this, the impact of the 2015 gross additions look to be in the back half of the year.

• This last point can be both a positive and negative.   By taking over these 1,750 stores, Sprint takes out the same number of distribution points for postpaid rivals AT&T and Verizon (no T-Mobile) and Tracfone prepaid brands (US Cellular in some markets).  The big "BUT" is the amount of wireless business a declining RadioShack generated for competitors. If it's immaterial, then it's not that great of a loss for those competitors.

Overall, this deal is one of the best moves Sprint has jumped on since the beginning of CEO  Claure's tenure. 

Bullet Point Analysis: T-Mobile's $40 Simple Starter Threatens Competitors' Prepaid As Well

WHAT IS IT?

On Wednesday, April 8, T-Mobile announced a new plan called Simple Starter aimed at the individual entry smartphone data user.  Specifically with the following features: 

• 500 MB of LTE data 
• Unlimited Talk and Text
• The subscriber has ability to add on data when 500 MB has been reached
• For an additional $5, the customer can add 500 MB/day or $10 for the next week

ANALYSIS

There are benefits for T-Mobile but this minor plan introduction isn't likely to shake up the industry, hence no UnCarrier X.0 associated with it.  Even its previous plan adjustment (31 days prior), that offered additional data and expanded the Simple Choice portfolio from three plans to four and Stateside international texting did not warrant a X.0 or 4.1 moniker.   

T-Mobile Benefits: 

• From a portfolio viewpoint, T-Mobile now has a lower price point to grab entry data users who aren't sure how much data they may use.  

While T-Mobile has an opportunity to upsell its featurephone users, its designs are at other carriers' postpaid featurephone base. As of 4Q13, Verizon Wireless has 30% of its postpaid subs not on smartphones while it's 23% at AT&T and around 20% or less at Sprint.  This is helped by T-Mobile's $650 switching offer (UnCarrier 4.0) launched in January. On pure out-the-door price perspective, T-Mobile bests even the lower and equivalent pricing (recent price moves at the entry end) from AT&T ($25/1GB) and Verizon Wireless ($30/500MB) simply because of the device access charge ($25/AT&T NEXT, $30/Verizon Wireless EDGE). Sprint's $55 single line Framily plan also comes in higher.  Given the target featurephone customer is likely to be price sensitive, T-Mobile may be successful with this segment. 

• T-Mobile also has an opportunity in converting prepaid users to postpaid.  Let's face it, the 'no-contract' has some of the hallmarks of prepaid but it's still postpaid.   Simple Choice and Simple Starter plans do not have the 'handcuffs' that come with subsidized two-year contracts, however, most T-Mobile customers will take advantage of the equipment installation plan (EIP) with 24 month device financing (a different type of contract lock).  A quick scan of the leading monthly prepaid offerings suggest that the $40 price point for Simple Starter has the potential to make inroads into the prepaid sector.   Looking at the table below, most competitors are at the $45 and greater price point.  Note that the only prepaid offerings at $40 are MetroPCS (T-Mobile brand) and Net10 and Simple Mobile (Tracfone that also buys wholesale from T-Mobile).   

Logically, competitors may provide more data than T-Mobile's Simple Starter, but there may also be an element of brand aspiration and effective T-Mobile marketing momentum beyond features and price to help adoption.  

Looking at Simple Starter, the plan is characteristically old school prepaid. That is, if a customer runs out of data, they can refill. In the olden days, it was minutes, now it's data.  Verizon Allset and AT&T GoPhone plans do just that. Innovation-wise and addressing 'users' pain points and frustrations,' Simple Starter is unremarkable. 

• If T-Mobile is successful with drawing price sensitive entry postpaid switchers and prepaid (that's where the industry growth is), T-Mobile has one of several upcoming elements to help drive to their 2014 2-3 million postpaid net add target. 

COMPETITIVE IMPACT?

• It's clear that Tier 1 competitors' featurephone bases are the targets of Simple Starter, helped with the UnCarrier 4.0 switching proposition. As T-Mobile is offering a out-the-door lower price, it will be tough for rivals to drop pricing, especially at AT&T and Verizon because they want to maintain premium network brand positioning.  At Sprint, Framily from a single line price viewpoint is vulnerable. If T-Mobile had been feeding off Sprint users in the past, it will continue to do with the remaining featurephone base. Sprint's equivalent switching promotion may help stem the bleeding in possibly attracting gross adds.  If the T-Mobile postpaid brand aggressively targets the prepaid segments that MetroPCS doesn't, this could spell trouble for Tracfone, AT&T, Verizon Wireless and Sprint's prepaid group.  

• T-Mobile claims to have additional minor and major announcements to come. All those are components to reach or exceed their 2014 goals.  By all rumors, T-Mobile will post stellar postpaid net adds for Q1 2014 (1million+?). Let's see how T-Mobile does Q2 and Q3 go for gross and net adds.  

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4Q2012 Prepaid Carrier Trends – Be Warned – It’s A Long One

Now that the Q4 2012 earnings are done, let’s look at the segment that had been driving a lot of the wireless growth in the past few years – prepaid. Rewind back to 2007/2008, Leap and MetroPCS were strongly acquiring subscribers with their unlimited propositions. The subsequent years saw similar flat rate introductions from the likes of Boost, Virgin Mobile, Tracfone’s StraightTalk and NET10. With the pressure from the monthly prepaid plans, Tier 1 carriers Verizon Wireless, AT&T and T-Mobile also joined the mix. The commonality in competition is for the high-value user. The traditional pay-as-you-go (PAYG) user’s contribution is far less. These users range from ‘glove box’ (low use) to moderate users. They also tend to be highly price sensitive and have a higher churn profile. The opposite is true to monthly plan users. These users while also price sensitive are heavier users and are fine with a flat rate model for predictability. They often have a lower churn profile relative to the PAYG user. That’s not to say they’re in the postpaid sub 2% churn territory. But for the prepaid segment, these monthly users are lower churn. 

Smartphones have been appearing in the prepaid segment for the last two years. While the companies want to offer the same capabilities as the postpaid segment, the prepaid model calls for low to no subsidies on devices. Of course companies strive to find low cost providers (e.g., Huawei and ZTE) to fill that niche and to leverage price against existing suppliers (e.g., Samsung, LG, Kyocera, HTC, etc.). The goal of course is to drop the smartphone price so that buyer can perceive that they’re affordable. However, prepaid providers walk a fine line for inexpensive devices because if a device is perceived as almost a throwaway, the likelihood of churn increases. For those reasons, expensive halo devices like a Samsung Galaxy S3 or the Apple iPhone keep the carrier sticky. 

With this as a backdrop, let’s look at how the players fared? Purely on net addition numbers, we can see that the regional unlimited players that ruled the day back in 2007/2008 are in trouble with Leap Wireless in the poorest shape with over 300K in subscriber losses. In Leap’s earnings call they noted that they are de-emphasizing their pay-as-you-go and mobile broadband business. There is logic in this as mobile broadband users eat more bandwidth (leaving less for monthly users) and PAYG are less revenue generating. MetroPCS though with less subscriber loss follows the same loss trend that has plagued Leap for many quarters. The company claims that they’re de-emphasizing CDMA growth but this tactic has resulted in an overall 5% loss in the base. This meshes with the long term strategy anyway once T-Mobile integrates and eventual use the 1900 CDMA to convert to 1900 HSPA+. By contrast, Tracfone’s net additions are by far the most impressive. The company buys wholesale from many carriers and has a large mix of PAYG and a growing base of monthly users. Presumably StraightTalk is doing well for the company as evident in ARPU. Several years ago, Tracfone ARPU was 10. In Q4 2011, it was 16 and in Q4 2012, it is now 18. APRU just doesn’t jump like this by growing a purely PAYG product. 

While Verizon Wireless had a tremendous Q4 in the postpaid side with over 2.1M net adds, the positive prepaid numbers indicate their competitiveness. Despite a down from a year ago and the previous quarter, it speaks to their premium brand messaging and perhaps a new November double data plan promotion. This is pretty decent for a predominately postpaid company. AT&T on the other hand is on a steeper downward slide. In Q3 2012, the company added 77,000 users with those gains erased with the 166K lost in Q4. AT&T is still a postpaid company with prepaid making up around 7% of the total subs. It will be interesting to see which way the direction turns for AT&T in Q1 2013. Another predominately postpaid carrier doing well in prepaid is US Cellular. Though the regional carrier continues to shed postpaid subscribers, the new U Prepaid plans that it has partnered with Alltel may be helping the cause. 

Moving onto the rest of the carriers, Sprint’s prepaid numbers have been down relative to previous quarters because the Assurance brand that had been driving huge subscriber count has been slowed due to FCC’s revamping of the subsidized Lifeline program in 2012. The company has already warned of a 1.2-1.3M subscriber loss possibly in Q2 2013 due to the revamping of rules. Regardless, the company indicated that the Boost and Virgin Mobile brands have contributed to the positive numbers. At the same time, the company is actively trying to migrate older Boost iDEN users off ahead of the iDEN network decommissioning. Finally, T-Mobile’s prepaid business is offsetting continued losses (550K) on the postpaid side. Again the above numbers are branded prepaid. T-Mobile counts MVNO (wholesale) net additions as prepaid as well. Branded prepaid at end of year 2012 represented 17% of the overall T-Mobile base. Looking ahead with the combination of MetroPCS’ prepaid subs, branded prepaid will transform to 45% of T-Mobile’s subscriber count. Given the higher churn profile of prepaid and lower revenue, it’ll looks challenging for future higher revenue contribution. But that’s months away…. Q1 2012 typically continues Q4 sales momentum. We’ll visit that to see what develops.

MetroPCS Q4 and 2012 Results - Ouch

MetroPCS released their Q4 2012 and year to date 2012 results ahead of the Q4 earnings call later in the month. What stands out is the surprise subscriber loss over the year. 

With over 93K subs lost in what is supposed to be a hot Q4 holiday selling season,  the results suggest that the prepaid sector is as cut throat and competitive as ever. The result of these losses invariably is a function of its gross additions.  The simple theory goes, if you have a good distribution and acquisition network, you can help offset the subscriber losses and in an optimal scenario, come out ahead.

MetroPCS' gross additions were also down in Q4 and end of year compared to 2011.  Churn is down a small bit at 0.1% or 10 basis points in financial speak. It's a small win.  There are other metrics that can help tell the story of what's going on such as EBITDA/OIBIDA margin, ARPU, CPU and CPGA but we'll have to wait on that.  While this may look bad, one can give MetroPCS the benefit of a sliver of doubt assuming that they could be letting go of low-value or high-risk users for more profitable customers.

Yet the prepaid sector is very competitive with many similar offerings from Tier 1 competitors (Verizon Wireless, T-Mobile, AT&T, and Sprint prepaid brands Boost Mobile and Virgin Mobile) and MVNOs such as Tracfone's Straight Talk and Net10.  Another worry may be any hint of distributor apathy ahead of the mid-2013 T-Mobile-MetroPCS transaction. While T-Mobile intends to retain the MetroPCS brand, MetroPCS better figure out how to reverse subscriber losses before the deal is consummated.