The US wireless market, 6 years since the iPhone, Part 1: operator consolidation

This is the first of a series of posts on what’s changed in the US wireless market since the launch of the iPhone in June 2007.  This first post looks at wireless carrier consolidation.

We backtrack past 2007, all the way back to the halcyon, Nokia candy bar-characterized days of 2003. All estimates of total market size come from CTIA data; individual operator subscriber levels come from operator investor filings. Share estimates come from dividing operator subscriber estimates into CTIA estimates. CTIA keeps a handy statistics page here.

In 2003, an operator market share chart looked kind of like an erratically sliced pizza. Sprint, T-Mobile and Nextel were all clustered together between 12 and 16M subscribers, and the top 3 carriers (Verizon, AT&T and Cingular) had a combined market share of 53%. The top 4 (Verizon, AT&T, Cingular, Sprint) had a combined market share of 635. There were about 160M connections in the US market. US wireless industry share December 2003

By June 2009, AT&T had merged with Cingular; Sprint and Nextel had merged; and Verizon had acquired Alltel, which itself had acquired Western Wireless. There were now two mega-carriers with over 75M connections on their networks. There were about 275M connections, and the 4 major carriers of AT&T, Verizon, Sprint and T-Mobile had 90% market share. Sprint, Verizon and AT&T had 79% total market share combined. US wireless industry share June 2009

As of December 2012, the top 3 carriers had about 80% share, and the top 4 (in order, AT&T, Verizon, Sprint and T-Mobile) had 90% share. Total lines had grown to 326M, again per CTIA.US wireless industry share December 2012

With T-Mobile and MetroPCS’ union now complete, the share of market held by the Big 4 now is about 93%.US wireless industry share April 2013

Note that this does not represent a higher level of consolidation than most developed wireless markets, where consolidation into 3 major operators (e.g., KDDI, DoCoMo and SoftBank in Japan; SKT, LGT, and KTF in South Korea) is common.

Smartphones, in the form of BlackBerries or Palm OS-based devices, certainly predated the iPhone in the US market. As shown here, consolidation most certainly did as well. But “modern” smartphones, i.e., the iOS, Android or WP-based mobile computers of post-2007, have exacerbated the need to consolidate. In the US, wireless phones are generally sold through your carrier, bundled with a service contract, most likely of two years. (Prepaid service, which is more common in the EU, has grown in share in the past 5 years, and will be the subject of a later post.) Your smartphone is most likely sold at a subsidized price, such that a subscriber can walk out of the store with an iPhone 5 that cost over $600 to the carrier for $99 or $199, as with T-Mobile’s recent iPhone 5 campaign. In essence, the subscriber has received an interest-free loan of $300-$500, depending on the operator’s handset acquisition cost. $400 is a good ballpark.

Thus, smartphones have rewarded scale and capital. Those operators with the wherewithal to front the immense capital required to activate several million smartphone subscribers in one quarter have been rewarded. Note the dip in AT&T Mobility’s operating margins with each holiday quarter, which reflects the large number of smartphone activations in that quarter. AT&T operatingmargin 2011-2013

Sprint and T-Mobile, which are less capitalized than AT&T or Verizon, have been very candid about the subsidy burden. Sprint’s Dan Hesse, keynoting the Open Mobile Summit in 2010, acknowledged that “bright shiny devices” had become the marquee element in subscriber acquisition, and with regards to smartphone subsidies, commented “something’s got to give”. T-Mobile’s recent move to “no contract” is a direct result of subscriber acquisition costs due to smartphone subsidies. Note that T-Mobile’s “no contract” plans still have a contract, and one that makes transparent payback of the handset subsidy. Early termination fees have long been an unloved part of wireless service, and they are a reflection of this subsidy.

Next up – how much more headroom / upside is there for smartphones in the US?

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