IPhone overshadows everything else in Q4

AT&T had a gangbuster quarter. It added 9.4 million smartphones in the quarter alone, smashing its previous smartphone record by 50 percent. On the heels of the iPhone 4S launch, AT&T more than doubled contract subscriber additions to 717,000 for the quarter. AT&T leads the industry with 56.8 percent of contract clients using a smartphone. Though Sprint launched the iPhone for the first time, churn stayed muted at 1.4 percent. This shows that there is a significant disconnect between the negative press coverage that AT&T continues to receive and how clients are as a matter of fact behaving as existing clients stay with AT&T nearly record low numbers and large numbers of new subscribers are joining them. Surprisingly, prepaid was weak for the quarter, as prepaid phones are often given as holiday gifts, making December 25 typically the day with the most activations in the year. During Santa seems to have come up short on the prepaid side, the wholesale and connected group made massive gains. Since AT&T dominates the e-reader segment this has been largely driven by Amazon Kindles and Barnes & Noble Nooks.

In January 2012, AT&T introduced new data plans while the quarter. Clients get 50 percent more data for $5 more. There was widespread confusion and misreporting in the press regarding the motivations behind this change. The pricing move has to be looked at through the prism of declining operating margins, which plummeted from 22.9 percent last year to 15.2 percent. The reason for the decline in operating margin is smartphone handset subsidies. AT&T has to slow down the smartphone conversion rate to improve its operating margins as the typical smartphone comes with a $200 to $450 device subsidy. Early adopters and mainstream clients motivated by technical novelty and value have become smartphone users, driving ARPU significantly up. Innovation laggards and less affluent customers on the whole using feature phones remain to be converted. For these feature phone users, price is a major motivating factor if they are converting to a smartphone. By increasing the monthly recurring charge the conversion rate especially from their own feature phone base is going to slow down and margins are going to begin to improve due to a better revenue to subsidy ratio.

Santa was very good to Sprint in the fourth quarter. Sprint had the most customer additions in the last seven years. APRU went up by $3.68, the highest of any operator in the United States. As well, Sprint in short gained contract clients. The company now has more clients than ever and has officially recovered from its disastrous merger with Nextel six and a half years ago. During the Nextel platform is in terminal decline and continues to lose clients, the Sprint network is adding more and more customers. Sprint sold more than 1.8 million iPhones in the fourth quarter, and 40 percent of iPhone sales were to new Sprint customers. This translates into in broad outline 720,000 customers, which was substantially more than the 161,000 net contract additions. Numbers of the same type show that the power in the wireless industry has obviously shifted towards the makers of blockbuster devices. Without the iPhone it is quite likely that Sprint would have continued to lose customers in the fourth quarter. What is concerning is that the percentage of prime postpaid customers on Sprint declined from 83 percent to 82 percent, which is in broad outline 330,000 customers. This means that twice as many sub-prime customers became new postpaid customers at Sprint than the company had contract net additions. During Sprint was focusing on selling new iPhones, its sales of 4G WiMAX devices slowed down substantially. Sprint added nearly 1 million customers on Clearwire's 4G network. During this is for all that a respectable number, it was only half of what Sprint added in the previous quarter. Sprint's churn numbers are as well manageable, with contract churn at 1.99 percent and non-contract churn at 3.68 percent. In spite of all the concerns about Sprint's profitability, Sprint raised $2 billion in debt recently for the 4G LTE (Long Term Evolution, latest standard in the mobile network technology) network expansion and to help out Clearwire.

Pretty miserable quarter

T-Mobile had a pretty miserable quarter, losing 706,000 contract clients and a buyer. During the quarter began so then with the introduction of T-Mobile's value plans, the iPhone 4S launch on competing networks, combined with the collapsed AT&T deal, devastated T-Mobile's hope for a positive quarter. Contract churn increased to a disappointing 3.6 percent--the range in which prepaid operators as a rule see their churn. T-Mobile's prepaid churn was 6.8 percent. It is admirable that T-Mobile was able to add 220,000 prepaid clients when faced with such high prepaid churn. In an effort to get churn pursuant to this agreement control, T-Mobile is planning to recontract a lot of their clients, which is a complete reversal of their strategy of the last several years. In other positive news, T-Mobile was able to increase smartphone contract customers to 11 million or 40 percent of its base. T-Mobile's wholesale business only declined by 39,000, in spite of one large customer disconnecting 265,000 lines while the quarter. The overall impact of this customer loss was negligible as these 265,000 lines represented only $1 million in earnings or 30 cents of APRU. A 20 percent increase in data ARPU helped to keep blended ARPU flat at $46. With the spectrum that T-Mobile is getting from AT&T as part of the break-up fee, the company is launching a 4G LTE network in the AWS band. It is able to use the optimal 20 MHz configuration in half of its footprint, with the other half using 10 MHz. T-Mobile is able to compete with this, even better than Sprint, which is at first using 10 MHz nationwide. During building out the AWS spectrum with 4G LTE, T-Mobile will move some of its HSPA+ to the 1900 MHz band. This will open the door for T-Mobile to offer the iPhone in the United States. As soon as possible, jailbroken iPhones running on T-Mobile will be able to take advantage of HSPA speeds first, giving them faster speeds than Verizon or Sprint customers until everyone will see some Apple 4G LTE love.

Verizon Wireless had a terrific quarter. It added the most contract clients, by a long way, in the fourth quarter, with more 1.2 million clients, over 50 percent above AT&T's tally. The company had its best ever smartphone quarter in its history, with 44 percent of its contract base now on smartphones. Contract churn was nearly record lows at 0.94 percent. The no-contract segment of Verizon Wireless, which traditionally suffered from benign neglect, showed a nice customer uptick. On the heels of the nationwide rollout of its Unleashed product, prepaid net additions jumped to more than a quarter million. The $50 all-you-can-eat plan gives Verizon Wireless an offer to compete against other unlimited prepaid providers albeit with a quality premium built-in. Verizon had to clean up its connected device database, which led to a decline of more than 1.3 million connections. The company as well announced that it has come to an agreement to purchase AWS spectrum in other words currently owned by several cable companies; the spectrum covers 93 percent of the United States. During the spectrum is currently idle, Verizon Wireless will be able to use it for 4G LTE services--if the transaction gets approved. Verizon and T-Mobile would create a healthy ecosphere in this spectrum band, leading to lower prices for handset. Ironically, this would help T-Mobile the most though it has petitioned against the spectrum acquisition. Verizon as well expanded its 4G LTE network to 195 markets, covering more than 200 million clients.

Leap Wireless gained 209,000 voice clients and lost 30,000 broadband data clients for a net gain of 179,000. This was a dramatic improvement from only 10,000 net additions while the third quarter. Interestingly, 65,000 new subscribers were added outside of Leap's network footprint. As a rule, operators try to minimize usage outside their own network footprint because roaming costs make these clients unprofitable. Like nearly every other carrier out there, Leap is building its own 4G LTE network. MetroPCS benefitted from the seasonally strong forth quarter by adding 197,000 subscribers.

The whole in the doldrums

US Cellular is on the whole in the doldrums, having lost 13,000 subscribers overall, with 20,000 contract customer losses and gains of 7,000 no-contract subscribers. The problem with US Cellular is that it does not get enough new people in the door as postpaid churn is a healthy 1.5 percent. Hence, the company is looking for a new advertising agency to reposition the company. The Belief Project advertising campaign worked then for the US Cellular customer base nevertheless did not inspire the proper belief in clients from other carriers. The good news is that US Cellular's clients are very satisfied with the company and enjoy one of the best networks. The bad news is that this a very then kept secret. US Cellular is as well lagging behind in smartphones with only 30 percent of its clients using one. Its smartphone percentage rose to just above 30 percent; 50 percent of devices sold this quarter were smartphones. The company knows that if it wants to remain a viable provider, it has to compete on 4G. The unlaunched 4G LTE network covers 25 percent of US Cellular's licensed population, with an expected 50 percent by the end of 2012.

While Clearwire had a good quarter, with 873,000 subscriber additions, the bad news from its strategic investors keeps piling up: Google announced it is selling its Clearwire stake for $47.1 million, which is a 94 percent discount from what it invested at Clearwire's inception. Into the bargain, Google was only able to realize a price of $1.60 per share compared to the $2.15 the shares were trading at previously the announcement. It is becoming clearer and clearer that Sprint is the only friend left for Clearwire. During its other strategic investors are bailing on Clearwire, Sprint is raising more money for them to give it a chance to surive. How dependent Clearwire is on Sprint becomes clear when we look at the net add breakdown. Sprint added 904,000 clients to Clearwire during the company lost 31,000 Clear-branded clients. This is half of the previous quarter due to Sprint's focus on the iPhone, and this sends a direct message to Clearwire about how vulnerable it in effect is.

The Founder

Roger Entner is the Founder and Analyst at Recon Analytics. Recon Analytics specializes as a matter of fact-based technology and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.