It is that time of the quarter again….companies are putting out their quarterly results. In the case of the wireless world, many of us go through and look for key metrics as to how these companies are doing.
Aside from some of the usual metrics (ARPU, churn rate, subscriber growth), I like to follow what percentage of the base (or in some cases, what percentage of new subscribers added) were using smartphones. This is an important metric, as, let’s face it, the average person with a smartphone generally has a much larger phone bill each month than the person with a Motorola StarTac flip phone. Just ask parents of teenage girls. As a funny FYI, my 8 year old found one of my old StarTac’s in the drawer and could not believe that this was actually a phone. To him (and his generation), all cellular phones are smart, or just “phones”. See the picture below to what it looks like, if you are not familiar.
Smartphone growth has been one of the key drivers for the carriers in the past few years. While the upfront subsidies that the carriers provide can be a little steep for them (you can thank Apple for that), the recurring revenue that has occurred afterwards has been more than rewarding.
From the most recent polls, 91% of Americans currently own a cell phone. The actual number of connections (when compared to people) does exceed 100% given some people have more than one phone and the fact that machines are talking to each other…..you may have heard of M2M.
I went through some of the most recent quarterly results from the 3 major carriers in the US. It seems that smartphone sales are as strong as ever.
- Verizon Wireless = 70% of all phones being used were smartphones (Q4/2013)…I could not find a stat for Q4 activations
- Sprint = 95% of all new postpaid customers in Q4/2013 were smartphones
- AT&T = smartphones were 93% of new postpaid cell phones (Q4/2013)
To put that in perspective….
- 96.7% of US Households own a TV (down from 98% a few years back)
- 78% of US Households have Broadband (some still want it, but it is not available in their area)
- 46% of US Households own a DVR
- 43% of American Adults own a Tablet or E-Reader
So….are there many more people who want a smartphone but do not yet have one?
Probably not. Sure, there are some, but for the most part, most people who wanted to make the move from handset to smartphone have likely done so. So, many of the activations that are being done today on “new” smartphones are likely users who are moving from one carrier to another. This is a costly venture for the carriers (at least upfront) as there are significant costs to gaining a net new subscriber.
So, what does this mean?
Over the past 20 years or so, there has always been “the next growth thing” for the carriers….
- At first, it was just having a cell phone. When the costs came down, we all got one. Just watch old episodes of “Saved by the Bell” to see how ridiculous they look now.
- Next, it was getting a digital phone. Ahh, sneaking away from the office became easier when it was not so easy to tell if a person was on a landline or cellphone!! Ok, they could still tell, but we didn’t know that.
- Next, it was PC Cards. What better way to keep yourself busy while getting your car fixed then to pull out your laptop and browse email at 14.4 Kbps….Damn the person who sent you a 3MB joke picture, as it just cost you $10 to see it.
- After that, it was the Blackberry….and this took the market by storm. You too could view your email in a single color on a handheld with just a few lines (so you had to scroll like a madman through people’s long signatures). Ok, it got better with future versions.
- Next on the list was the smartphone…..not that the BB wasn’t smart, but the iPhone (and later Android) devices launched another wave of carrier growth.
- Finally, we have the tablet…..or so we thought. Ok, perhaps the tablet growth (from a cellular activation point) was not as great as thought, since up to 90% of all tablet usage is over Wifi. Nevertheless, it does drive a lot of data.
So…what is next and what are the obstacles?
From what I have heard, M2M is next. I think this is wonderful…..but, there are issues.
• All of the devices in the past were always aimed at people….meaning, people used them. Everyone understood why you needed them. M2M is mostly used by machines (and the data is then prepared for people), so people need to know how to explain why they are needed. This does not align well with many of the carrier salespeople’s skill sets.
• The ARPU sucks…if the value of your company (meaning how trader’s value your share price) is based on both how many new users you brought on AND by how much they spend each month, bringing on users at $1 per month would be a dumb idea. I think that investors are starting to see the value of M2M, so this may change.
• Much of the revenue from M2M is not airtime related. When you are selling an iPhone, there are really only a few different areas to make money (at least for the carriers). You can try to make money from the hardware, but since you end up almost giving it away, that is unlikely. You can make some money (or, your dealers can) from cases/accessories, but that is a competitive space now. And, you can try to make some money from applications, but that market has competition all over it. So, for the most part, you made money from the recurring airtime (and some extra services). Well, if you do that with M2M, you will miss up to 90% of the revenue, and you risk letting someone else control the sale.
Bottom line
The obstacles for the cellular carriers to dominate the M2M market are not huge, and to their credit, most have done a good job to start to make the move towards M2M as a big growth engine….”the next big thing”. And, based on the penetration of smartphones, it can’t come soon enough!
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