GigaOM

Written by Jason Kowal, U.S. head of research at Analysys, an international telecom research and consulting firm

Taken individually, the latest quarterly results for three of the top U.S. mobile operators look strong. AT&T, Verizon and T-Mobile all saw fourth-quarter subscriber growth of between 3 percent and 4 percent, and annual growth figures between 11 percent and 14 percent. Add in Sprint’s two consecutive quarters of net subscriber losses, however, and the picture looks substantially different. Total annual subscriber growth for the top four operators dropped to 9 percent for 2007 — the slowest growth rate this decade. There is little doubt that Sprint is directly to blame for its own losses, but there is also something bigger going on here: a shortage of new subscribers.

2008 will mark the end of rapid mobile subscriber growth in the U.S. — and the beginning of a long decline. By 2012, total annual subscriber growth in the U.S. could fall to as low as 2 percent per year.

Saturation shouldn’t come as a surprise to anyone in the industry. The U.S. mobile market is finally approaching the level of market penetration (85 percent in 2007) reached in Europe years ago. But while the U.S. would do well to learn from Europe’s experience, there are also fundamental differences between the two that could make the transition in the U.S. smoother than it was across the Atlantic.

In the UK in 2002, for example, subscriber growth slowed from to 9 percent from 16 percent in 2001 (the year that penetration rates reached 85 percent), and since then has only exceeded 10 percent in one year (2004). In 2006, UK subscriber growth was just 4 percent. Meanwhile, ARPU fell by 24 percent between 2000 and 2001, a drop from which it has only recently started to show a slight recovery, thanks to the contribution of data services.

In Europe, carriers have responded to saturating markets and falling ARPUs in four ways. They have:

• moved to de-emphasize aggregate subscriber growth figures when reporting financial results
• attempted to bolster overall ARPU by increasing their portion of contract (i.e. higher-ARPU) customers
• pursued fixed-mobile substitution as a way of increasing average minutes of use per customer and thereby voice ARPU
• encouraged customers to spend more on data services as their spend on voice services has fallen

Although the first response — to change reporting techniques — could be seen as disingenuous, it is also an honest reflection of operators’ shifting priorities. U.S. carriers may find the second of these four strategies counterproductive, but should pursue the third, and with the fourth approach are likely to do even better than European carriers.

In the face of slowing subscriber growth and a challenging outlook for the growth of revenue, there are several actions that U.S. wireless carriers can take. These include:

• maximizing revenue from prepaid customers, while minimizing the costs of addressing this market
• protecting the revenue of high-ARPU contract customers by differentiating clearly between their contracts and prepaid offerings, even using a separate brand for prepaid
• using data mining to develop a more proactive and targeted approach to customer retention incentives for contract customers
• exploring the potential for future revenue streams from femtocells
• improving the accessibility of non-voice services (particularly mobile media and entertainment services) by presenting content pricing clearly to customers
• addressing target markets beyond the youth market, which can be fickle and low-spending
• recognizing and withdrawing from elements of the value chain that are better served by specialists
• seeking to make it easier for customers to discover and access services
• encouraging the growth of both on-deck and off-deck offerings (i.e. within and outside the operator’s own portal), with smaller carriers in particular focusing on the latter

We can already see many of these actions well underway. The contribution of non-voice services to U.S. carriers’ ARPU is already growing strongly, and to a certain extent this has disguised the level of voice ARPU decline. We expect non-voice services to account for 17 percent of ARPU in the U.S. in 2007 (compared to 12 percent in 2006) and to continue growing to reach nearly 30 percent of ARPU in 2012. However, even with this level of growth in non-voice service revenue, overall ARPU levels could continue to decline until 2009 due to price competition, the dilution effect of adding new subscribers with lower spend than early adopters, and the effect of a growing proportion of prepaid customers, whose ARPU is well below that of contract customers.

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