Where the Growth is in US Wireless

Once or twice in the past, I’ve provided little nuggets of information from the data I collect on the US wireless market each quarter on behalf of a number of my clients. Today, I wanted to share some numbers specifically on the question of where the growth is in the US wireless market now that we have at least subscriber numbers from all the major operators that I track for Q4.

Phone Subscribers Aren’t Really Growing

As I’ve said before, even though we tend to think of the wireless market primarily as the cellphone market, that really isn’t where the growth is today. As the chart below shows, the total number of phones in use among the five largest operators is barely growing year on year, at just 2-3 million versus a base of over 280 million:

Phones, shown in dark blue, are the slowest growing of the three major categories for the last four quarters. Both tablets and “connected devices” are growing considerably faster. (As a reminder, connected devices are non-traditional devices like utility meters, connected cars, and so on, where the connectivity isn’t sold directly to the end customer but rather to an intermediary.) The growth of tablets with cellular connectivity has also been slowing lately, but it’s still at around 7-10 million per year, largely driven by AT&T and Verizon, with Sprint and T-Mobile selling relatively few tablets in comparison. But it’s connected devices that are really driving industry growth, with AT&T leading the pack and Sprint and T-Mobile reporting respectable but not stellar numbers (Verizon doesn’t report this number officially, so the actual growth is likely even higher). Connected cars in particular have been a major driver for AT&T, which has been adding roughly a million per quarter. Both tablets and connected devices have significantly lower revenue per connection than phones, but far greater potential for growth in the coming years.

By contrast, almost everyone who’s going to get a phone has one and the only growth in the market comes from a combination of population growth and the cohort effect of teenagers replacing seniors in the addressable population, with a substantially higher likelihood of device ownership. But this is good for just 2-3 million new phone customers year on year, meaning that if wireless carriers in the US want to grow their phone bases, they have to drive switching from other carriers. This helps to explain why both T-Mobile and Sprint, the smaller two carriers, are pursuing switchers so aggressively with various price discounts and other promotions. In order to close the scale gap with Verizon and AT&T, they have to grow significantly. AT&T and Verizon meanwhile, do what they can to protect their phone bases while pursuing growth in tablets and connected devices.

Smartphones Aren’t the Boon They Once Were

In part, carriers have avoided the unpleasant consequences of this phone saturation by aggressively driving their phone subscribers to upgrade from basic feature phones to smartphones over the last ten years or so. As customers move from feature phones to smartphones, they’re forced to pay for data plans, significantly increasing revenue per user. This has driven significant revenue growth for the US wireless carriers even as growth in the base of phone subscribers has slowed. The challenge now though, is smartphone penetration among the phone base is nearing saturation rates. The chart below shows penetration of smartphones in the postpaid phone base specifically (this is the segment which pays a monthly bill rather than topping up a balance of minutes and data periodically):

As you can see, penetration has risen rapidly over the last couple of years, from 75% to nearly 90%. But, of course, the closer the number approaches 100% the more it will slow down, as laggards stubbornly hold on to their feature phones. Smartphone sales have been 95% or more of postpaid phone sales in the US for some time now, but that 5% of buyers who prefer dumb phones refuses to budge. In the next year or two, this smartphone-driven boon for US wireless carriers will largely come to an end and they’ll be left trying to convince subscribers to move to higher-tier data plans. Going back to the first chart, you can see the smartphone base has been growing strongly, but the rate of growth is slowing significantly over time and this trend will continue. That’s bad news, not just for the carriers but the phone makers as well. They, like the carriers, will soon find themselves forced to compete for switchers rather than capturing entirely new smartphone customers. This helps to explain Apple CEO Tim Cook’s recent emphasis on Android switchers in his remarks on earnings calls, because that’s going to be almost the only source of growth for the US iPhone base within a year or two.

Of course, none of this is unique to the US market. Many other markets in Europe and parts of Asia will be seeing very similar trends over the next few years. This, in turn, means carriers there will also have to aggressively pursue new opportunities in connected devices and their bedfellow, the Internet of Things. It also means device vendors around the world will have to do a better job tapping into the remaining growth in the world market for smartphones, largely in emerging markets, while also diversifying their portfolios to include additional devices – tablets, wearables, and so on – that can be sold to their smartphone customer base.