Wireless subscriber growth has been off the charts over the past year, with second quarter increases nearing records as mobile service providers like AT&T, Verizon and T-Mobile blanket the market with free offerings. But as subscriber numbers have surged, MoffettNathanson principal and senior analyst Craig Moffett wrote in a research report that those new customers are a volatile bunch, meaning the industry may soon have to decide whether to keep heavy promotions going just to maintain the status quo, or risk losing them by turning off the promotional spigot.
According to Moffett, the wireless industry has added about 8 million new customers in the past 12 months, 5 times the annual population growth rate. They’ve been able to do that via heavy promotions that offer free handsets and reduced charges for customers that take on an extra line, whether they need it or not. That has resulted in a big increase in promotional cap ex. As an example, Moffett pointed to AT&T, which added about 920,000 prepaid and postpaid wireless customers in Q2, its fastest customer growth in years, as balance sheet liabilities tied to promotions rose sharply to $4 billion in Q2 2021 compared to $2.5 billion in the same period in 2020. That leads to the question of whether AT&T will be able to pull back its promotional efforts once that growth begins to slow. Moffett doubts that AT&T, or any other provider, will be able to do so.
“Cheap lines and free phones inevitably promote low quality phone net additions,” Moffett wrote. “To keep those lines from churning, or to replace them when they do, the companies now dependent on promotions to bolster growth will need them even more to maintain it.”
AT&T isn’t the only wireless service provider aggressively pricing its service. T-Mobile, Verizon and even cable companies have all slashed prices and are offering potential customers free handsets and other perks to boost subscriber rolls. Dish Network, which is scheduled to launch its first wireless market -- Las Vegas -- in Q4, is also expected to be aggressive on price and free offerings to attract customers.
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While cable has been aggressive on pricing, it has basically stayed away from the heavy promotions offered by incumbents, Moffett wrote. In the past, cable companies like Comcast, Charter and Altice USA have accounted for about 30% of overall new wireless subscriber additions, rising slightly to 31.9% in Q2. That, Moffett wrote, is still impressive considering cable companies only market wireless to their broadband customers (about half of U.S. households), and don't match the rich promotions of the incumbents.
And though Verizon, which began matching AT&T’s aggressive promotions in June, said it would pull back those offers in late July, the company has indicated that it will be as promotional as needed to maintain parity, according to Moffett.
In Q2, AT&T added 751,000 postpaid wireless customers, more than twice analysts consensus estimates of a gain of 352,000 subscribers. Verizon added about 275,000 postpaid customers in the period, besting consensus of 185,000 additions and T-Mobile added 627,000 postpaid subscribers, besting consensus of 598,000 additions.
Over the past four quarters, T-Mobile, AT&T and Verizon have added 3.2 million, 2.9 million and 723,000 wireless subscribers respectively, while cable operators have seen their total additions rise about 55% to 6.5 million from 4.2 million in Q2 2020, according to Moffett. Overall, total phone subscriber additions peaked at 2.6% in Q2 2021.
According to Moffett, that overall phone subscriber growth will begin to slip in Q3 to 2.2%, leveling off to 1.4% by 2025, still well ahead of 2021’s population growth of 0.34%.
“The industry’s recent super-normal growth informs every industry metric. It has flattered every operator,” Moffett wrote. “...Strong subscriber growth has been a welcomed offset for what has otherwise been rather anemic growth for revenues and EBITDA, particularly for Verizon and AT&T,” Moffett wrote. “If, as we expect, industry subscriber growth normalizes, the backdrop won’t be nearly so flattering.”
