As the percentage of Americans who own cell phones approaches 100 percent, analysts predict that the two biggest wireless providers in the country will have a harder time selling new cell phone contracts to high-value subscribers.
AT&T and Verizon, which are announcing first quarter earnings this week, are likely to see slower growth of contract customers, analysts say. AT&T reports its quarterly results on Wednesday and Verizon reports the following morning.
Wireless operators typically add fewer customers in the first quarter, since many consumers buy new phones during the busy holiday season. But analysts say they expect the first quarter of 2010 to be especially slow for AT&T and Verizon Wireless, because most people already have phone service.
According to CTIA, the wireless industry's trade association, more than 90 percent of adults in the U.S. already own a cell phone. And with many Americans still facing difficult economic times, many people are turning to less expensive prepaid phone services. This will likely reduce the number of new subscribers signing up to postpaid or contract phone service.
Postpaid or contract customers are valuable because they tend to spend more money on wireless service and they are locked into lengthy contracts, which wireless providers like. If these customers break their contracts, they pay early termination fees. Wireless operators have relaxed some of their early termination fees recently, but they still play a major role in deterring customers from dropping service.
Meanwhile, prepaid customers tend to spend less money per month. And because they do not have to sign a contract, they are more likely to switch to a new service if they can find a better deal. The recession, which has forced many Americans to trim expenses, has spurred more growth in the prepaid market. A new study released by the New Millennium Research Council, a Washington, D.C.-based think tank, said that for the first time ever, prepaid subscriptions grew faster than contract customers at the end of 2009.
Smaller regional players such as Leap Wireless and MetroPCS have built their entire business models around the prepaid market. Sprint Nextel and T-Mobile have also been emphasizing this part of their business more. Last year, Sprint bought Virgin Mobile to boost its prepaid business. Even AT&T and Verizon, the biggest and strongest wireless operators in the U.S. market, have been seeing more customers migrate toward less expensive prepaid services.
In research notes published ahead of earnings, analysts from firms such as J.P. Morgan, Deutsche Bank, and Credit Suisse said that they see tough times ahead for the postpaid cell phone market.
"This could be the worst quarter on record this decade for postpaid," Jonathan Chaplin, an analyst with Credit Suisse said in a recent report.
AT&T is expected to report earnings of 54 cents per share on revenue of $30.76 billion, according to FactSet Research. Last year during the same quarter, AT&T earned 53 cents per share on revenue of $30.57 billion.
The company is expected to gain a total of 1.5 million subscribers, which is down from about 2.7 million new customers in the fourth quarter of 2009. Only about 600,000 of these subscribers is expected to be contract or postpaid customers.
Much of AT&T's wireless growth will come from the iPhone. The company is still adding new subscribers due to the popular device. But rumors of the iPhone going to Verizon Wireless and the expectation that Apple will come out with a new device could slow sales.
Meanwhile, Verizon is expected to report profits of 56 cents per share on $26.9 billion in revenue. Last year, it reported a profit of 58 cents per share on $26.6 billion in revenue. Verizon is expected to add a total of 1.5 million new mobile subscribers with about 700,000 of those subscribers expected to be the postpaid subscribers. Verizon has made inroads into the prepaid market with the StraightTalk service sold through Wal-Mart.
Talk of Verizon getting the iPhone could keep some loyal Verizon customers from defecting. And it could entice new subscribers to consider the carrier. But it's unlikely that Verizon will get the iPhone anytime soon. Verizon CEO Ivan Seidenberg and other execs are keeping mum, but they have said that Verizon is interested in the iPhone.