With the holiday shopping season approaching, AT&T (NYSE:T) has started offering a rare discount on the 16GB iPhone 5S as part of what it calls its seasonal smartphone strategy. The promotion prices the subsidized entry-level iPhone 5S at $100 but offers no discount on the pricier 32GB and 64GB iPhones. Still, the discount on offer is noteworthy considering that AT&T has hardly ever offered a newly launched iPhone for $100. The strategy has not been replicated by Verizon (NYSE:VZ) so far, which can likely be explained by the fact that AT&T’s subscriber additions are dependent on iPhone sales to a far greater extent than Verizon’s. While the iPhone accounts for about 50% of Verizon’s smartphone activations, AT&T’s iPhone mix has historically been much higher at 70-80%. Further, AT&T faces increased competition from T-Mobile, which is carrying a new iPhone for the first time this year and aggressively promoting its no-contract plans as an alternative to the usual subsidy-based service plans that other carriers promote.
That competition from T-Mobile is starting to have an impact on rivals can also be seen in Sprint’s (NYSE:S) decision to offer the same $100 discount on all the iPhone 5S versions, including the 32GB and the 64GB. A saturated wireless market, where new subscribers are hard to come by, has intensified competition further as rivals look for innovative ways to hold on to their subscriber base or poach market share from rivals. AT&T has to therefore contend with not just Verizon, which has wider LTE coverage and is promoting shared data plans, but also with the likes of Sprint and T-Mobile – both of which have emerged stronger following a series of M&A deals and are aggressively differentiating themselves with unlimited data plans and no-contract plans, respectively.
The impact of AT&T’s lagging LTE coverage
AT&T’s lag in LTE coverage has been a concern over the past several quarters, with its postpaid net adds shrinking in comparison to industry leader Verizon. Last year, for example, Verizon added over 5 million postpaid subscribers, more than three and a half times that of AT&T. So far this year that trend has continued, with Verizon’s postpaid net adds outnumbering AT&T’s 2:1.
However, the loss of market share has been less severe for AT&T this year as compared to 2012, when its LTE coverage trailed Verizon’s by a wide margin. This time last year, for example, the difference in coverage was nearly 115 million PoPs, with Verizon’s LTE network covering nearly twice as many people as AT&T’s. At 250 million PoPs currently, the coverage of AT&T’s LTE network is still behind Verizon’s but the lag has become less of a concern with each passing quarter. While Verizon’s postpaid net adds so far this year have declined as compared to last year, AT&T’s are improving. Compared to postpaid net adds of 685,000 in the first three quarters of 2012, AT&T has added about 1.2 million postpaid subscribers so far this year. This means that while AT&T continues to lose market share to Verizon (Verizon added nearly 2.5 times as many postpaid subscribers as AT&T in Q3), its subscriber patterns are showing signs of stabilizing as the LTE gap between the two heavyweights narrows.
T-Mobile’s no-contract plans becoming a force to reckon with
On the other hand, competition from a resurgent T-Mobile has become a lot more intense in recent quarters. The carrier started an aggressive promotional ‘Uncarrier’ campaign around its no-contract service plans with which it plans to disrupt the industry, and launched the iPhone for the first time this year. It has also done well on the 4G LTE front, starting the deployment of its network much later than rivals but rolling it out at a breakneck speed to cover about 200 million PoPs already. T-Mobile’s aggressive posturing in the wireless market helped it add 648,000 postpaid net adds during the third quarter, more than 75% ahead of what AT&T managed in the same quarter. AT&T did see its Q3 postpaid net adds double from the year-ago quarter, but most of the new subscriber additions came from tablets and other connected devices rather than smartphones.
AT&T’s iPhone discounts seem to be a way of countering this smartphone threat from T-Mobile specifically and no-contract plans in general. Increasing adoption of no-contract plans could see churn rates increase as customers start to switch carriers more frequently, making it costlier for AT&T to hold on to its subscriber base. Growing competition for smartphone subscribers could also put pressure on AT&T’s ARPU growth as tablets form a greater mix of device usage on its network. The higher iPhone subsidies on offer would negatively impact AT&T’s margins in the fourth quarter but likely impede the growing threat of no-contract plans in the near-term.