The U.S. Wireless Industry: 2015 In Review

The U.S. wireless industry had an eventful year, amid intense promotional activity and competition between the major carriers in an increasingly saturating market. In this note, we compare the financial and operating performance of Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile over the first 9 months of 2015, and explain some of the broader trends within the U.S. wireless industry.

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Revenues Grow On Increasing Equipment Sales

Market leader Verizon continued to garner the greatest amount of revenue in the U.S. wireless market – about $68 billion for the first nine months of 2015 – owing to its larger postpaid subscriber base and its comparatively expensive wireless plans. ^[1] The carrier’s service revenues were about 2% lower year-over-year, although overall revenues rose on account of higher equipment revenues. AT&T also saw growing equipment revenues boost its overall top line. This trend is due to the increasing proliferation of equipment installment plans, which essentially decouple equipment and service billings for customers, while recognizing a larger portion of equipment revenues up front.

T-Mobile continued to see the greatest top line growth, with wireless revenues rising by about 13% overall. The carrier’s growth is particularly noteworthy, since it was driven primarily by service revenue improvements and strong postpaid phone net subscriber adds, rather than just equipment revenues. This is because T-Mobile transitioned to equipment installment plans before the broader wireless industry. Sprint continued to struggle somewhat, with revenues declining by about 6% year-over-year amid aggressive promotions as well as subscriber losses during the first half of the year. ^[2]

Operating Margins Trend Higher

Verizon continued to lead the industry in terms of wireless EBITDA margins (44%) on account of its higher overall ARPU, larger scale and relatively modest marketing expenses. However, its margins remained flat on a year-over-year basis. AT&T, on the other hand, saw margins improve to about 39.2%. T-Mobile and Sprint continued to trail the larger carriers, on account of their higher customer acquisition expenses and weaker service revenues. That said, both carriers saw an improvement in margins as compared to the last year, and that trend could continue into 2016 as they realize the full benefits of their recent customer additions.

Postpaid Subscriber Additions

Subscriber additions – and particularly postpaid phone subscriber adds – are perhaps the most important metrics for comparing the performance of wireless players. T-Mobile maintained its lead this year, adding a net of 3.2 million postpaid subscribers and 2.6 million postpaid phone subscribers, driven by its “Un-carrier” promotions and improving LTE coverage. Verizon came in second, adding a total of 3 million retail postpaid customers. AT&T saw total wireless net adds of 1.1 million subscribers, although its postpaid phone subscriber base declined owing to attrition of lower-value feature phone subscribers. While Sprint lost postpaid phone customers over the first two quarters of the year, the carrier turned things around in the third quarter, adding 237,000 customers, taking its 9-month phone net addition tally into positive territory. It’s likely that the number will pick up further over the holiday season, with the carrier offering customers switching to its network 50% off current rate plans from their existing carriers.

Average Churn Trends Lower 

Churn rates in the U.S. wireless market have been trending lower, driven by stricter credit standards, improving wireless data performance and a trend towards adding more devices to a postpaid wireless plan, which makes customers less likely to jump carriers. This is a positive development for the industry, since it should eventually help to rein in customer acquisition and marketing costs, which should in turn bolster wireless margins. While Verizon’s average postpaid churn declined by 0.05% to 0.95%, T-Mobile saw the number decline 0.14% to about 1.36%. ^[3]  Although Sprint continues to have the highest postpaid churn in the industry, its year-over-year improvement was strong, with the metric declining by 0.55% to 1.65%. AT&T was the only carrier to see a slight deterioration in churn (1.06% vs. 0.97% last year) driven by its feature phone attrition.

ARPU Falls, But Average Billings See Improvement

Verizon continues to hold the strongest pricing power in the industry, on account of its robust coverage and service quality as well as its strong brand. We estimate that Verizon’s overall wireless ARPU (in terms of the total subscriber base) stood at upwards of $60, compared to under $40 for Sprint and T-Mobile. As expected, total postpaid ARPU trended lower across carriers due to an increase in the adoption of equipment installment plans, which contribute less to service revenues. That said, the total average billings per user (which include service revenues plus installment plan billings) has trended upwards across carriers, indicating that the net impact of the price wars might be somewhat limited.

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1. Verizon Q3 2015 Results [↩]
2. AT&T Q3 2015 Financial and Operational Results [↩]
3. T-Mobile Q3 2015 Financial Results [↩]