Is growth over for wireless operators?

The wireless industry can simply not be described as a growth industry anymore. This, according to Bernstein Research analyst Craig Moffett, was the general consensus after all the major US wireless operators reported their fourth quarter and full year results over the past month. The industry grew its revenues only 2.6% in Q4 and 3.3% for the year, a significant decline from the past two years.

Bernstein doesn’t expect these figures to improve either. It is projecting a further slowdown in postpaid, with grow at just 1.2% in 2010. Prepaid should fare better at 18.2% for the year, but with much of the growth stemming from machine-to-machine subscriptions. In total, Bernstein expects 5.1% subscriber growth in 2010, down from 5.9% in 2009. ARPU is also expected to be flat on the postpaid side and down 7% for prepaid. As a result of the slowdown, a rebirth of the 2008 postpaid pricing wars could be imminent.

“The stresses in postpaid, so similar to the stresses a year ago in prepaid, raise the specter of a 2010 meltdown, where missed subscriber goals lead to round after round of postpaid price cuts,” Moffett wrote in a research note. The industry consensus for revenue forecasts amongst the top four tier-one carriers, as well as MetroPCS, Leap and US Cellular, was for growth of 3.4% to 4.4% in 2010, but Bernstein believes it will be 2.7% or less.

“As economic stresses have mounted, and as the price gap between prepaid and postpaid has grown, the prepaid market has begun to crowd out growth in postpaid,” Moffett said. “Prepaid and reseller subscribers now account for 22.6% of the total market, up a full ten percentage points, over the past five years. Revenue mix remains more stable, however. Postpaid remains, and will remain, the core of the industry, currently accounting for about 90% of total service revenues.”

The Telecommunications Industry Association (TIA) took a more positive stance on the year past, noting that the growth came even as prices routinely dropped throughout the year and competitive pressure grew from prepaid providers. The TIA is somewhat optimistic for continued growth too, forecasting ‘mid-to-high single-digit’ growth rates for the next five years. Specifically, the industry organization expects revenues from voice, data, wireless infrastructure terminals and services to reach $278 billion in 2013.

TIA attributes the rise in total wireless subscribers to the lower service costs, a trend that influenced both the pre- and postpaid wireless operators in 2009. The bar for prepaid providers, first set by Boost Mobile at $50 for an unlimited plan, fell to $40 following aggressive cuts by MetroPCS. Regional CDMA provider Leap Wireless also got most of its customer additions in Q4 from a promotional $25 unlimited prepaid plan. US Cellular’s prepaid segment saw a 6.2% sequential subscriber improvement in Q4 after two quarters of losses. Like its competitors, the boon came after the traditionally postpaid-focused carrier introduced its first unlimited prepaid plans in all of its markets in July.

According to Moffett, potential mergers Leap and MetroPCS may be built to withstand the downward pressures in pricing in a way their larger competitors, T-Mobile and Sprint, are not. On its Q4 earnings call, Leap executives suggested new pricing plans not necessarily built around price cuts may be on the horizon, leading Moffett to believe prepaid wireless prices could be stabilizing. The carrier was able to achieve higher gross additions and lower churn in the quarter, making it the first where aggressive prepaid pricing may not be needed.

“Leap's fourth quarter results bolster confidence, as the most important underpinning of the story – super low costs – remains intact,” Moffett said in a separate research note. Leap’s cost structure, the foundation of its competitive advantage, remained low as well with subscriber acquisition and growth cost down annually despite 17% revenue growth.

Both post and prepaid providers will have to keep a closer eye on the price wars in 2010, as their existing customers become their best – and perhaps only – bet. PricewaterhouseCooper’s annual survey echoed the need for carriers to derive value from existing customers to offset the effects of saturated mobile penetration, soaring retention costs, consumer price sensitivity and surging data traffic demands. Whether carriers are looking at premium users, value-oriented family plans or the prepaid market, the emphasis is shifting to price, PWC’s US wireless industry leader Pierre-Alain Sur said in the study.

Carriers have already largely realized this trend as well. Prepaid providers are exploring new ways to add value to existing subscribers, including unlimited data packages and introducing smartphones to their typically basic handset line-up. MetroPCS is even looking towards its 4G LTE network to grow the potential of prepaid well into the future. Meanwhile, the large carriers have invested more than $160 per subscriber in their networks, a more than 30% leap over 2008, according to PWC’s survey. This came at the same time customer retention expenses grew more than 50%.

"Mobile carriers must dive deeply into the profitability profiles of all their existing customer categories,” Sur said in the study. “And with today's enhanced visibility, carriers have a far more robust set of tools to increase their bottom lines across every kind of customer interaction.”

See the rest of Connected Planet’s fourth-quarter coverage here:

- Gap between Verizon’s wireless and wireline arm widens
- AT&T: Improving 3G network the major focus of 2010
- Sprint plans targeted-services strategy to regain prepaid lead
- T-Mobile prepaid helps growth, hurts revenues
- MetroPCS to tap the potential of prepaid 4G