VERIZON LEAPFROGS SPRINT PCS WITH Q2 SUBSCRIBER NUMBERS

The wireless carrier industry's second-quarter results showed a surprising shift in market share as Sprint PCS fell from grace after a nearly four-year lead in subscriber additions and Verizon Wireless added considerably more customers than analysts expected.

When Sprint PCS reports disappointing numbers, investors throughout the industry typically panic. “Everyone had assumed there was another leg down in growth when Sprint PCS announced its numbers,” said William Benton, wireless analyst with William Blair & Co. “While growth isn't robust, there was more of a market share shift evident by Verizon's numbers.”

For all the emphasis on new data application, second-quarter numbers indicated that pricing was the main reason for the shift. Verizon Wireless, which added a whopping 723,000 customers, about 400,000 more than what analysts expected, provided a clearer marketing message than its competitors, lowered its credit requirements and offered more competitive entry-level pricing plans.

Sprint PCS, which held the distinction of market leader in subscriber additions for 15 straight quarters, late last month announced disappointing subscriber additions of 308,000. Analysts had expected around 700,000.

Verizon, which has launched its high-speed data network in various markets throughout the country, attributed some of the unexpected gain to a sharpened marketing message in the second quarter. Gone are commercials featuring people holding up the “V” sign with their fingers. In is a focus on quality, with spots that feature a geeky guy in glasses walking around different parts of the country with his Verizon phone asking, “Can you hear me now?”

“They realized they weren't getting their message across,” said Phil Redman, research director with Gartner Group.

But Verizon also hit Sprint PCS where it hurt. Sprint PCS historically had bolstered its numbers through an innovative prepaid plan called Accounts Spending Limits (ASL), which allows high-risk customers to pay postpaid rates but requires them to pay in advance and put down a deposit. Analysts have estimated that ASL customers represent about 20% of the carrier's customer base. Verizon Wireless changed its credit policy to match Sprint PCS's offering.

“Before ASL, customers went to either expensive prepaid plans or conventional postpaid markets,” said Jonathan Atkin, wireless analyst with RBC Capital Markets. “Now [ASL] isn't the only game in town. That market is getting more saturated.”

In addition, Sprint PCS fell from price leader to price follower, said Benton. At the entry-point level — a segment that carriers are now trying to penetrate more fervently as overall penetration rates increase — Sprint PCS now has the least competitive rate plans.

Moreover, there isn't much Sprint PCS can do about pricing until it launches its next-generation cdma2000 network this fall. The launch will be complemented with heavy advertising and new rate plans, which Sprint PCS didn't want to change until it introduced high-speed data services.

Sprint PCS isn't changing its stated goal of 2.5 million to 2.7 million new customers for the year. It also expects a big boost in sales when it launches its cdma2000 network.

“I don't think necessarily everybody will run out and buy 3G phones because they immediately want to use large amounts of data capacity, but the excitement created from 3G will drive people into our stores to see what Sprint has to offer,” Chuck Levine, president of Sprint PCS, said during the company's quarterly conference call.