The dark side of the smartphone

But there’s a trade-off, right? For every converged device sold there is a new high-value data subscription. That’s only partly true, Moffett added. While average revenue per user (ARPU) in data has been increasing, it’s been doing so at the same rate voice ARPU has been decreasing, leading to carriers holding the line on revenues per subscriber and in some cases seeing total ARPU declines. Carriers’ overall revenues are up because they’re adding subscribers as well as adding data revenues, but you only have to turn to Sprint to see what happens when net subscriptions start falling.

“Data ARPU growth simply doesn't have enough power to replace subscriber growth as the main catalyst for growth in the wireless industry,” Moffett said. “In the third quarter, good old-fashioned subscriber growth accounted for more than 90% of both AT&T and Verizon's overall wireless revenue growth and has not accounted for less than 90% of total growth since the beginning of the year.”

The problem will come into stark relief when the U.S. market reaches saturation. With no more subscriber growth, the industry will have to depend solely on ARPU growth to keep growing. According to Moffett, that happens when we reach 90% penetration — which is only about 15 million subscribers away. Given the state of the global economy, it could be a slow, grueling path to achieve that final 5%. Nokia has projected that for the first time, upcoming global phone shipments will be lower than the previous year (2009 vs. 2008), and that’s even accounting for the rapid growth in emerging markets.

I would add one caveat to Moffett’s analysis, though. Data growth in the U.S. has primarily been driven by messaging for years, and messaging has been subjected to the same downward pricing pressure as voice. The beauty of smartphones, however, is that their data impact comes from far more than messaging. Carriers are charging $20 to $35 monthly data subscriptions for many of these devices, and when you start adding content services or premium e-mail plans, they increase further. AT&T and Verizon in recent quarters have reported that most new data growth is coming from Internet and data subscriptions. Compared to millions upon millions of customers who have standard voice and messaging services, though, the percentage of subscribers on these high-value data plans is tiny. The end result is that they have little effect on total ARPU. But as more smartphones penetrate their networks the percentage of high-revenue plans will increase, which could have a dramatic effect on total ARPU. The question is whether those data plans will be subjected to the same downward price pressures as voice and messaging.