Why Access To Smartphones Is The Key To Wireless Industry Growth

iPhone 4 Locked Screen

What a weird time to be one of the leading wireless carrier companies in America: a strong earnings report can just as easily be used against you as it can be used to show your intelligence and discipline. AT&T (NYSE: T) and Verizon are no doubt proud of the financial reports they issued this week, but they may have won a short-term battle to lose a long-term war if the rest of the wireless industry continues to suffer from the top-heavy wireless picture.

The numbers speak for themselves: AT&T posted solid gains in both revenue and net income from its wireless division, as smartphone sales increased 43 percent amid AT&T’s third-best-ever quarter for sales of the most profitable devices in its lineup. Verizon swung to a substantial profit on the back of strong wireless growth and a nice boost to its margins from sales of smartphones.

See a common theme? Smartphones are driving growth at wireless carriers, far more than sales of regular mobile phones. That’s because not only are those phones more attractive to consumers in Year Four of the iPhone Era but because AT&T and Verizon have every incentive to promote them due to the increased revenue they make per smartphone subscriber as opposed to a regular voice subscriber.

Yet AT&T would swear up and down that it participates in a competitive market, where feisty rivals like Sprint (NYSE: S), MetroPCS, and U.S. Cellular keep it on its toes. It really has no other choice should it want to convince skeptical federal regulators that its bid for T-Mobile won’t impede wireless competition in the U.S., but its results paint a different picture. Access to top-tier smartphones is exactly what is driving revenue and profit at both of the nation’s largest wireless carriers, which creates more investment capital to secure exclusive deals on hot new smartphones, perpetuating the cycle.

Just ask the companies themselves:

“That means high-quality customers, both new and existing ones, continue to choose AT&T.”–John Stephens, chief financial officer, AT&T.

“Just if I look back over my 20-some years on the Wireless side, every time we brought in new devices, we brought in new use cases, we saw nice expansion of the market.”–Lowell McAdam, new CEO of Verizon Communications (NYSE: VZ) and former CEO Verizon Wireless.

The other players in this market simply don’t have the capability to secure devices the way AT&T and Verizon do because of their established positions in the market: phone makers aren’t stupid, they want volume. Sprint provides a credible foil, but is beset by problems of its own transitioning to 4G and getting out from under a mountain of debt. Other U.S. wireless carriers get the hand-me-downs of the smartphone market, having to pitch their customers on generation-old Android or BlackBerry devices when the iPhone and the best Android devices are reserved for the top of the food chain.

Allowing AT&T to absorb T-Mobile would not improve this situation, which is why AT&T insists at every turn that the U.S. wireless market is competitive. However, it’s clearly not: AT&T added 1.1 million customers during the last quarter to finish June with 98.6 million subscribers. Verizon added 2.2 million customers to finish June with 106.3 million subscribers.

We’ll get a better picture of what’s going on next week when Sprint reports earnings, but Sprint matched AT&T’s current gains in the last quarter by adding 1.1 million customers–its best performance in five years, it said–only to trail AT&T by a huge figure with 51 million customers. And it still lost money. U.S. Cellular shed subscribers during its last quarter. And MetroPCS doesn’t report earnings results MetroPCS is also struggling. (Updated 8/2 to correct bone-headed error in which I couldn’t locate the investor-relations section of its Web site.)

Numbers don’t lie. Access to premier smartphones is what is driving wireless carrier growth in 2011. If AT&T be allowed to acquire T-Mobile, it will only strengthen its grip on those premier smartphones. And if Verizon tries to follow suit by snapping up Sprint, which just about everybody in this business (including Sprint) thinks would be a likely outcome of a successful merger, the options for smartphones will dwindle.


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