The Cellular Market In The US Is Saturated

Among them, Verizon Wireless, AT&T (NYSE: T), Sprint (NYSE: S), and T-Mobile have almost 260 million wireless subscribers in the US. The population of the US is 305 million people and some of those are too young to need or use a phone. Others don’t want one. Quite simply, there are very few new subscribers to be had. That means the cell phone subscription wars are much more about taking market share.

During the last quarter, Verizon (NYSE: VZ) added only 423,00o new contract subscribers and AT&T only 512,000 customers of the same type. Sprint has been slowly losing subscribers for the last two years.

The saturated market leaves the large cell service providers with only a few options to increase their wireless revenue. The problem is particularly acute for AT&T and Verizon Wireless because their consumer landline bases are shrinking quickly as people drop their home phones. AT&T and Verizon both have fiber initiatives to compete with large cable companies such as  Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) for broadband and TV customers. But, cable is well-entrenched which means that price cuts may be the only way to get consumers to charge their allegiances.

The largest cell companies also face the need to cut prices on their handsets to gain shares from their rivals. The lower prices they have to charge for phones hits their bottom lines. There is evidence that AT&T pays close to $500 for each iPhone its buys from Apple (NASDAQ: AAPL) It sells some of those handset for under $300 to get subscribers to sign up for two-year plans.

All of that price and margin pressure leaves the large cellular service providers with only three significant ways to make money. The first is to charge subscribers for premiums video content. It is too early to know whether customers will accept that model, particularly when they are already paying monthly service fees of $100 in most cases.

The second way for the cellular firms to bring in new revenue is to have text and video ads that run with content used on handsets. Google (NASDAQ: GOOG) places text ads next to some  mobile search content. It splits the revenue from those with the carriers. Whether the amount of money from the marketing messages will be large enough to yield significant revenue is still open to question.

The last, and so far, most promising source of revenue for the cellular service providers is to charge for the data that many subscribers download to their handset whether those are video files or other large files with compressed content. Verizon Wireless. AT&T, and Sprint all say that this is their greatest revenue source for the future. It remains to be seen if customers will accept those charges or whether one or more carriers will offer these services at large discounts to pick up market share. That would cause a pricing war which would bring down profits for all the providers.

The revenue growth rates for cellular services is not dead, but it ailing.

Douglas A. McIntyre