What Slow but Steady Wireless Growth Means for Top Telecom Stocks
Here’s what Morningstar’s analyst thinks of AT&T, Verizon, and T-Mobile today.
Fears of slowing wireless customer growth have yet to materialize, as we estimate the industry added 1.9 million net new postpaid phone customers during the first quarter, up from less than 1.8 million a year ago. With the U.S. postpaid phone customer base growing around 4% year over year for the past several quarters versus less than 1% population growth, this pace of wireless growth can’t continue, but carriers keep offering generous discounts to put 5G phones in customers’ hands to eliminate a reason to switch providers.
The cable companies’ wireless efforts took another step forward, with Comcast CMCSA and Charter CHTR claiming 15% of customer decisions during the first quarter, up from a steady 12% throughout 2021. These virtual operators rely on Verizon’s VZ network for service.
Average revenue per postpaid customer hasn’t changed much despite solid household income growth. AT&T T initiated a price increase on older rate plans in May, with Verizon following suit. We expect the carriers will implement more explicit price increases in the coming years to maintain margins in the face of rising costs.
Much has been made of the postpaid customer loss that Verizon posted during the first quarter, but this doesn’t mark a new trend—the company has lost net customers during the first quarter in each of the past nine years, reflecting seasonality in its promotional efforts and the industry as a whole. Verizon’s postpaid customers remain fantastically loyal, based on monthly churn rates. Only AT&T’s renewed focus on its wireless customer base and resulting churn improvements make Verizon look like a bit of a laggard. T-Mobile TMUS also continues to make steady progress in reducing churn as it integrates Sprint customers.
AT&T has also made impressive progress in improving its positioning with customers looking for a new carrier. Its share of gross customer additions roughly matched Verizon’s during the first quarter. Verizon’s share was also up nicely year over year despite reported weakness with consumer accounts, reflecting the company’s strength among business customers. T-Mobile remains the industry’s share gain leader, but the gap has narrowed considerably. We expect T-Mobile will maintain its lead as it pushes into smaller markets where it hasn’t provided service previously.
Verizon and T-Mobile have shown solid growth in revenue per postpaid customer recently, which we believe reflects the discipline they have shown in their promotional efforts. AT&T will probably continue to see postpaid average revenue per user drift lower over the next couple of quarters as the amortization of promotional credits builds, but recent price increases should offset some of this pressure. Differences in ARPU among companies reflect not only relative pricing but also the mix of individual, multiline, and business accounts and how the companies allocate revenue among services, equipment, and other related offerings, like device insurance.
Dish Network DISH has struggled to retain customers since it acquired the Boost brand from Sprint as it wrestles with T-Mobile’s accelerated 3G network shutdown, a back-office system transition, and migration to a wholesale agreement with AT&T. But the prepaid market has been stagnant or declining overall for several quarters, reflecting the emphasis that carriers have placed on postpaid plans and solid consumer finances. Only T-Mobile’s Metro brand has performed particularly well, adding customers and increasing revenue per customer, building on the company’s aggressive 5G network rollout and marketing efforts.
Verizon appears to have continued migrating the Tracfone customer base upmarket toward the Straight Talk brand, as prior Tracfone owner America Movil had been doing. Adjusted for the acquisition, Verizon’s prepaid average revenue per user would have increased nearly 6% year over year.
On the basis of total postpaid and prepaid phone customers, Verizon remains the clear industry leader, though the addition of the lower-end Tracfone base makes the gap look bigger than it is. We believe AT&T and T-Mobile have adequate scale to generate strong profitability without chasing market share. We also think Dish will primarily pursue nontraditional wireless customers.
Revenue growth has accelerated across the wireless industry on the back of strong postpaid customer growth and the migration of postpaid customers to higher-end rate plans. For example, Verizon reported that 36% of its postpaid accounts have taken a premium unlimited plan, up from 23% the year before; it believes this figure can hit 55% by the end of 2023.
T-Mobile continues to offer the best balance of customer additions and gains in revenue per customer, reflecting the strong momentum it has in the marketplace. Management expects revenue per postpaid phone customer will grow in 2022, the strongest guidance it has provided in recent memory.
We calculate that Verizon remains smaller in the prepaid market than AT&T and T-Mobile, based on revenue, despite serving more customers. Tracfone has a sizable base of customers on subsidy programs. Still, the addition of Tracfone has widened Verizon’s lead modestly.
Market share shifts very slowly in the wireless business. Even with the incredible success it enjoyed during 2017-19, T-Mobile saw its total share increase only about 2 percentage points. AT&T’s share drifted modestly lower during this period as its management focused more on the media business. We expect Verizon will be content to lose modest market share while working to retain its best customers.
The cable companies have posted strong customer additions recently, but their combined market share remains below 3%, again reflecting the difficulty of shifting share in this market. We expect the cable companies to steadily expand their customer bases without meaningfully impinging on the retail share of the three major wireless carriers.
In our view, the similar size of the three major wireless carriers, relative to their positions before the Sprint/T-Mobile merger, eliminates the temptation to desperately pursue growth in search of scale, lending credence to the idea that each will generate comparable, albeit modest, growth over time.
Cable networks remain the most common means for consumers and smaller businesses to receive high-quality broadband internet access. However, we estimate the major phone companies have passed nearly 5 million new homes and business locations with fiber over the past year, ratcheting up the level of competition facing the cable industry. The large phone companies each plan to accelerate fiber construction in 2022. Still, it will probably take a decade or longer for fiber networks to come close to matching cable in terms of homes and businesses passed.
We’re also now tracking the fixed-wireless home broadband offerings from Verizon and T-Mobile. Hundreds of small wireless internet service providers offer service today, but we expect the two wireless giants will bring this technology into the mainstream over the next couple of years.
Over the past year, the cable companies we follow have expanded coverage to nearly 4 million new locations, though about a third of this growth was the result of acquisitions. Several very small, mostly private cable companies serve perhaps a couple of million locations across the country.
Slowing broadband growth has prompted handwringing among cable investors. From 2016 through 2021, the cable companies added between 900,000 and 1.2 million net broadband customers during the first quarter versus only 462,000 this year. This development shouldn’t come as a surprise. The pandemic clearly pulled demand forward into 2020. More important, 4%-5% customer growth is not sustainable in a maturing market that’s limited to the rate of household formation.
The importance of fiber networks to the phone companies is clear in their customer growth numbers. Still, these companies’ aggregate customer additions were down from 79,000 last year to 44,000 despite their growing fiber capabilities. This lends credence to the notion that a big part of the slowdown in broadband growth for the cable companies is as much macro-related as anything.
While Verizon and T-Mobile posted strong customer growth during the quarter, we suspect that fixed-wireless access has expanded the market for broadband, making new uses possible. Half of Verizon’s fixed-wireless access customers are business accounts, which probably include a large proportion that aren’t good candidates for fixed-line service.
Despite the slowdown in customer growth recently, Charter and Comcast have continued to gradually increase broadband penetration despite consistent network expansion (likely around 2% in 2022 for both companies). The benefits of fiber networks show up clearly in this metric as well. Verizon’s relatively mature Fios network has maintained steady penetration rates over the past few years, picking up some ground more recently as the company has placed a renewed emphasis on its consumer business. AT&T’s penetration rates ramped up quickly in the years following its initial fiber build (after 2018) but have stagnated again as construction efforts have resumed over the past year or so. Penetration rates for the phone companies in areas where they haven’t upgraded to fiber are often abysmal, in the 10%-15% range. AT&T’s U-verse copper upgrade of a decade ago makes this company an exception, as its copper penetration rate sits at a more respectable 23%.
Mapping out broadband customer additions by quarter over the past few years demonstrates the pandemic’s impact on demand. The cable companies posted decade-high growth over much of 2020 and remained solid well into 2021. Even with the slowdown in growth, cable has continued to take the vast majority of net new fixed-line customer additions over the past two quarters, indicating that the competitive balance versus fiber hasn’t shifted dramatically. The question is whether customers are increasingly turning to fixed-wireless offerings at the margin instead of traditional providers. We suspect fixed-wireless access has had some impact on the market, but we would expect the service to hit slow DSL services from the phone companies the hardest. Of the major phone companies, only AT&T saw a meaningful increase in DSL losses.
Measuring broadband revenue is as much art as science, given how companies account for the contribution from various services, but high-quality networks continue to command solid pricing power. The cable companies have been able to consistently garner low- to mid-single-digit increases in broadband revenue per customer in recent years, built on price increases and the elimination of bundle discounts as more customers cut television service. AT&T and Frontier FYBR have also shown good growth in this metric as an increasing portion of their customer bases are on fiber rather than lower-quality copper networks. Even Lumen’s LUMN relatively poor network has affected its customer growth more than its ability to raise prices as customers take faster speeds.
The consumer broadband business is a fraction of the size of the wireless market—likely around $20 billion in aggregate revenue during the first quarter versus about $70 billion in wireless sales. This makes us question how aggressively the wireless carriers will ultimately pursue this market. We suspect the wireless carriers will be reluctant to risk degrading the experience of their core wireless business to serve customers who consume far more network capacity and don’t pay materially more.
The increase in broadband revenue per customer over the past year is part of a trend that stretches back more than a decade. The cable companies have effectively shifted profit dollars from television to broadband services over this period, as only around 50% of cable customers in the United States still take TV service, down from more than 85% 10 years ago. By contrast, nearly 95% of cable customer relationships include broadband service. Cable One CABO has been the leader in shifting its business away from television—only about 20% of its customers still take the service—which partially explains the higher revenue per customer it garners. Altice USA ATUS has been an outlier in reporting weak gains in average revenue per user. It increased prices aggressively in recent past years and has to rethink its pricing strategy in the face of renewed competition from Verizon’s Fios in the New York metro area.
AT&T, Verizon, and Lumen remain the largest players in fixed-line enterprise services, but their market share has steadily declined in recent years. We expect this market will look more like the consumer business over time, with a heavier emphasis on basic connectivity rather than add-on services and consulting. We also expect the range of connectivity types that businesses demand will evolve to favor providers that can deliver complex fixed-line and wireless solutions, including private networks that keep employees connected to key resources, like datacenters, across multiple locations. Verizon has made the strongest push in this direction, but AT&T is active as well. AT&T also has formed a partnership with Dish Network that could be interesting in the future, and T-Mobile has partnered with Lumen in this area.
Michael Hodel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.