Smartphone evolution. Source: Phil Roeder/Flickr.
The U.S. smartphone market is rapidly approaching saturation. At least it was up until around June. In the four months after June, the number of U.S. smartphone subscriptions increased by just 3 million, and now total 72.9% of the overall market. From the looks of it, the U.S. market may be nearing a saturation point.
This is bad news for the four major U.S. carriers -- AT&T (T 1.88%), Verizon (VZ -0.53%), T-Mobile U.S. (TMUS 0.57%), and Sprint (S). While the first three continue to add postpaid phone subscribers, all are heavily reliant on smartphone subscribers to increase average revenue per subscriber.
Even worse for the major carriers
Among the four major carriers, smartphone users, as a percentage of their postpaid subscriber bases, is extremely high. Jackdaw Research estimates Verizon has the lowest percentage of users on smartphones, and the company just reported 77% of total phone subscribers (prepaid and postpaid) are on smartphone plans.
Year over year, Verizon's average revenue per device fell from $57.24 to $55.78 as it competes to keep high-value smartphone users out of the hands of low-cost rivals T-Mobile and Sprint. It's worth noting that Verizon added a significant number of tablet devices during the last year, which carry a lower-than-average service price compared to smartphones.
T-Mobile and Sprint actually have the highest percentage of postpaid subscribers on smartphones. Competing from behind gives them the ability to offer more aggressive pricing on smartphones. Both offer unlimited data plans, whereas AT&T and Verizon do not. Both have also promoted deals that will pay users' early termination fees to switch carriers. These relatively low-cost plans and promotions have steadily increased the number of smartphone users subscribed to each carrier.
What happens when there are no feature phones to upgrade?
The question AT&T and Verizon must be asking themselves is how can they continue to increase average revenue per phone subscriber after they've upgraded all of their feature-phone users to smartphone users? Considering Sprint and T-Mobile will continue attracting customers with their low-price plans, it will be difficult for either of the larger carriers to offer similar smartphone plans at a higher price.
For now, the two big guns are looking to use their wallets to buy up some of the valuable AWS-3 spectrum licenses currently up for auction. License prices have soared well above expectations, with top bidders committing $44.3 billion so far in an auction analysts saw raising no more than $22 billion. The higher-than-expected price means that T-Mobile's dollars -- Sprint isn't participating -- won't go as far as initially planned in the auction.
Both AT&T and Verizon boast superior network capabilities over T-Mobile and Sprint, and aim to keep it that way with the purchase of new spectrum licenses to increase network capacity and speed. This way, the big carriers hope that if they see higher-than-expected churn rates from users switching to Sprint or T-Mobile, users will be unsatisfied with their new carrier's network and come back, even if it is at a higher price.
Sprint and T-Mobile aren't currently very concerned with their network capacities, and both seem to be holding out for the 2016 FCC auction of low-band spectrum, which has superior capabilities for phone signals compared to the current AWS-3 spectrum on the auction block. However, if either adds more customers than expected, they could run into capacity issues, and have to spend money redeploying current spectrum licenses, or buying spectrum from other owners. That's not a terrible problem to have, though.
In this light, it makes perfect sense why analysts see Verizon and AT&T growing revenue just 2% to 3% next year, while the Street expects T-Mobile to grow revenue at a much more robust 9% on top of a near-20% increase this year. With the U.S. smartphone market saturating, there will be significant pricing pressure for the larger carriers' smartphone subscription plans.
