As growth in phone subscribers has slowed (or turned negative) for most of the big four U.S. wireless carriers in recent years, they've begun to push for more net subscriber additions through connected devices and tablets. Verizon's (NYSE:VZ) tablet net adds drove its total net add growth for several quarters, but total net adds fell to its lowest levels in two years last quarter. Tablet net adds specifically reached its lowest level in three years.
Tablets play an important role for Verizon. CFO Fran Shammo has said tablets help increase data consumption and reduce churn. So, what's causing Verizon's tablet net adds to decline, and should Verizon investors start to worry?
Verizon's overall postpaid churn rate fell 7 basis points to 0.96%, but management indicates it's seeing a much higher churn rate on tablets. That's because of a promotion it ran about two years ago where it gave tablets away to customers in exchange for signing a two-year contract to pay $10 per month for adding a device to their service plan.
"[Customers] signed up for the two-year agreement because they got a tablet for $10 a month, so $240, and they disconnected it at the end of the agreement," Shammo told analysts on Verizon's first-quarter earnings call. "Some of these tablets [are] now coming up on the two-year deal. We anticipate that some of that higher churn in that tablet environment will hit us over the next couple of quarters, so we should be prepared for that."
These are relatively low-value subscribers for Verizon. They found a way to get a nice tablet for $240, and they used minimal data on the tablet. Verizon would much rather see customers buy larger buckets of data to support multiple devices.
Sprint (NYSE:S), which actively targets price-conscious customers, ran a similar promotion at the same time. While Verizon still added over 500,000 tablet subscribers last quarter, Sprint saw the first decline in the industry, losing 36,000 tablet subscribers in the quarter.
Slowing tablet growth overall
Tablet additions overall have started to slow across the industry. AT&T (NYSE:T) also saw a big drop in tablet net additions, and T-Mobile (NASDAQ:TMUS) added just 30,000 more mobile broadband customers than it did in the first quarter of last year. According to research company Strategy Analytics, global tablet sales fell over 10% last quarter.
The decline in overall tablet sales means carriers will soon be working to attract tablet customers from other carriers instead of relying on the natural growth of the market. That's the same situation carriers face with much more valuable phone subscribers right now, and it's unlikely a customer will use one service provider for phone service and another for mobile Internet devices like tablets. As such, it's likely the carriers that are best able to attract phone customers will also win share in the tablet market without having to do much extra work.
To that end, T-Mobile and Verizon have been the big winners attracting phone customers away from AT&T and Sprint. Verizon's first-quarter decline in phone subscribers of 8,000 was much better than the first quarter of last year, when it lost 138,000 phone subscribers. The company still added over 1 million postpaid phone subscribers in 2015.
So, while Verizon may be in for a few more quarters of relatively poor net additions due to high tablet churn and slowing tablet growth, overall, it's well set to continue growing total subscribers and capturing high-value customers from its competitors.