Wireless Carriers Hanging On To Customers Longer

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NEW YORK (Dow Jones) For the wireless carriers it's all about family.

Service providers have aggressively gone after customers with various promotions, highlighted by the ubiquitous family plan. But there's also Cingular Wireless's minute-rollover feature and Sprint Corp.'s (FON) "Fair and Flexible" program. As a result, the second quarter has yielded a similar theme for each player: more people staying put with their carriers, and paying less for their service.

Although still growing, the traditional voice wireless service is quickly approaching maturity. Even with the potential elimination of two competitors in AT&T Wireless and Nextel Communications Inc. (NXTL) through acquisitions, the need to keep customers loyal have the carriers pressured to continue their promotions. That pressure will likely lead to continuing year-over-year declines in the turnover rate and average revenue per user over the next few quarters.

"It's no surprise, it's late in the business cycle," said Greg Gorbatenko, an analyst for Marquis Investment Research. "Almost by definition, competitors are staying constant."

With every player out with their own offer, there's little impetus for customers to go through the hassle of switching plans. One of the most effective tools in keeping customers is the family plan, which is embraced by nearly all of the carriers because it makes switching services difficult.

"As those members become more reliant on their wireless phones, it would require agreement of everyone for them to switch," said William Power, an analyst with Robert W. Baird & Co. "It's a strong driver for each of the carriers."

For some more than others. Take Verizon Wireless, which saw family plans add 40% to 50% growth to overall revenue growth, according to Power. It reported an industry-low turnover rate of 1.2% Tuesday. Cingular, meanwhile, saw a third of its growth come from family plans, he said. Last week, the carrier, jointly owned by SBC Communications Inc. (SBC) and BellSouth Corp. (BLS), reported turnover of 2.2%. Sprint also reported a rate of 2.2%.

The family plan and other promotional programs still have legs, especially with the back-to-school and holiday seasons coming up. Power said the plan likely has a couple of quarters before the promotion hits a wall. The analyst doesn't have any conflicts of interest to report.

Sprint President Len Lauer partly attributed the declines in net subscriber growth to aggressive marketing from its competitors. The company will launch short-term promotions focused on family plans.

One factor leading to higher turnover is the rising popularity of prepaid services such as Virgin Mobile, or Nextel's Boost Mobile. Customers who use prepaid services don't sign a contract, so are typically more inclined to switch carriers.

Diminishing Revenue Per User

The consequence for lower turnover is a decline in average revenue per user. Family plans, so effective in keeping subscribers, also generate lower revenue because multiple lines are tied under one discounted plan. While they are typically cheaper than several individual plans, they also promote more individual subscribers, leading to higher total revenue. The major carriers' net new subscribers have again exceeded second-quarter expectations.

So far, the average revenue declines have been slight. Cingular saw its average revenue fall 0.6% to $50.43, while Verizon saw a decline of 2.7% to $49.42. Even Nextel, which is less focused on the consumer, saw its average revenue fall 2.8% to $68. Some say the trend will continue.

In its conference call last week, Cingular Chief Financial Officer Pete Ritcher blamed the decline on the migration to more attractive plans within the company such as rollover and nationwide calling. He reassured investors that the declines would diminish in the second half.

Fitch Ratings analyst Michael Weaver said a major factor in the decline is the loss of roaming and overage charges. With the glut of minutes offered in even the cheapest plan, callers are no longer exceeding their plan limits as often as before. Nationwide and in-network calling means calls are carrying fewer charges in general.

"Many plans don't even have roaming and overage charges anymore," Weaver said. He doesn't have any conflicts of interest to report.

The looming emergence of mobile virtual network operators, or companies that offer wireless service by leasing someone else's network, may be a competitive threat. Virgin Mobile stands as the most successful, but other notable entrants include ESPN and Walt Disney Co. (DIS).

The carriers have called MVNOs niche players, but a more crowded industry could lead to more aggressive pricing. For players who lease out their network such as Sprint, they would record the subscribers on a wholesale level, which typically generates lower revenue.

In addition, the integration of Web-based phone services with a wireless network could cause hurt prices down the line. Pricing wise, Internet phone service "knocked the stuffing out of traditional voice," Gorbatenko said. It's only a matter of time before it does the same to wireless, he said.

None of the cable companies or other Web-based phone service providers have concrete plans for wireless, and Gorbatenko noted the technology won't hit the market for another one to two years. The analyst doesn't have any conflicts of interest to report.

While the wireless voice business matures, the carriers look to data services such as text messaging, emails and ringtone downloads for new sources of growth. Verizon has been particularly aggressive with the rollout of its high-speed wireless service, V-Cast.

"We're seeing a clear demand for wireless broadband," Verizon Financial Chief Doreen Toben said during its earnings conference call Tuesday.

Sprint has also been aggressive with its Vision offering, and as a result, its average revenue per user bucked the trend and remained flat at $62, helped by industry-high data services revenue contribution.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires"

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