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US Operators Tapping Wholesale Market for Growth

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With operators fighting aggressively to capture share in a slowing market, the US network operators turned to the wholesale channel in 4Q09. Verizon Wireless added one million wholesale customers, the bulk of which can be attributed to TracFone's "Straight Talk" plan, rolled out in a number of locations, including Wal Mart outlets, in 2009 using Verizon's network. Similarly, T Mobile USA added 400,000 wholesale customers again, primarily TracFone customers, offsetting a decrease of 117,000 postpaid customer adds and slow growth in the company's prepaid retail base.

In total, TracFone added a stunning 1.2 million net subscribers in 4Q09, the most of any retail brand.

According to John Byrne, director of TBR's Telecom/Networks practice, "While operators are relying on the wholesale channel for growth, it is arguable that TracFone's extremely low unlimited rates are causing ripples in the industry that are serving as the basis for many customers to conclude that they are better off moving to prepaid service. If so, then this wholesale growth may be coming at the expense of operators' far more lucrative postpaid businesses."

AT&T also saw its operating dynamics altered dramatically in 4Q09, as the company added 1.8 million wholesale customers - an increase of more than one million compared to 3Q09 and 4Q08. Unlike the TracFone-driven wholesale growth of Verizon and T Mobile USA however, AT&T's wholesale total reflected more than a million connected devices, including eReaders such as the Amazon Kindle, Sony Reader Daily Edition and the Barnes & Noble Nook. TBR believes AT&T has considerable momentum in its Emerging Devices unit which is likely to carry over into 2010, with the emergence of a variety of new devices, primarily in the wholesale category, which leverage AT&T's network and a host of new form factors.

The strong wholesale growth offset what was, frankly, alarmingly slow retail growth for AT&T and Verizon, both of which enacted 1Q10 price cuts in the hopes of maintaining momentum in their flagging retail divisions. Meanwhile, aggressively priced unlimited pay-in-advance plans from the likes of TracFone and Boost Mobile continue to threaten the postpaid business models of all operators, driving down overall ARPU levels.

In the case of Verizon Wireless, a combination of slower subscriber growth and declining ARPU has resulted in two consecutive quarters of declining voice revenue year-to-year, raising the importance of growing data revenue streams. To this end, Verizon, which retained its lead in TBR's Mobile Operator Benchmark, will place even greater emphasis on data services and smartphone sales in 2010, and redouble efforts to establish non traditional revenue streams. Additionally, the company will begin LTE rollout in 2010, planning to launch service in 25 to 30 markets by the end of the year.

AT&T, which maintained the No. 2 spot in the Benchmark, is working to address continued complaints regarding the quality of its wireless network, announcing the completion of an initial HSPA 7.2 software upgrade, which should offer some relief to disgruntled customers. Furthermore, the company unveiled a $2 billion plan to upgrade its backhaul capacity, which should improve data speeds in urban areas, where iPhone adoption has taken the largest toll. TBR believes the company's investment, while belated, should put AT&T in a much strong position vis--vis Verizon Wireless in terms of network quality, though the company will need to hit the airwaves aggressively to counter the barrage of Verizon Wireless advertisements focusing on Verizon's network advantage.

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