Skip to main content

File the story about wireless-phone subscriber surge after Sept. 11 with the other urban legends.

As Americans listened to accounts of stricken New Yorkers and Washingtonians calling home on their mobile phones, financial pundits grabbed hold of a potential mini-boom in handset sales. Whatever rush there was on mobile coverage proved to be brief and scattered enough that it didn't add up to a gangbuster third quarter for the wireless sector. Carriers turned in the performance the Street had been expecting since July forecasts were made.

Sprint PCS


was the first mobile carrier to report, and it scored whopping customer additions of 1.2 million, compared with estimates in the 800,000 range. That encouraging finish was followed by

AT&T Wireless'


Street-meeting 748,000 new faces and so-so results for

Verizon Wireless

TheStreet Recommends

(VZ) - Get Verizon Communications Inc. Report

, which turned in 752,000 subscribers.



turned in the 480,000 additions it had promised for the quarter, after briefly upping its forecast before Sept. 11 and then reducing it. While Cingular's overall number grew 95,000, its numbers weren't as impressive as its competitors' because it made considerable efforts to weed out unprofitable, low-end subscribers. All in all, a strong quarter for wireless carriers, but one driven by the advancing symptoms of market maturation, not a one-time event.

"Maybe some more people are buying phones for security reasons, but on the flipside the economy is getting worse," posited Peter Friedland of WR Hambrecht, who categorized the hopes for a third-quarter rush as "media hype," given that there were only three weeks left in the quarter on Sept. 11. He said a mild event-driven increase in wireless demand might be at work, however, in the industry's ability to keep up with expectations. "People don't want to spend in general, so maybe it helped offset the economic effects."

On the whole, carriers were nagged by the same trends that have troubled them in the past few quarters. They can add lots of customers, but at a price. About 45% of the U.S. population has a mobile-phone plan, which means that to maintain a rapidly increasing base of users, carriers have got to reach for consumers who might have less than sparkling credit. Those users tend to pay less each month for calls and are more likely to drop their plans, hurting carriers' average revenue per user and increasing churn.

Sprint PCS's dramatic gains were accompanied by an uptick in churn from 2.2% in the second quarter to 2.6% in the third. The company is courting no-credit and low-credit customers through its assigned spending limit plans, which will not let a user spend more than his or her designated dollar limit each month. Estimates peg 25% of Sprint PCS subscribers in the ASL category. The carrier is clearly not slowing from the group, given that it expects to add 1.3 million more subscribers in the fourth quarter, but analysts have their worries.

AT&T Wireless surprisingly backed off its credit-challenged customers by working down its controversial prepaid customer base. After pledging at the end of the second quarter to make the prepaying user a profitable customer, AT&T Wireless stressed the decline in that population as a percentage of its 17.1 million total subscriber base in the third quarter. Churn was still high in relation to the rest of the industry at 3.1%, and average revenue per user slipped from $63.80 to $63.60, but President Mohan Gyani insisted AT&T Wireless was attacking the problem "the hard way, bringing on higher gross additions as opposed to keeping the customers we already have" in the prepaid segment.

"It's great if they could continue to do that, but the reality is that carriers are going to have to use prepaid and ASL to continue adding customers," Friedland explains. "Or they can limit their phase of growth. Wireless carriers don't have to grow their subscriber ranks forever. Nobody has a gun to their head."