Cingular's strong growth in prepaid customers helped cover up a sequential slowdown in conventional subscriber gains. Thanks to reseller partners that sell Cingular wireless service to pay-as-you-go customers under brands such as Tracfone, Cingular was able to count 2.4 million net new users in the fourth quarter. Cingular is the wireless unit of AT&T ( T) and is in the process of changing its name to AT&T. But buried in that figure is Cingular's soft postpaid subscriber growth. The Atlanta-based company added about 861,000 users in the quarter, which is down sequentially for the second quarter in a row. In the third quarter, Cingular had 928,000 net new postpaid subscribers. Analysts had been looking for postpaid subscriber additions to be above 900,000. Wall Street prefers postpaid subscribers because they are more profitable and, in part due to contracts, less apt to defect to competing services. The numbers point to a significant slip in market share at Cingular. Rival Verizon Wireless, the big U.S. joint venture of Verizon ( VZ) and Vodafone ( VOD), has been adding nearly 2 million postpaid customers a quarter. Industry watchers say that unlike Verizon Wireless, Cingular has failed to take advantage of massive subscriber defections from No. 3 mobile phone service Sprint ( S). On a conference call with analysts Wednesday, Cingular CEO Stan Sigman said there has been "some slowdown in postpaid, but I expect good growth going forward."
Cingular's heavy reliance on prepaid customers to fuel growth, however, has set off alarms with analysts and investors. Prepaid service gains can boost the top line, but they bring a host of challenges. Pay-as-you-go arrangements require no contracts and typically attract credit-challenged users with less reason or ability to stay on as loyal customers. Prepaid users are seen as boosting churn, the monthly defection rate. And they don't contribute as much as contracted customers to profits and the all-important revenue-per-user, or ARPU, figure that investors use to gauge telcos. Sigman defended Cingular's prepaid business, saying the company has a good strategy with its Go Phone strategy. "The prepaid market is expanding," Sigman told analysts on the conference call. Despite the heavy influx of prepaid users, Cingular says it was able to keep its churn rate at 1.8% and increase ARPU by 1% over year-ago levels. Reading into the Cingular performance, one analyst says he's pretty sure of one thing: Verizon Wireless will report it had "huge numbers" in the fourth quarter.