Wireless TowerJust as Iain Gillott was making the final edits to an iGR report showing the shrinking numbers of wireless customers served by regional and small operators (RSOs), an announcement came out saying that AT&T planned to purchase Leap Wireless, owner of the Cricket brand.

Gillott didn’t have to change the report because the AT&T/Cricket deal isn’t final yet.  But assuming it goes through, we should expect to see even fewer RSO customers next year.

As Gillott explained in an interview, several factors are likely to fuel the continuation of that trend.  “What I think will happen is we will see more consolidation,” said Gillott.

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The drop in RSO customers between 2012 and 2013 was close to 50% – from 22.2 million to 12.5 million. It resulted from several mergers that took key RSOs such as MetroPCS out of the market. “If the AT&T/Cricket deal goes through that’s another five million subscribers – and the RSO customer base will drop to 8 million,” said Gillott.

The Handset Quandary
iGR did its census of smaller wireless operators as part of its research on the RSO handset market – and what’s going on in that market illustrates the unique challenges that RSOs face and helps explain why RSO numbers are shrinking.

The research firm looked at 48 smaller carrier websites and compiled data on which handsets the carriers offer.  Today’s smartphone market is overwhelmingly dominated by just two manufacturers – Apple and Samsung.  And although some smaller carriers offer products from those companies, they often do not have the latest models.

Because the volume of devices that RSOs need is so much smaller than that of the nation’s largest carriers manufacturers’ top priority is the big guys.  Right about the time a few small carriers started getting the iPhone 4S, Apple released the iPhone 5 to AT&T, Sprint and Verizon. Since then only a handful of small carriers have gained the iPhone 5.

Complicating matters for small carriers is the fact that major new handset releases typically are accompanied by major nationwide advertising campaigns – and those campaigns only add to RSOs’ woes, Gillott observed.

“Expectations are set on a nationwide basis,” he said.   “The problem is people watch nationwide TV.  It’s one thing [for an RSO] to say ‘Sorry, we don’t have Apple.”  It’s another thing to say ‘We have Apple but not the iPhone 5.’  That’s a bit more frustrating.”

A Potential Consolidator
Assuming the AT&T/Cricket deal goes through, the largest remaining RSO will be U.S. Cellular, which has between 4.5 million and 5 million subscribers, Gillott noted.  Behind U.S. Cellular is C Spire, with less than 1 million subscribers.  After C Spire comes a wide range of considerably smaller carriers with a total subscriber base of two million.  “There are a lot of carriers with 50,000 subscribers,” observed Gillott.

Gillott believes U.S. Cellular could play the role of RSO consolidator.  The company, he said, “could stitch together smaller guys – you could build quite a nice market, especially when you get into LTE.”

The industry shift toward LTE will be another key challenge for RSOs that could drive consolidation in that market.  Deploying LTE in a small market, Gillott said, is “really tough – it’s like building 3G all over again.”  He noted, for example, that LTE equipment vendors targeting RSOs will need to look at using virtual servers, hosting and the like to “offer LTE in a different way.”

What advice does Gillott have for smaller wireless carriers moving forward?  He believes smaller rural carriers that will survive are those with diverse business models and infrastructures, such as those that operate fiber networks and have cable businesses as well as wireless networks.  Those carriers, he said “can do pretty well [because] wireless leverages other things.”

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One thought on “Why is the Tier 2 Wireless Business Shrinking?

  1. We're just figuring out, 30 years after competition first started and 100 years after policy makers set in stone balkanized networks, that the network effect (aka metcalfe's law) is present at every layer and boundary point in terms of supply and demand across the InfoStack? Who knows, maybe soon people will actually understand the WAN-side scale that Google is bringing to its fiber projects or Glass ecosystem. Or maybe we'll soon understand that the smartphone and coming 2-way HD video conferencing trends don't give a hoot about arbitrary and artificial geographic, market segment or application verticals/silos?!? Heavens forbid if local, state and federal regulators realize that they got policy wrong all these years!

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