As phone growth slows, carriers turn to tablets

By Ryan Knutson

Phone companies have a new best friend: The tablet.


Wireless companies have been jockeying for new subscribers in a market where there are more active cellphone plans than there are people, a predicament that led to slowing growth and increased competition.

Carriers have found the answer in tablets, which represent one of the few places where the industry can wring out a new source of revenue after the companies have nearly tapped out smartphone upgrades. The companies are offering aggressive promotions to get customers to sign up.

But the new tablet connections aren't as attractive as smartphones for two reasons: they don't generate as much revenue as smartphones and they aren't bringing in new customers. Rather, the majority of tablet sales are upgrades to existing customer plans.

The lifetime value of a tablet customer to a wireless carrier is $761, about one-third of that of a handset customer, according to New Street Research.

Subscriber figures "no longer have the same meaning as they used to," said Paul de Sa, a senior analyst at Bernstein Research, in a research note this week. "They now represent success in up-selling tablets to the base, rather than reflecting shifts in subscriber market share between carriers."
View gallery
Tapping the Tablet
WSJ

Verizon Communications Inc. is giving away some tablets free. The devices led the company to add 1.4 million of the most lucrative postpaid customers in the second quarter, the vast majority of which—or a record 1.15 million—were for new tablets. During the first quarter, tablet sales at Verizon offset a decline in handset connections.

"Tablets are extremely good for the industry, not just for Verizon," said Verizon Chief Financial Officer Fran Shammo on Tuesday.

More than 85% of AT&T Inc.'s postpaid customer additions during the past four quarters have come from tablets, and Sprint Corp. has recently relied on tablet sales to offset significant subscriber losses. And last year, T-Mobile US Inc. began giving away a chunk of free data to lure tablet customers.

The boom in tablets is fueled in part by a proliferation of cheaper and smaller alternatives to Apple Inc.'s iPad. When the iPad launched in 2010, it was the first of its kind but these days consumers have a wide range of choices from companies like Samsung Electronics Co., Amazon.com Inc. and Google Inc.

Overall, in the first three months of the year, tablets made up roughly 70% of net retail subscriber additions, according to New Street Research, a trend that is likely to continue as carriers search for new ways to grow. AT&T reports second-quarter earnings on Wednesday. T-Mobile and Sprint report next week.
Amazon Fire Phone: Game-Changer or Gimmick? Play Video
Amazon Fire Phone: Game-Changer or Gimmick?

Mr. Shammo defended the economics. Tablets represent only about 5% of Verizon's total postpaid connections. Customers who have them are more likely to pay for a larger data bucket and are less likely to switch carriers, he said. At the same time, the company spends less subsidizing the cost of the device.

"We have a great opportunity with these devices to generate growth," Mr. Shammo said.

But most consumers don't buy data plans with their tablets and rely on Wi-Fi networks instead. More than 70% of all tablets shipped globally in 2013 were Wi-Fi only, according to research firm IDC, which expects there to be some growth in tablets sold with cellular connections. "Wi-Fi will still be the de facto connect method for the majority of tablets," said Carrie MacGillivray of IDC.

Tablets made up 8.7% of device connections in the U.S. last year, according to Cisco Systems Inc., a figure expected to climb to 13.9% by 2018. On average, a tablet generates 70 times more mobile data traffic a month than a basic handset while a smartphone generates 42 times more, according to Cisco.

Robert Orth, of Omaha, Neb., is exactly the type of customer wireless carriers are looking for.

On Monday, Mr. Orth went to a local Verizon store looking to replace his broken smartphone with a new one. A sales representative convinced him to get a Verizon Ellipsis 7 tablet free of charge and switch his plan from one with unlimited data to a pricier plan that has a 10-gigabyte limit shared among all his devices. His new monthly bill will be $150 a month, up from $120.

"When I walked in originally, I had one device that would use up data and I walked out with three," said the 52-year-old utility worker, who also got a mobile hot spot and a Samsung Galaxy S5 smartphone.

Mr. Orth has only had his tablet for a day, but says he expects he'll eventually upgrade to a better one. "I like it," he said. "So they're probably going to get a lot more money out of me."