Sprint CEO: Wireless operators need to focus on profitability

Consumers watch your wallets. As it gets harder for wireless operators to add new subscribers to their lucrative contract plans, their focus is turning toward getting individual subscribers to spend more each month.

The wireless market is changing, which means mobile operators will no longer be able to rely on adding new high-value contract subscribers to boost their bottom lines. Instead, these companies will need to focus on retaining the customers they have, while encouraging individual subscribers to spend more, Sprint CEO Dan Hesse said Wednesday during the company's first-quarter conference call.

Sprint saw big losses in its contract customer base again in the first quarter. Part of the decline was due to the fact that the company is migrating old Nextel customers off that network and putting them onto Sprint's network. But part of it has to do with fundamental changes in the wireless market.

"The wireless industry is still a good business to be in," Hesse said. "But it will evolve. When it comes to postpaid, we have to focus more on profitability. Because even though growth in our customer base may not increase in this segment, the profitability can still increase."

He said the way to do this is to push individual subscribers to consume more services either on their existing devices or by adding new devices to their data plans. This might include adding tablet services or additional family members with smartphones or other data devices to the Sprint contract services.

He also emphasized the importance of retaining these high-value customers.

"As churn (the rate at which customers cancel service) and ARPU (average revenue per user) improve, the lifetime value of each customer can improve because wireless is more and more important," Hesse said. "We are still bullish on the potential of the industry, although the economic model will change. And postpaid phone service will not be as dominant in terms of what drives success in the market."

In addition, he acknowledged the importance of slowing the upgrade cycle for customers with contracts. Sprint previously changed its policy so that subscribers can only upgrade after 20 months of service. Verizon Wireless announced earlier when it reported first-quarter earnings that it plans to extend its upgrades to every 24 months.

Still, Hesse admitted that consumers don't want to upgrade devices any less frequently. But if carriers expect to grow revenue and focus on profitability, they must keep the upgrade cycle under control. The reason why is simple. Most customers on contract plans buy subsidized devices as part of their plans, typically paying $200 or less for devices that can cost as much as $900 at full retail price. Hesse said a rapid upgrade cycle is simply unsustainable.

"The cost of the subsidies keeps going up," Hesse said. "And we just can't afford to allow people to upgrade as often. But we're not seeing any evidence that customers are interested in upgrading less often. In fact, the opposite might be true, which means the policies we have in place are quite important for the industry."

It looks like other wireless operators are already moving in this direction and focusing on ways to get existing customers to spend more. For instance, AT&T has been extremely focused on getting more of its customers to move away from unlimited data plans and into usage-based plans. The company also is focused on getting people to sign up for its data share plans that allows people to connect multiple devices and thus increase their data usage.

AT&T executives said during the company's first-quarter conference call on Tuesday that the company has seen some success here, with about 70 percent of its customer base now on usage-based plans. And executives said that 10 million of its subscribers are now signed up to a data share plan with a good proportion of those customers signing up for the higher 10GB plan.

Shift toward prepaid

The contract-based customers have long been where wireless operators have made most of their money. These customers have often been considered very valuable. They tend to spend more on services, and they don't leave as readily as a customer on a prepaid service plan that does not have a contract.

But over the past couple of years, the prepaid market has grown tremendously. Once a service targeted for consumers with bad credit, who were ineligible for contract plans, prepaid is now attracting customers who had been postpaid or contract customers. In fact, growth in prepaid customers has been outpacing growth in the traditional contract plans since 2010. And in 2012 for the first time ever, wireless operators saw their first ever net decline in contract customers. Meanwhile, prepaid customers continued to grow, accounting for roughly 25 percent of all mobile users.

Hesse acknowledged that for many customers looking for a good value, prepaid has become an acceptable alternative to the traditional carrier contract. One major reason for this, he explained, is the fact that more prepaid providers are offering top-tier devices such as the iPhone. This all leads to a stronger and more robust prepaid offer that competes with the traditional contract plans.

He said that this is the reason why Sprint has "doubled down" on prepaid by acquiring prepaid brands such as Virgin Mobile and also offering a new Sprint-branded prepaid service called Sprint As You Go. Sprint also hopes to benefit from this trend by having a strong wholesale business that sells network capacity ad service to third parties, which then resell the service as prepaid offerings to customers under their own brands.

"This is why we believe in having a balanced portfolio," Hesse said. "It's why we have invested in prepaid brands and our wholesale business. And it's why it's important to focus on profitability for postpaid."

T-Mobile USA, which has been shedding contract-based customers for several quarters, seems to get Hesse's point. The company recently launched its no-contract, no-device subsidy plan earlier this month to attract customers who don't want to be locked into a contract and are looking for good value. While no other major wireless operator has announced it will follow T-Mobile's lead, the industry is likely watching closely how consumers respond to these new service plans.

In the end, it's all about getting existing consumers to spend more, whether that's adding more devices to the network or simply consuming more services.

"We are still very bullish on the potential of the industry," Hesse said. "But the economic model will change. And postpaid won't be as dominant in terms of what drives success in the market."