After the iPhone, Connected Devices Emerge as AT&T's Savior

AT&T (T) is going to start selling Kindles in its stores, it said Monday, Feb. 28. Verizon sells iPads at its retail locations. T-Mobile and Sprint (S) are hawking tablets in their stores, and it is only a matter of time until operators no longer just sell cell phones but also a wider range of connected devices, as they chase what has become the savior of the wireless business: wireless data plans. In the process, your local AT&T or a Sprint store may soon look more like a Best Buy (BBY) than a phone store.

According to data released Monday by Chetan Sharma, a wireless consultant, for the first time in the U.S., the number of smartphones shipped last year exceeded the traditional computer segments (which consist of desktops, notebooks, and netbooks). He goes on to say that in the coming year the smartphone segment, along with connected devices, will not only exceed the computer segment in units shipped, but also in revenue generated. We've written about how rapidly the connected devices segment is growing and how important it is for operators as a low-revenue—but high-volume and high-margin—business.

Sharma provides a lot of data backing that up, and suggests that in order for the segment to really take off, carriers will have to offer bundled subscription plans, kind of like a family plan for devices. He also suggests new models, and the data on what has grown in the last year appear to back that up. The top growth categories are connected devices and wholesale.

AT&T Is Ahead of the Pack

AT&T is making huge strides in connected devices and has the most connected devices of any carrier. Sharma reports that "for the fifth straight quarter, AT&T reported more net-adds from connected devices than postpaid [subscriptions]. Connected devices are now almost 10 percent of AT&T's subscription base." The entire connected device segment grew 9 percent during the fourth quarter and 55 percent from the fourth quarter of 2009 through the same period in 2010 to now account for 7 percent of the base data revenue for operators.

This is good for AT&T, because it has to somehow continue its impressive growth since 2007 when it scored exclusive rights to the iPhone. Sharma shows how AT&T's net additions had been on a decline, but jumped after the iPhone was released, netting AT&T almost 6 million subscriptions in the last 13 quarters. But now that Verizon has the iPhone, AT&T might stop seeing new adds even as it manages to keep existing customers who are still locked in with contracts.

New Plans Needed

For connected device revenue to grow, operators need to adjust their pricing plans. And perhaps in doing so, they might help boost the wholesale business as services arise that bundle mobile broadband and offer it to consumers via prepaid or other plans. On the business side, services such as iPass offer such bundling, but on the consumer side, it's rare. But operators must offer multi-device plans to boost the growth of connected devices. Otherwise, people will use Wi-Fi. Sharma notes:

"However, not all sub-segments are going to be successful in the operator channel until multi-device data pricing plans are introduced. Most of the tablets and e-readers can work well with only Wi-Fi most of the time. Monthly data plans make sense for enterprise users but not for consumers who might use these devices occasionally. As such, tablets will be more successful in direct and traditional retail channels."

And lest anyone forget why connected device revenue is so important, Sharma offers a sobering statistic about data growth vs. revenue growth: While the data revenues for the year increased 23 percent, the mobile data traffic grew 132 percent. Given that many of the super-phones introduced in the second half of 2010 are using 1 GB to 1.5 GB of data per month on average, according to Sharma, and that overall the average data consumption in the U.S. at the end of 2010 was 350 MB per month, operators have to find ways to boost revenue on devices that don't consume as much data.

So along with the growth in connected devices, operators will need to introduce new plans, revamp their stores, and hope for mass adoption to drive revenue.

More Stats

The U.S. wireless data service revenues grew 23 percent between the fourth quarter of 2009 and the same period in 2010, to $14.8 billion for the quarter. Mobile data revenue for the U.S. market reached $55 billion in 2010.

For the calendar year 2010, AT&T and Verizon accounted for 69 percent of the market data services revenues and 64 percent of the subscription base.

Verizon Wireless edged past NTT DoCoMo (DCM) and AT&T went past China Mobile (CHL) to become Nos. 1 and 3, respectively, in operators by mobile data revenues in 2010. Sprint and T-Mobile maintained their No. 6 and No. 8 rankings in the top 10 mobile data operators list for 2010.

The U.S. is also leading the way in smartphone sales. In the fourth quarter of 2010, 48 percent of the devices sold in the U.S. were smartphones, compared with 25 percent globally.

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