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."
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.
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."
Thomas Gryta contributed to this article.
Write to Ryan Knutson at ryan.knutson@wsj.com
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