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U.S. Cellular Corp. gives customers good service but not the iPhone

by Arjuna Soriano
Nov 22, 2011

USM Subs

Arjuna Soriano/MEDILL

U.S. Cellular has seen a dip in subscriptions but increased smartphone penetration.

United States Cellular Corp. is a little old fashioned. The nation’s sixth largest wireless telecommunications provider will gladly swap drained batteries for fully charged ones in retail stores. It sends customers text reminders to help prevent costly overage charges. Customers can upgrade their phones in as little as 10 months and aren’t required to have a contract after the first two years. It is this attention to customer service that has earned U.S. Cellular high marks for service.

“I can always make a payment arrangement and I use the battery swap all of the time,” said South Side resident Christina Crittendon. “If you don’t pay your bill, other carriers are going to cut you off.”

In fact, its customer-centric approach earned it a 2011 J.D. Power Customer Service Champion and’s Readers’ Choice award for four of the past five years. But U.S. Cellular may not be moving fast enough to keep pace in the ultra-competitive and rapidly changing industry.

Despite providing a positive customer experience in an industry notorious for unsatisfactory service, U.S. Cellular is losing subscribers.

In the past 12 months, it has lost 171,000, or almost 3 percent of its total 5.9 million subscriptions. Meanwhile, industry leader Verizon Communications Inc. gained 6.6 million customers to bring its total to almost 107.7 million and second-place AT&T Inc. added almost 3.8 million lines for a total of 88.7 million wireless phone subscribers.

The loss in subscribers, somewhat counter-intuitively, did not translate into a decrease in revenue or net income for U.S. Cellular, a Chicago-based subsidiary of Telephone and Data Systems Inc. For the first nine months, operating revenue increased 4 percent to $3.24 billion, while net income attributable to U.S. Cellular shareholders leaped 34 percent to $172.2 million, or $2.02 per diluted share, compared with the year-ago period.

The revenue increase is largely due to customers from competing carriers making calls on U.S. Cellular’s network. This has translated into an almost $35 million increase in roaming payments significantly adding to the company’s bottom line.

U.S. Cellular’s bottom line also has benefited from higher per-user monthly fees associated with smartphones. Last quarter smartphones made up 40 percent of all handsets sold by U.S. Cellular, bringing the total number of smartphones on the network to 26 percent. This number trails far behind the rest of the market. According to comScore Inc.’s latest numbers, smartphones accounted for 37.4 percent of all cellphone service in the U.S.

“We think USM will continue to be successful upgrading existing subscribers to higher [average revenue per user] smartphones,” said Raymond James analyst Richard Prentiss in a note to investors.

U.S. Cellular is so confident in its ability to convert users to smartphones that it is the first wireless provider to have publicly turned down the opportunity to sell Apple Inc.’s newest offering, the iPhone 4S.

“While we have the opportunity to add the iPhone to our device lineup, the terms were unacceptable from a risk and profitability standpoint,” said President and CEO Mary Dillon in a call to investors. She was not blind to the effects of the iPhone on the market, though. “The launch of the new iPhone will keep competition for new customers as intense as ever,” she said.

Company representatives declined to expand on this but they are likely referring to the high wholesale price carriers must pay to Apple for the phones. Consumers pay $199 for an iPhone with a two-year contract but the carrier must pay Apple around $600 per unit.

This translates to a $400 premium that would eventually be made up in monthly fees but the upfront cost for offering the phones is daunting.

The iPhone is now available on U.S. Cellular’s three largest competitors: AT&T Inc., Verizon Communications Inc. and Sprint Nextel Corp., which is betting that the expensive deal with Apple would stem its subscription losses and turn the company around. The deal is so expensive that Sprint officials estimate the iPhone will not be profitable for the company until 2015. The latest and smallest carrier to offer the iPhone is regional carrier C Spire.

C Spire has the highest smartphone penetration rate of all carriers at 51 percent. The company provides consumers with one of the largest selections when it comes to smartphones and management is enthusiastic about adding the iPhone to its stable.

“I think the iPhone’s reputation for quality that made it so wildly popular speaks for itself,” said media relations manager Dave Miller.

C Spire broke all records for a single device sold in a day when it began selling the iPhone earlier this month translating into a large payment to Apple.

U.S. Cellular’s management remains happy with its current line up of hardware and expects to finish 2011 strong. ““Our cutting-edge device lineup, quality high-speed network and the value of our offerings makes our customers the happiest in wireless,” said U.S. Cellular’s Dave Kimbell, vice president of marketing. Customers are so happy that management raised its guidance for 2011 earnings by $20 million to a range of $820 million to $894 million from the previous $820 million to $875 million.

That optimism does not guarantee success over the long-term though. There are a few trends that could mean trouble for U.S. Cellular in the coming years.

In addition to losing subscribers, the company is facing a decrease in revenue from the Universal Service Fund. The money from this fee on cell phone bills goes to wireless carriers, including U.S. Cellular, that provide service to rural and under-served communities. It is not a trivial amount either. The company currently receives $160 million per year. That fund is set to be reduced by 20 percent per year beginning in 2012.

“We believe USF is very high-margin revenue for U.S. Cellular and any cuts will likely have a noticeable impact on (already low for the industry) margins at USM,” notes Prentiss.

The industry also may be in for major changes. The first satellite 4G provider, Lightsquared, plans on providing wholesale high-speed service to retail carriers beginning in 2012. This could turn the industry on its head by lowering infrastructure costs and giving regional providers and new players an avenue to provide national service. C Spire and Best Buy are two of the companies that have already signed deals with Lightsquared.

So far U.S. Cellular’s share price has not been hurt by these issues and the market has reacted well to the company’s third-quarter performance. The shares have risen nearly 5 percent to around $43 since the announcement earlier this month. But they are still trading below their 52-week high of $52.41. That is way down from their five-year high of $101.45 in July 2007.

The price/earnings ratio for U.S. Cellular shares is currently about 21, higher than the S&P 500 index, which is trading around 14.23. That means investors are optimistic and willing to pay a premium for the company’s stock.

U.S. Cellular currently has a market capitalization of $3.52 billion, about half the size of Sprint’s $7.79 billion, but far less than Verizon’s more than $102 billion and AT&T’s $168 billion.

The coming year will bring changes to U.S. Cellular. It plans to roll out its new 4G network and with it, increased smartphone conversions. But one thing won’t change, executives promise: U.S. Cellular will still be the nice guy on the wireless block.