In their effort to promote profitable growth vs. growth at all costs, paging carriers have watched their net subscriber additions fall incrementally over the last several quarters, most notably from the second to the third.
Perhaps the most dramatic reduction of subscriber additions came from Paging Network Inc., which added 101,148 units in the second quarter, but lost 137,654 subscribers in the third.
SkyTel Communications Inc. posted 85,300 net adds in the second quarter and 80,900 in the third; Arch reported 115,000 in the second but only 80,000 in the third; and PageMart counted 100,137 in the second and 15,449 in the third.
Of the carriers reporting third-quarter financial results, only Metrocall Inc. showed an increase in incremental net adds and even that was fairly insignificant, from 107,121 in the second quarter to 108,200 in the third.
Carriers have attributed the lower additions to their strategy of raising prices, but financial analysts have noted these price increases have come mostly at the expense of the direct sales channel. While carriers seem to have no problem raising prices to direct-side customers, analysts say carriers remain influenced by the competitive nature of the indirect sales channel, resale in particular.
Chris Larsen, analyst at Prudential Securities Inc., said this is because resale customers continue to see paging airtime as a commodity, while direct customers place enough value on retaining their service and phone number that they will agree to higher prices.
While carriers continue to promise they will raise prices to resellers, Larsen and other analysts remain skeptical.
PageNet, for instance, attributed its subscriber base reduction to the cancellation of several large reseller accounts, but analysts said those were on the lowest end, and PageNet has backed off from its promise to raise rates to resellers overall.
The same could be said for other carriers. Metrocall, for instance, said it walked away from some 80,000 units in the third quarter, which came from the direct channel. At the same time, the company added 100 sales agents to its direct sales force.
In its third-quarter earnings conference, Metrocall explained these seemingly contradictory actions by saying the sales programs put in place in the third quarter are not expected to result in further net adds until the fourth quarter, when these programs are fully up and running. Metrocall said it expects to add 120,000 units in the fourth quarter.
PageMart also said its lower net adds came at the expense of the direct channel.
“We experienced additional disconnects as a result of a price increase implemented for our direct-bill customers who were below standard pricing and target profitability levels,” said John Beletic, president and chief executive officer of PageMart. However, the company has not enacted the same pricing strategy on resale accounts.
Despite the apparent change of heart in pressuring resellers, analysts have voiced positive sentiments at the changes carriers have made to date. Jeanine Oburchay, associate director at Bear Stearns & Co., said Wall Street was adamant carriers slow growth, and these falling net adds show carriers have heeded that advice.
“What we are seeing in some cases are better fundamentals,” she said, pointing to improvements in core business and a slow progress to free cash flow and profitability. “From the standpoint of financial growth, things are improving.”
In a recent Strategis Group report, churn in the paging industry has increased to an average of 4 percent, up from 3 percent in previous years. Of those stating their intention to discontinue paging service, 19 percent said they were switching to a wireless phone and 14 percent said their decision was based on paging service getting too expensive.
Regardless of the reason, carriers can sustain this slow growth model only for a limited period of time.
“They need to speed up their advanced messaging growth enough to offset slowing one-way growth,” Oburchay said.
The lack of widely commercially available advanced messaging networks could be one reason carriers have been slow to increase prices to resellers. While carriers may plan to raise those prices to meet that of the direct-side model, to do so now may slow their core additions to a non-sustainable point, considering they haven’t the advanced messaging services available to make up for it.
