United States Cellular (NYSE: USM) is a Midwestern mobile phone company with 6.1 million customers as of December 31, 2009. The majority of U.S. Cellular's shares are owned by TDS, a fixed-line phone company owned largely by the Carlson family. This chain of ownership severely limits the diversity of the shareholder pool and focuses power within a small group of individuals, making independent USM shareholders vulnerable.
U.S. Cellular provides solid mobile phone services with customer-satisfaction goals, and is known for having a very low disconnect (churn) rate of under 2% for three years running. It is, however, primarily a rural carrier and, because of its size in comparison to competitors like Verizon and AT&T, the company has been known to be slower than competitors to release industry-standard services like data transmission and VoIP. This causes the company to lose potential revenue, and forces it to spend more in order to penetrate already-established markets. U.S. Cellular's current plan to not enter new markets (domestic or otherwise) means that there will be more time and money to dig deeper into its existing markets. However, many of these existing markets (like Chicago and St. Louis) have already been penetrated by larger carriers, putting U.S. Cellular at a great disadvantage. However, a loyal customer base and dominance in relatively uncontested rural markets keeps U.S. Cellular competitive, even against the industry giants.
With 6.1 million customers in 26 states, United States Cellular is the eighth-largest cellular provider in the U.S., and a relatively small player in a highly competitive market. Based in Chicago and concentrated primarily in the Midwest, the company has the majority of its subscribers in rural areas and follows a customer-satisfaction approach to mobile phone service.
In 2009, USM earned a total of $4.21 billion in total revenues. This was a decline from its 2008 total revenues of 4.24 billion. However, despite the decrease in revenues USM was able to increase its net income. Between 2008 and 2009, USM's net income increased from $33 million in 2009 to $238 million in 2009.
United States Cellular divides its revenues into two categories.
This category refers to the mobile hardware sold by the company. In addition to mobile phones, this category also includes accessories like prepaid phones and headsets.
The bulk of the company's revenue comes from its subscription plans; customers receive a limited number of minutes and data transmission based on how much they pay a month, paying extra for using extra. U.S. Cellular offers plans with voice and data transmission, but does not appear to offer video services; the company rolled out its data services much later than its competitors and is thus behind in this market.
U.S. Cellular operates on a very strong customer-satisfaction strategy. With a number of service plans, different content and accessory options, and extensive customer-service resources, the company has created a loyal customer base with a low turnover. U.S. Cellular's churn rate has been under 2%, putting it on par with its largest competitors Verizon (1.1%) and AT&T (1.8%), and ahead of Sprint (2.7%) and T-Mobile (2.9%).
The company is not expected to expand into new markets--perhaps a good move, considering the $1 billion debt incurred in recent years. This indicates a desire to focus on maximizing subscribers in existing markets through advertising and other marketing tactics. Stopping new market entry allows the company to focus on maximizing existing revenue bases in the present while cutting expansion costs. Without new infrastructure investment, however, future subscription growth could lag, putting the company's longer-run income rates at risk. To try to compensate, U.S. Cellular has entered federal biddings for wireless spectrum, in which it will bid to the FCC against other carriers for the right to broadcast its wireless signal in areas it has not penetrated. This move signals a continued interest in long-term expansion.
About 80% of U.S. Cellular (95% of voting power) is owned by Telephone and Data Systems (TDS), a mid-sized telecommunications company controlled primarily by the Carlson family, exposing all of U.S. Cellular to relatively power-concentrated decisions. TDS's financial status also affects U.S. Cellular's, potentially impacting the company's spending, revenues, and profit distribution. While the actions of the Carlson family could damage the income of the company as well as of other investors (for example, if they were to vote to invest in dead markets), the majority ownership of TDS does provide a cushion for U.S. Cellular to lie upon: finding investment funds will probably never be an issue.
VoIP is a potential threat to all major cellular carriers. Phones gaining the ability to make free calls over WiFi connections means that consumers can save their phone minutes when in hotspots. T-Mobile, for example, recently released a phone with the ability to transition from cellular coverage to internet coverage seamlessly when the phone enters a WiFi hotspot. Users can make phone calls in a hotspot without using up minutes, making T-Mobile plans much more attractive; furthermore, T-Mobile has HotSpots in such diverse locations as Starbucks, Borders, and FedEx Kinko's. Since offering a free wireless router with its internet plan, T-Mobile has gained an aggressive first-mover advantage; it won't be long before other large carriers jump on the bandwagon. But for VoIP services to really benefit a carrier, that carrier must offer WiFi services of its own. Verizon, AT&T, and Sprint already have their own 3G broadband access plans, and so will be able to sell internet subscriptions to make up for the loss of cellular subscriptions. U.S. Cellular, however, does not have this ability.
VoIP is especially dangerous to U.S. Cellular because the company is historically late on releasing new technologies because of its limited markets and rural subscriber majority. U.S. Cellular is also owned by TDS, a company that is primarily a land-line provider. VoIP is a major threat to land-line companies because faster internet connections and the evolution of 3G triple-play technology is making it more cost-efficient for households to cut their home phone plans, pay for high-speed internet, and use VoIP services like Skype. Threats to TDS are threats to U.S. Cellular because TDS has direct control over TDS, its actions, and its financial assets.
Mobile phones used to be primarily for voice applications: phone calls, voice messaging, and so on. Now, as more powerful telecommunications infrastructure like fiber optic cabling and new 3G wireless technology allows faster, higher bandwidth transmissions, mobile phones can be used for all kinds of communications.
U.S. Cellular could have benefited from the shifting uses of mobile phones had it entered the data service market early and taken advantage of the new demand; however, the company released its data services after its larger competitors did, and so only has about 5% of company revenues stemming from data. With its larger competitors already entrenched in the market, it is unlikely that the company will get much more penetration in the high-growth, high-profit data market.
U.S. Cellular is not well positioned in comparison to its competitors. Historically, the majority of its markets were in rural communities, where most subscribers tended to favor the most inexpensive and basic plans, depriving U.S. Cellular of the more profitable added-value voice and data services. Thus, rural ARPUs ("Average Revenue Per User") are usually lower than urban ARPUs, making each rural subscriber less profitable to the company on average than each urban subscriber.
Because big telecom companies tended to stay out of smaller rural communities, U.S. Cellular was relatively insulated from competition; however, despite U.S. Cellular's rural strength, the limited infrastructure in rural areas and the company's inability to generate an economy of scale advantage combine to keep profitability down.