US Mobile Market Update – Q3 2016

 

 

 

Highlights of the US Mobile Market Q3 2016

• After four straight quarters of service revenue declines, Q3 2016 saw an increase in service revenues. The increase was primarily due to T-Mobile. Overall revenue also increased.
• Net income increased by 6% with Sprint and T-Mobile making good gains. Verizon’s net income declined.
• In the last four quarters, T-Mobile has accounted for a whopping 81% of the phone net-adds.
• After seeing the decline for last couple of quarters, the device revenue jumped 7% QoQ helped by the iPhone launch.
• The overall industry upgrade cycle is over 2.5 years now.
• Verizon and China Mobile are slated to become the first operators in the world to generate $50B in mobile data revenues in a calendar year.
• AT&T is dominating the IoT Revenues and with Verizon, the duo is pretty much cleaning up the IoT revenue stream in the operator segment in the US.
• AT&T’s connected car reached the 10M milestone in Q3 2016, the first operator to do so. AT&T reached this milestone in less than 12 quarters compared to 25 quarters it took for the tablets.
• Industry EBITDA and Net Income saw 6% gains indicating operators are running a much tighter ship than before.
• For the year, non-phone net-adds are at 71% share with Cars and IoT dominating.
• Churn is at historic lows. Despite all the commotion in the market, fewer customers are churning each quarter.
• US is well positioned to cross 400M in subscriptions in 2016. As of Q3 2016, the subscription tally stood at roughly 395M.
• The first 100 million connections in the US took 18 years. The last 100 million just 6 years.
• The mobile data consumption continues to rise. US is third behind Finland and Korea in terms of GB consumed per sub/month and first amongst nations with more 60M population.
• The average data consumption in the US will touch 5GB/mo by the end of 2016. The first 1GB took roughly 210 months. The last one just 4 months.
• Apple captured 79% of the profits in the device ecosystem in Q3 2016. All the gains made by the Android ecosystem in the last quarter were lost primarily due to the steep drop in Samsung’s fortunes.
• We are likely to see a first time decline in both revenue and profits in the handset space in 2016.
• Verizon’s IoT+Telematics rose 25% YoY to $217M inching towards a $1B/yr run rate.
• Apple’s service revenue is now consistently greater than iPad and Mac revenue streams making it the number two revenue stream behind the gargantuan iPhone bucket.
• AT&T and Verizon on average made $17 per sub/mo while T-Mobile and Sprint improved their numbers to $2.7/sub/mo.
• Sprint’s capex continued to decline with a 73 % YoY drop. Industry capex declined 17% YoY.

EPIC week for the industry

There is never a dull moment in our industry but last week was EPIC. It will take many weeks to truly understand the long-term implications. Consider this:

· AT&T made its biggest blockbuster deal yet with the acquisition of Time Warner for $85B.

· Qualcomm made a bid for NXP for $39B.

· CenturyLink acquired Level3 for $25B.

· Google’s Fiber plans hit a snag.

· FCC passed tough privacy regulations limiting ISPs ability to monetize data.

· AT&T launched DirectTV Now.

· Verizon and one other major player might not be participating in the broadcast incentive auction.

· Microsoft upstaged Apple in the computing wars for the first time in a generation.

· T-Mobile continued its run in cleaning up the postpaid table.

· AT&T reached the 10M connected car milestone in Q3.

The rise of the Super Operators

To our regular readers, AT&T-Time Warner deal wasn’t a surprise. In fact, it was expected.

In our 2012 paper, “Operator’s Dilemma: The 4^th Wave,” we argued that to stay relevant in the next phase of industry evolution, mobile operators need to focus on becoming digital lifestyle solution providers else their role will be relegated to access providers. While we are still early in the cycle, in the US, AT&T and Verizon are making investments to diversify their revenue streams. AT&T in particular has done a better job across multiple streams – content, home, IoT, health, transportation, retail, security, and other verticals. Some of the progress is visible in the financials and for others, one must dig deeper.

One of the hypothesis of the 4^th wave thesis was that given the investments required to be a Digital Lifestyle Solution Provider (DLSPs), there will be a few operators morphing into Super Operators who get into multiple lines of businesses. Content and video play is close to the core operator strenghts and as such is a natural category for big acquisitions. The fusing of the access and content layer is not by accident. As such, in each major geography, we are likely to see the rise of Super Operators who manage access, platform, and applications across multiple dimensions.

Cable players have been reluctant participants in the mobile ecosystem but given the pressure on their core content business, wireless is their best bet to ensure the next decade of growth and sustainability. Comcast is expected to launch its MVNO next year. How far will it go remains to be seen? Over the long-haul, cable service providers will have to become solution providers too and have a more active play in the wireless world.

Implications of the AT&T-TW merger

Content has always been the salesperson to sell access. Binge-On, Go90 are all but a strategy to sell access. If it works, Advertising is just a side-benefit. As margins on the core telco business decline, operators must diversify to retain customers and improve life time value. Consumers still pay for content they like. Good content creates good revenue streams. Acquisition of content helps AT&T with diversification of its revenue streams, reduce churn, and extend its runway. Enough ink has been spilt on the probability of the deal going through. If the deal goes through, obviously, AT&T gains but if it doesn’t go through, it might still end up benefitting them. If regulators reject the vertical integration argument, then, in the future, they are likely to reject similar transactions e.g. Comcast/T-Mobile or Sprint.

4^th Wave Index

5 years ago, we put forth the theory of 4^th wave to explain the upcoming changes in the mobile ecosystem. For the most part, the industry changes and tribulations have tracked the 4^th wave curves. Last year, voice revenues declined by 23%, messaging revenues by 18%, while data revenues grew by 23%. 4^th wave revenues which now dominate the ecosystem now grew by a 60% YoY.

The 4th Wave thesis captures the underlying shifts in industry dynamics that the value is shifting dramatically from access to applications. The quality of networks, the power of devices, the sophistication of applications and services have upended the industry landscape. The competitive dynamics are changing right in front of our eyes, predictably, but dramatically. Consider the fact that Uber is valued more than T-Mobile and Sprint combined, Facebook is valued more than AT&T or Verizon, and Google is valued more than all the US wireless operators combined. The success of the 4th Wave economy is not limited to a handful of Internet players from the US but rather it is a global phenomenon and it is happening across all industry verticals.

So, how does one value an operator vs. an app, a leading device manufacturer vs. a new wearable entrant. If you had a dollar to invest, where would you invest? Infrastructure, devices, platforms, or in services? It was clear that the industry needs a better way to benchmark progress of various companies as well as understand the competitive dynamics. It is also useful to understand the positioning of these companies in a very complex ecosystem. We need to assess a corporation’s strengths across multiple key dimensions in various sub categories and understand how these companies are prepared to compete in the 4th Wave economy.

Our 4th Wave Index offered first view on how a complex ecosystem can be studied. We took a look 29 key variables across four key dimensions: Infrastructure, Devices, Platforms, and Services and calculates the 4th Wave index. It is a useful benchmarking exercise to see if companies are slipping competitively or are making progress. Additionally, the model provides a view into what it will take these players to move from aspirants to challengers to leaders. (I will be giving a keynote covering some of these topics at the Wireless Global Congress later this month).

Journey to 5GB/mo consumption

From the first inklings of data usage in the US market back in mid-nineties (remember CDPD, Mobitex, DataTac, etc.?), it took US consumers roughly 210 months to reach the threshold of 1GB/mo consumption. The last GB increase from 4GB/mo to 5GB/mo will take just 4 months.

Future of WiFi

It is well understood that WiFi plays a critical role in moving bits around. But it has been more due to the economics of the solution than the performance of WiFi as a technology. If one replaces WiFi with LTE at the same cost to the ecosystem, what would you choose? Well, the costs are coming down and LTE small cells and base stations could start to match WiFi access points in pricing at least in the enterprise. It could get real interesting real fast.

Microsoft getting its mojo back?

Microsoft’s cloud business is firing on all cylinders. However, the announcement that caught everyone’s attention was that of Surface Studio – a beautiful machine with a new design is an excellent attempt at reinventing a machine long thought to be past its prime. This was especially interesting as it contrasted with Apple’s long-awaited announcement of the MacBook line of computers. Consensus was that Microsoft stole the show. Perhaps, it will encourage them to release the secret Surface phone next year which will be less impactful due to the lack of a viable app ecosystem. Microsoft is also performing well on other fronts. It continues to be a formidable competitor to AWS and it is getting its stride back when it comes to experimenting and releasing new products, apps and services – both built on its existing platforms as well as new areas such as VR, MI, etc. Satya’s leadership has enabled Microsoft to discover its lost mojo.

OEM drama

We pointed last year that Chinese OEMs are dominating the device ecosystem in terms of unit shipments. The lack of a blockbuster new design from Apple and Samsung’s bungling of the Note recall widened the opportunity window for the Chinese OEMs. The fact that Samsung Note 7 is considered a hazard on flights similar to bombs has done tremendous brand damage and should be a case study for future products. Thankfully for consumers, there are viable Android substitutes available. Pixel from Google and Le S3 (better value) from the new entrant LeEco are both worthy replacements. LeEco’s content play is quite interesting but they will have to spend a lot on creating an acceptable brand in the US.

5G Economics

5G is gaining steam. All the major players have outline their preliminary plans to do trials on 5G with Verizon being the most aggressive in its intent. FCC become the first major regulator to set aside spectrum for 5G. There has been a lot of discussion on 5G from the technology point of view but not much from an economics point of view. We have taken a deeper look at the economics questions that the industry ought to be asking. The 5G Economics paper discusses the cost structures, ROI, and the TCOs that will make it worthwhile for the operators to deploy 5G profitably (I will be giving a talk on 5G Economics at the IEEE 5G Summit this weekend). 5G is going to be a different ecosystem than the first four generations and the current cost model of building out networks might not be sustainable given the demand.

US is likely to be the key driving force in setting the standards and pushing the trials to deployments even though there is no Olympics as a motivator. But competition sure is. We see US, Korea, and Japan shaping the global standards and deployment process with Europe playing a wait-and-see game.

IoT Revenue Streams and what it means for the ecosystem

Service provider IoT revenue passed the important $1B mark back in 2013. So far it is tracking the growth of the early days of mobile data. However, they are different curves influenced by different factors. Mobile data was relatively an easier curve to climb as the revenues went up with more data handsets coming online. The sales, business case, and ROI was straight forward. IoT is a bit more complicated as it is across multiple vertical areas and it is not just about the data network, it is about the complete solution. The sales cycle and execution strategy is different and requires patience and resilience.

Spectrum Auction

FCC’s incentive auction began earlier this year is showing signs of sputtering through the process. There isn’t that much reserve laying around to bid for the spectrum so we are likely to see more rounds of speculation and intrigue. No non-traditional player made it to the second round. Some major players are sitting out as well. This could be a long drawn out process with suboptimal outcome which is not surprising.

The shifts in Net-adds

In 2014, 61% of the accounts added were phones. Cars accounted for 12% and IoT 18%. Tablets were at 9%. In 2015, due to heavy promotions by the operators, tablets share rose to 35% while phones dropped to 33%. Cars and IoT combined to gain 32% of the net-add share. For the first 9 months of 2016, Cars and IoT combined for a 55% share of net-adds while phone share dropped to 29%. Absent promotions, tablets dropped to 16%. So, non-phone category went from 39% in 2014 to 71% in 2016 so far. Overall net-adds have stayed flat and just going through the normal gyrations. Overall, phones still dominate and that’s what generates the bulk of the industry revenue but IoT is starting to inch up in material impact.

Regulations for the new age

Some of the regulations in the communications space are over a 100-year-old. Communications itself has drastically changed though the principle of transferring the bits from point A to B remains the same. T-Mobile reported that 60%+ of its voice calls are on VoLTE. IP messaging is many times the SMS global volume. Gradually, almost all voice and messaging will be on the IP layer – voice and messaging will just become apps on the data layer. So pretending and regulating these services as if it were 2000 doesn’t help. An ideal strategy for consideration should be that the IP layer gets regulated for fair pricing, competition, and consumer good while everything on the top of the IP layer gets regulated on a “same service, same rules” principle.

The interconnection between apps to deliver services like connection to PSTN, E911, etc. can be addressed by fair market pricing principles. VR is going to become the next communication platform; IP messaging the next application development and commerce platform. To keep the regulatory regime simple and in with the times, by focusing on the access layer, one can guarantee that whatever takes place on the top has the opportunity to grow as the market desires. Similarly, data rules across all apps and services on top of the IP layer should be the same irrespective of the provider. This market shift is required to make the market more competitive and fair. Maybe it is time to consider creating Federal Digital Commission (FDC) that has a broader perspective on competition and is prepared for the digital age.

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Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds, future research reports, articles. The next US Wireless Data Market update will be released in Feb 2017.

Disclaimer: Some of the companies mentioned in this update are our clients.