US Mobile Data Market Update Q1 2012

http://www.chetansharma.com/USmarketupdateQ12012.htm

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Summary

The US mobile data market grew 6% Q/Q and 21% Y/Y to reach $18.7B in Q1 2012. Data is now over 40% of the US mobile industry service revenue. For the year 2012, we are forecasting that mobile data revenues in the US market will reach $80 billion.

For the first time in the history of the industry, the US operators had a net decline in postpaid subs. The top 7 operators lost a combined 52K postpaid subs. In overall net-adds, Sprint bested both of its bigger rivals for the first time since Q1 2002. That was exactly a decade ago when Cingular and Nextel brands were still around, before Google IPO and before Zuckerberg enrolled into Harvard. In fact, Sprint is the only US operator that has added more than 1 million subs every quarter since Q4 2010. However, most of these net-adds are coming from prepaid and wholesale segments. If we look at the net-adds over the last 4 quarters, AT&T comes out on top by a distance. In terms of postpaid net-adds only, Verizon is the clear leader during the same time period.

In terms of Y/Y growth, Connected Devices segment grew 23%, Prepaid 15%, Wholesale 10%, and Postpaid 1%. AT&T, Sprint, Sprint, and Verizon are number one respectively in these categories.

One-third of US consumers don’t use landline phones. The wireless only US population went past 100M subs in Q1 2012. Mobile will continue to increase its share of the household IT budget and thus improving the overall revenue picture. However, there will be fierce battle for the prized postpaid subs that have been slowly migrating to prepaid as a result of the economic doldrums. It is quite possible, they will come back but predicting the reverse migration is tough.

Q1 2012 will also be remembered for Samsung’s ascend to the top of the hill ending Nokia’s 14 year run. In terms of unit sales, it dominates the overall unit shipments and also the more lucrative smartphone segment. However, Apple dominates both the device revenues and more importantly just crushes the competition on device profits. It has only 8% of the global unit shipment share but over 70% profit share.

Apple has the complete stronghold on the supply chain and has sucked out the oxygen from the OEM world. Samsung for its part has done a credible job at keeping pace and in being competitive. As expected, the Chinese OEMs – ZTE and Huawei (and some new ones that you will hear about in the next few quarters) are coming on strong from the bottom. This means, the players caught in the middle face perilous times.

AT&T edged past NTT DoCoMo to become number two in global mobile data revenues rankings for the first time. Now top positions in the global rankings are occupied by the US operators.

Smartphone sales continued at a brisk pace accounting for almost 70% of the devices sold in Q1 2012.

Operator and OTT – The way forward

We are at a critical juncture of the industry evolution. The OTT phenomenon is shifting the tectonic plates at a rapid pace. What seemed like a minor irritant only a few quarters back is become a nuisance virus that is eating away the core. Some operators have gone into panic mode while others have stepped back, assessed the situation, embraced it, and will try to exploit the opportunity. The truth of the matter is that the two biggest apps – voice and messaging didn’t really evolve a period of two decades. When the last big invention was interoperability and that too a decade ago, you know things are ripe for disruption. Thanks to the availability of always-on IP networks, new and nimble players are pushing the boundaries of what’s possible. It is not that some of these concepts haven’t been around for a while. RCS has been around for the last 5 years and this year there has been some tangible progress. However, while the world waits for interop and wide availability, startups can offer similar and in most cases, better services now. They can iterate rapidly and reach scale at much faster pace. We are in software-defined world after all. Smarter operators are launching their own OTT services while nodding at the standards implementations.

It is such a critical topic for the industry that we are devoting two Mobile Breakfast Series events to this topic. The first in Seattle on June 7^th with AT&T, T-Mobile, Groupon, Ivycorp, and Sidecar and the second in London on June 29^th with Telefonica, Orange, Rebtel, and Horizons Ventures. We will also be delving deep into the subject at our annual mobile brainstorming summit – Mobile Future Forward on Sept 10^th in Seattle.

Mobile First to Mobile Only

Couple of years, the realization in the industry set in that mobile is going to really dominate the world. Senior executives like Eric Schmidt at Google started to preach the gospel. Very quickly, we are at another pivot point wherein the mobile first doctrine is going to move to mobile only. It is not that the desktop world will disappear into oblivion. Far from it. But, the investments, strategy, and execution will be driven by mobile. As we said in our global research update last month, in 3-5 years, with few exceptions, if a company is not doing majority of its digital business on mobile, it is going to be irrelevant. There are already several data points to support the theory. Leading apps and services like Facebook, Twitter, Pandora are already operating in the world where mobile is driving majority of their user engagement. Expedia, Fandango and others are seeing the early signs of migration into the mobile dominated world.

Postpaid Doldrums

For the first time in the history of the industry, the US operators had a net decline in postpaid subs. This is because of the shift to prepaid in recent times as well as the increased competition for the last few potential postpaid subs. So, the question emerges, where will the net-sub and net-revenue growth going to come from in the next few years. The smartphone penetration in the US was at 43% as of Q1 2012 so the significant opportunities are in the upgrades and non-data to data conversion. Family data plans (see below) will help in bolstering data revenues as well. Multiple devices/consumer will increase the sub penetration which is at 110%.

Family data plans

We have been big advocates of family data plans for the last 2 years and they are finally coming to the US market in the next few months if not weeks. Like gravity, it’s inevitable. Consumers want simplicity and common sense. Family data plans doesn’t necessarily mean that all family members will be forced onto a single data plan but rather the consumers given the opportunity to combine data usage under the same umbrella if they wanted to. If all in the family are heavy data users, initially, some of the data tiers might not make sense but for the vast majority, there are always going to be devices or family members who don’t need a separate full-fledged data usage plan.

When I talked to CNBC earlier this year (Jan), I said that there is a 90%+ probability that the family data plans will be introduced in the US market in 2012. I discussed this more with Bloomberg and USA Today last week. Verizon and AT&T have been preparing the media and the consumers for this eventuality. Once one operator opens the door, expect rest to follow. Our Atlanta Mobile Breakfast Series will touch upon this topic during the discussion on Connected Devices, the Cloud, and the Consumer (with AT&T, Synchronoss, and CNN).

Mobile Data Growth – The Gigabyte Generation

The smartphone data consumption at some operators in the US is averaging close to 800 MB/mo. As we move into the 1GB range along with the family data plans getting introduced shortly, you can expect the data tiers to get bigger both in GBs and $. Mobile data traffic growth continued unabated doubling again for the 8th straight year. We expect the mobile consumption to double again in 2012. Data now constitutes over 85% of the mobile traffic in the US. As new devices and new network technology roll-outs continued in 2012, the data traffic will grow at the expected pace. The signaling traffic is growing at even a faster pace, 3 times in some cases. Stay tuned for our research paper in the Yottabyte paper series on the topic later this year.

Platform wars

Now that Google’s Motorola deal is approved in China and Facebook’s stellar IPO is behind us, we are going to witness a contentious platform battle between the fab five. Google is preparing to get deeper into handset business while Amazon and Facebook are tinkering with their own handsets. Microsoft is banking on the Lumia success and the release of Windows 8 and its impact on the ecosystem will be closely monitored. Samsung is putting some resources behind Tizen to hedge its bets in case things go south with its current partnerships. The platform narrative is still being defined by Apple which has the commanding mindshare of the developers, operators, and the profits. Follow the money and the puzzle unravels in front of your eyes.

Mobile Patents Landscape

2011 was the most active year for mobile patents in terms of disputes. All the major players were active in filing and protecting their turf for the future battles. IBM topped the industry in the most number of mobile patents granted in 2011 in the US followed by Samsung and Microsoft. The rest of the top 10 in order included Sony, Qualcomm, LG, Ericsson, Panasonic, Broadcom and RIM. Of the major players, Nokia occupied #12, Intel #13, Apple #16, Motorola #21, and Google #23 spot in the top 50 ranking. Amongst the mobile operators, Sprint was the leader with 323 patents granted in 2011. We have more research coming out later in the year that shows the relative patent strength of the various mobile players.

Market Consolidation

The AT&T-T-Mobile merger might not have gone through but that doesn’t stop industry to play the M&A speculation parlor game. Except for a few impossible scenarios, all sorts of deals are being contemplated. The market economics is clearly crying out for more consolidations. However, in an election year, there is an uneasy uncertainty that is gripping the market. The smaller M&As won’t move the needle and bigger M&A are not going to be on the table until we get into a new calendar year.

Connected Universe, Monetizing Opportunities

While 2011 was the year of figuring what the opportunities are in the new connected era, 2012 is starting to focus on how to monetize those opportunities. That will be the theme of our Mobile Future Forward Thought-leadership summit in Sept. More details to come. Almost all the vertical industries are benefiting from the connected devices and ubiquity of broadband networks – security, health, retail, utility, transportation, entertainment, and others. We will take a deep dive into the issues, the best case studies, the opportunities, and the players. We are assembling industries who’s who to help you figure out where the industry is headed next.

What to expect in the coming months?

All this has setup an absolutely fascinating 2012 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems.

As usual, we will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q1 2012 US wireless data market is:

Service Revenues

• The US Wireless data service revenues grew 6% Q/Q and 21% Y/Y to $18.7B in Q1 2012. For the year 2012, we are forecasting that mobile data revenues in the US market will reach $80 billion.
• Verizon and AT&T dominated the quarter accounting for 68% of the mobile data services revenue and had 66% of the subscription base.
• Verizon maintained its #1 ranking in Q1 2012. AT&T also got ahead of NTT DoCoMo to occupy the number two spot in global mobile data revenues ranking. Sprint and T-Mobile maintained their #5 and #9 rank in the top 10 mobile data operators list for Q1 2012.

ARPU

• The Overall ARPU increased by $0.54. Average voice ARPU declined by $0.41 while the average data ARPU grew by $0.96 or 5% Q/Q.
• The average industry percentage contribution of data to overall ARPU exceeded the 40% mark in Q1 2012 and is likely to exceed the 50% mark next year. All the top three US operators are above the 40% mark with Verizon leading the trio. (For reference, all three major Japanese operators are now at the 60% mark, with Softbank at 65%).

Subscribers

• For the first time in the history of the US mobile industry, the postpaid net-adds were negative. While one data point doesn’t make a trend, we are approaching the peak of the curve where new traditional postpaid subscribers will be hard to find. It is possible that the newly minted prepaid subs might return to postpaid subscriptions. The shift is correlated to the economic woes. Majority of the new subscribers will come from connected devices as we have been saying for the last couple of years.
• In the last 11 quarters, T-Mobile has been able to add postpaid subscribers in only one quarter which was back in Q2 2010.
• At the end of Q1 2012, the mobile penetration in the US stood at approximately 110%.
• Sprint had the most net-adds at just over 1 million though most of them were in the prepaid and wholesale category. T-Mobile recovered from massive defections last quarter to add 187K new subs in Q1 2012.
• For the tenth straight quarter, AT&T reported more net-adds from connected devices than postpaid subs.
• AT&T now accounts for 48% of connected devices in the US (w/ cellular subscription of some sort).
• Rebounding from the failed AT&T merger, Deutsche Telekom announced its investment in the US arm and laid out some aggressive LTE launch plans. T-Mobile will launch its LTE network in 2013 in its attempt to catch-up with its stronger rivals.

Applications and Services

• While many of its brethren are seeing messaging volume declines, messaging in the US market grew by 6% YOY and 1% Q/Q. US consumers are now sending messages at the rate of 687 messages/sub/mo. Most operators are seeing decline in messaging revenue growth due to IP messaging. As expected, this transition will continue around the world at different rates. In the US, while the change is underway, we don’t expect any dramatic declines like in Philippines or the Netherlands in the near-term.
• The market is finally starting to see activity in the mobile commerce and payment services as well as in various industry verticals like healthcare, retail, and education.
• Q1 2012 again saw tremendous activity in the mobile commerce and payments space with a lot of announcements from the operators, Internet players, and startups as well as the retailers and the ecommerce players. All are vying for a piece of the mobile wallet. Much more to come in the next 12 months.

Handsets

• Smartphones continued to be sold at a brisk pace accounting for almost 70% of the devices sold in Q1 2012. Operators are averaging 80% of their postpaid sales as smartphones with Android dominating though iPhone leads in revenue and mindshare.
• Nokia lost its 14 year old top ranking to Samsung which slowly and steadily gnawed its rivals marketshare. Samsung now leads in every major unit sale category both on the world stage as well as in the US. However, profits are a different equation where Apple overshadows its rivals like Gulliver in the Lilliput land.
• While it is fairly clear that Windows will acquire the #3 spot behind iOS and Android, the journey to a substantial and competitive market share is still ways off.
• Apple had another monster quarter and with iPhone 5 around the corner, it is all set to dominate the remainder of the calendar year.
• US continues to sell roughly 40% of the world’s smartphone every quarter thus making it the most attractive market for OEMs.
• AT&T continues to dominate the connected devices segment with over 47% market share.
• Verizon added another 2.9M LTE subscribers making it the leading LTE operator in the world. AT&T’s LTE rollouts are gathering steam and Sprint plans to offer LTE in 2012. T-Mobile announced that it is putting the cash and spectrum it got from AT&T to good use and deploying LTE by 2013. Expect the “fastest network” marketing to continue for at least another seven quarters.
• There is always a beauty contest amongst operators as to who sold more iPhones. AT&T again bested its rivals by selling roughly 47% of the iPhones in the US. T-Mobile is still waiting for its date with Apple even though it has started to order the attire.

Mobile Data Growth

• The smartphone data consumption at some operators is averaging close to 800 MB/mo. As we move into 1GB range along with the family data plans getting introduced shortly, you can expect the data tiers to get bigger both in GBs and $.
• Mobile data traffic growth continued unabated doubling again for the 8th straight year. We expect the mobile consumption to double again in 2012. Data now constitutes over 85% of the mobile traffic in the US.
• While the spectrum debate rages on, in addition to the network and backhaul upgrades, policy management and data offload have emerged as top two solutions that operators deploying around the world. Signaling management solutions like Diameter routing are also getting good traction. However, a long-term video solution is still elusive. As we have been saying in our Yottabyte series of research papers, a comprehensive solution strategy is needed to effectively manage margins/bit.
• We will have the 3^rd edition of our “Managing Growth and Profits in the Yottabyte Era”research out later this year.

Global Update

• Race to a billion – China became the first nation to go past a billion subscriptions. See our detailed analysis of the Chinese and Indian mobile market.
• For more details, please see our Global Mobile Wireless Market Update released in April 2012.

Your feedback is always welcome.

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, and articles. The next US Wireless Data Market update will be released in Aug 2012. The next Global Wireless Data Market update will be issued in Nov 2012.

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