US Mobile Market Update – Q2 2014

http://www.chetansharma.com/usmarketupdateq22014.htm

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Summary

The US mobile services revenues in Q2 2014 declined marginally by over $200M. The mobile data services revenue however continued to increase and is on track to exceed the $100B mark in mobile data services revenue. Data contribution to the overall revenues is now at 55%.

T-Mobile continued to outperform its competitors in net-adds. T-Mobile has almost recovered all its postpaid losses that started back in Q3 2009 and continued till Q1 2013. It should move into the positive territory next quarter. T-Mobile also crossed the 50M sub mark and is now within a striking distance of Sprint and could become the number 3 operator in the country before early 2015.

AT&T registered the lowest postpaid churn in its history at 0.86. For the industry buffs, the US record is held by Verizon which recorded the churn of 0.84 in Q2 2012. The world record is held by NTT DoCoMo for its churn of 0.44 in Q2 2010. In general, Japanese have the most loyal customer base in the world.

The net-adds in the US market is now primarily driven by connected devices (tablets and m2m). 84% of the net-adds in Q2 2014 were from the non-phone category. Tablets are driving the connected devices segment with 70% share. The net-effect has been that while the overall subscriber count has increased, there has been a negative impact on the ARPU which declined by 2.27%. All operators saw their ARPU decline.

Smartphone penetration increased to 70% and roughly 93% of the devices sold now are smartphones. Android beat iOS handedly in the quarter. For the first time, Verizon sold more iPhones than AT&T.

M&A Season

From 2005 to almost 2008, the combined entity of Sprint and T-Mobile would have been the #1 operator in the US. Up until 2004, the “Others” were collectively the number #1 operator in the US. However, through a series of acquisitions, exclusive device deals, and just better business performance, Verizon and AT&T have dominated the mobile landscape in the US since 2007. Now, AT&T and Verizon are tied at the top while the market awaits the question mark on how the #3 will shape up. Iliad provided some market entertainment that kept media scratching its head with its offer to buy T-Mobile last week. It was an unattractive proposition as it doesn’t fundamentally offer to alter the US market structure. There are other global operators who are eying T-Mobile as a way to enter the lucrative US market. It might all come down to how desperate is DT to offload T-Mobile.

Yesterday, Sprint abandoned its pursuit of T-Mobile and probably saved itself a couple of billion dollars of break-up fee. The regulatory hurdle in the current environment of mega-mergers was just too high to overcome at this time.

So, will there be further consolidation in the mobile industry? Short answer is – Yes. The only question is about the timing. As we noted in the last note, T-Mobile has complicated things by being successful in the short-term. A third player with 30% market share will of course be better but T-Mobile has been able to change the market by being the fourth at 15%.

Is Windows Phone getting Zuned Out of the Market?

In 2012, we described “Zuned Out” as a phenomenon wherein the market punishes the player (even incumbents and dominant ones) for late entry into the market. The fast follower strategy that had served Microsoft so well for a couple of decades is no longer a useful framework for competing. Either one needs to be a “really fast follower” like Samsung (though they did invent the big-screen device segment that Apple is now following) or a trend setter like Apple/Google to have some command of the control points in the ecosystem.

Google was tempted by the lure of the device business and to some extent was forced to buy Motorola. It took 10 quarters to realize that the device business is a different beast, that there was a DNA mismatch, but the exercise did provide some key business insights to the management team. Google shed the device business and kept its partners happy. Microsoft’s acquisition of Nokia followed a similar pattern. Nokia threatened to go Android and Microsoft had no choice but to acquire the beleaguered company that has been just devastated since it picked up Windows as its primary OS. It was clearly a mistake both by Nokia first and Microsoft after that. The new CEO (to his credit) shed a good part of the business in a mere 3 quarters (a clear admission of a mistake). While the impending decimation of the once vaunted Finnish brand was very obvious, the bigger question in front of Microsoft is “what to do with Nokia that’s remaining?” The current plan is to continue churning out the Lumia devices at different price points and see what happens.

As is well known, Microsoft is very strong in the enterprise and in the cloud. Will the new “productivity and platforms” strategy look at the market facts and focus on where the company can be a player and invent new categories and experiences? Or will it focus on just chasing the competitors that have infatuated it over the last decade? Productivity is more than Office and Platforms have moved to iOS/Android. The “core” of the computing market is very different from what it used to be.

The market share of the windows devices in the US last quarter was 1.3%. Globally, it fared marginally better at 2.7%. Granted that in some countries, Windows is starting to approach double digit market share, even Microsoft admits its mobile strategy is in shambles. After being in the US market for more than 2 years with billions spent in marketing and distribution, 1.3% share is nothing to write home about. Microsoft can get better traction in markets where new-subs are entering the ecosystem vs. replacement markets like the US. However, what market is telling us is that despite the blood, sweat, and tears that have been spent over the past few quarters, there is little appetite or need for another platform.

Also, there is this issue of competing with your partners – Microsoft outperforms its ecosystem partners by a distance. I wrote at the launch of the new windows OS that is was a fresh approach, the OS is very well designed and the devices coming out a quite good. However, the current data indicates that unless something changes drastically, windows phones might be on the verge of being “zuned out” of the market. And just like Zune, the fault will lie not in the product or the distribution or the marketing but rather in the timing of the market entry. Microsoft might be better off giving up on its device dream and just focus on services on top of the platforms that dominate. It might be time for hermit crab strategy.

IBM-Apple deal

Intuitively, we have known for a while that the application development environment was moving from windows to iOS and Android. In 2012, we actually measured that shift and found that SMBs were moving to the new platforms in droves. The paper concluded:

“We believe that the SMB segment is a leading indicator of how larger enterprises and consumers in general will adopt mobile data solutions to enhance productivity and reduce costs.”

Fast forward 2 years. Last month, IBM and Apple announced their historic deal that woke up lot of people in the enterprise world. Apple is just looking to find a more efficient channel into the enterprise to sell iOS devices but IBM’s embrace means that the investment in iOS UX and app infrastructure will start to move more directly. Given that IBM is positioned well in all important enterprises across all industry verticals is a big coup for Apple. It also demonstrably indicates the shift from Windows to iOS and Android as the computing platform of choice.

Amazon phone

Amazon phone has been talked about for more than three years. It finally arrived but disappointed. While there were some interesting tech innovations seamed together to provide some differentiation, without any service pricing innovation (and the fact that it is only available on one operator), its fate seems similar to that of the Facebook phone.

Unraveling of Nokia

The mobile (more broadly digital) markets continuously remind us how brutal can the markets be if one is not quick enough to adjust strategies. As the old saying goes, “the bigger they are, the harder they fall.” Motorola was founded in 1928 and only a skeleton of the old glorious days remain as a subsidiary of Lenovo. An 80+ year old firm disappeared very quickly.

In the case of Nokia, the decomposition was even more stunning. A company founded in 1865 had 40%+ of the phone market only 7 years ago, employed tens of thousands of employees around the globe. After the latest round of rightsizing, only a few thousand remain (at least for the short term). Blackberry experienced a similar slide downwards. The cycle of complacency spares no one. The bigger the host, the more lethal the complacency virus is. This decomposition process is actually healthy for the ecosystem. Though the process is traumatic for those who are in the middle of it, it lays the fertile ground for new ideas and startups to germinate, and the cycle continues.

The bifurcation of the wearables market

After visiting the show floor at CES in January, we noted that “The space is going to get commoditized very quickly and it is likely going to get stratified into two major buckets – really cheap $10-20 wearables. The other bucket will be high-end fashion driven wearables.”

Last month, Xiaomi released a $13 tracker and Apple is expected to announce its wearable next month. The mid-market will mostly disappear.

What to expect in the coming months?

2014 has had an excellent start and rest of the year is looking great with a slew of announcements and activities planned for the rest of the year. We have already seen some massive moves, astounding acquisitions, and interesting strategic moves.

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 Q2 2014 US wireless data market is:

Service Revenues

• The US mobile services revenues in Q2 2014 declined marginally by over $200M.
• The mobile data services revenue however continued to increase and is on track to exceed the $100B mark in mobile data services revenue to become the first country to generate $100B from mobile data services.
• Verizon and AT&T dominated the quarter accounting for 68% of the mobile data services revenue and had 68% of the subscription base.
• Verizon and AT&T are at #2 & #3 global mobile data revenue ranking respectively in Q2 2014. Sprint and T-Mobile also maintained their rankings in the top 10 global mobile data operators.
• Revenue from new subs has declined to roughly 2%.

ARPU

• The Overall ARPU declined by $1.15. Average voice ARPU declined by $1.53 while the average data ARPU grew by 1% Q/Q.
• Data contribution to the overall revenues is now at 55%.

Subscribers

• The US operators added 3.2M new customers with T-Mobile leading the pack.
• 84% of the net-adds in Q2 2014 were from the non-phone category. The net-effect has been that while overall subscriber count has increased, there has been a negative impact on the ARPU which declined by 2.27%.
• Verizon’s tablet net-adds soared accounting for almost 48% of the overall tablets that were added in Q2. AT&T has the most number of tablets on its network but others are starting to catch-up.
• T-Mobile’s postpaid continued to see the positive growth for the fifth straight quarter. It has almost recovered its losses that began in Q3 2009.
• As other operators have started to gain in connected devices, AT&T’s share dropped to 46% though it continues to lead by a distance.
• AT&T registered the lowest postpaid churn in its history at 0.86. For the industry buffs, the US record is held by Verizon which recorded the churn of 0.84 in Q2 2012. The world record is held by NTT DoCoMo for its churn of 0.44 in Q2 2010.

Shared Data Plans

• Shared data plans launched by Verizon and AT&T have been quite successful. The attachment rates have increased tremendously over the course of 2013-14 with more consumers opting for cellular tablets and connected devices. 50% of postpaid accounts at Verizon are now on shared plans. Non-phone devices are performing 5x compared to phones.
• Some more granular data plans for tablets have also spurred interest as the cellular broadband is becoming available on demand vs. expensive on premise Wi-Fi solutions.
• 49% of AT&T’s postpaid accounts are on 10GB+ plans.

4^th Wave Progress

• The number of players making $250M/quarter on mobile continues to increase rapidly and these aren’t your traditional wireless players. For example, Mobile is now contributing 62% (up from 30% in Q1 2013) to Facebook’s quarterly revenues. Latest addition to the club is Twitter which is now doing 81% in mobile (of the total advertising revenue) up from 60% in 2013. Even traditional players like Hertz, Sears, and Starbucks are generating meaningful revenues from mobile. There are now dozens of such players and the list is just growing. (for more discussion on the topic please see: “Mobile 4^th Wave: Evolution of the Next Trillion Dollars”)
• In 2014, we are also seeing continued investments from the operators especially AT&T, Verizon, and Sprint in non-traditional segments like home security, healthcare, insurance, automotive, enterprise mobility, advertising, and security, and others. Collectively, this is already a multi-billion dollar business in the US.
• The cloud and security segments have also gained significant traction with incumbents as well as startups launching new initiatives and technologies.

Connected Devices

• Connected devices (non-phones) accounted for almost 84% of the net-adds in Q2 2014. This means that while there is a healthy smartphone sales pipeline, it is for the existing subs and as such net-adds for the phone business is tapering off and we can expect that new net-adds will continue to be dominated by the connected devices segment.
• Tablets form 70% of the connected devices sold.
• QoQ, the non-phone segment grew 10%.

Handsets 

• Smartphones continued to be sold at a brisk pace accounting almost 93% of the devices sold in Q2 2014. Within the next two years, the feature phone category will practically be extinct in the US market.
• The smartphone penetration in the US is now at 70%.
• Android had its best showing in the US market with 60% share of the quarter. In Q3, Apple is expected to announce its next iPhone that will pull it back into contention for the top stop for the second half of the year.
• 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. It renewed its entry into the battlefield with Windows phone last year but sales have been poor. While Microsoft has made steady progress in other regions, in the US, it’s not gaining any traction and its share remains at a measly 1-3%. (Read our paper to get more insights into why Windows hasn’t been able to make a dent so far).
• Verizon continues to sell more LTE smartphones as its LTE sub tally rose to 54M making it the leading LTE operator in the world. Other three operators are also deep into their LTE deployments. Expect the “fastest network” marketing to continue for at least another six more quarters. Verizon reported that 76% of its total data traffic is on the LTE network now, clearly the fastest technology transitions we have seen in the US wireless industry.
• Verizon and AT&T sell more iPhones than Android while the reverse is true for T-Mobile (by a big margin) and Sprint. There is always a beauty contest amongst operators as to who sold more iPhones. For the first time, Verizon sold more iPhones than AT&T.

Mobile Patents/IP

• 24% of the patents granted by the USPTO were mobile related. Samsung, IBM, Microsoft, Sony, and Ericsson make the top 5 patent players in mobile. We will have more details in our coming paper on Mobile Patents Landscape next month.
• US companies comprise of 50% of the top 50 list followed by Japan, China, and South Korea.
• Samsung was again the leader in mobile patents granted in 2013 in the US and worldwide. Samsung was followed by IBM, Qualcomm, RIM, LG, Sony, Microsoft, Ericsson, Google, and AT&T for the top 10 companies by mobile patent grants in 2013.
• Google made an entry into the top 10 overall mobile patents list for the first time. AT&T did the same for the mobile patents granted in 2013.
• US Mobile Operators dominate the top 10 operator rankings: Patent top 10 Rankings: AT&T, NTT DoCoMo, Sprint, Verizon, Telecom Italia, Swisscom, T-Mobile, Orange, SK Telecom, and TeliaSonera.
• Mobile Infrastructure Patent top 10 Rankings: Samsung, Ericsson, Alcatel-Lucent, Qualcomm, LG, Intel, Siemens, Fujitsu, NEC, and Panasonic.
• Mobile OEM Patent top 10 Rankings: Samsung, Microsoft, Sony, Nokia, Google, LG, RIM, Siemens, Fujitsu, and Panasonic.
• The top 5 categories for patents grants in the US for 2013 were Telecommunications, Digital Multiplexing, Digital Processing – Data Transfer, Digital Processing – Financial, and Computer Graphics.
• The top 10 filers of mobile patents in the US were IBM, Samsung, Microsoft, Sony, Qualcomm, Nokia, Ericsson, Google, LG, Intel and Apple. It was the first time that Samsung, Microsoft, Google and Apple showed up in the top 10 patent filers list together.
• Facebook’s mobile patent filings increased by 177% YoY.

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, articles, and our annual thought-leadership summit – Mobile Future Forward. The next US Wireless Data Market update will be released in Nov 2014. The next Global Wireless Data Market update will be issued in Sept 2014.

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

We will be discussing many of the ecosystem and technology issues, opportunities and challenges for the coming years in our annual mobile executive summit Mobile Future Forward on Sept 24^th in Seattle. Some of the confirmed speakers are: Bill Ruh, VP, GE; Tim Campos, CIO, Facebook; Erik Moreno, SVP, Fox Networks; Glenn Lurie, President, AT&T; Steve Mills, CIO, Motorola Mobility; Hank Skorny, VP/GM, Intel; Dr. John Saw, CNO, Sprint; JD Howard, VP/GM, Lenovo; Dave Webb, CIO, Equifax; Dr. Hassan Ahmed, CEO, Affirmed Networks; Mark Fernandez, Managing Partner, Sierra Ventures; Ujjal Kohli, Founder, Rhythm NewMedia; Vik Kathuria, Global Chief Media Officer, Razorfish; Erin Kienast, SVP, Starcom Worldwide; Josh Will, Senior Category Manager, Best Buy; Steve Elfman, President, Sprint; Paul McNamara, VP, Ericsson; Matt Grob, EVP/CTO, Qualcomm; Julie Woods-Moss, CMO, CEO of Nextgen Business, Tata Communications; David Richter, VP, Uber; Paul Brody, VP & Mobile Practice Leader, IBM; Mathew Oommen, President, Reliance ; Andreas Gal, CTO, Mozilla; Chris Putnam, SVP, Synchronoss; Fareed Adib, Global Head of Telecom Partnerships, Google; Brian Angiolet, SVP – Consumer Product Innovation, Verizon; Sharath Dorbala, Head of Mobile Financial Services, Amdocs; Rajeev Tankha, Senior Director – Applications, Oracle; Andy Chu, VP – mCommerce, Sears Holdings; Philip Fasano, EVP and CIO, Kaiser Permanente; Erik Ekudden, SVP, Ericsson, and many more to come. We hope to see you there for the brainstorm.