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Summary

The US mobile data market grew 5% Q/Q and 15% Y/Y to reach $22.8 billion in mobile data revenues. Data is now 48% of the US mobile industry service revenues and as we had forecasted a few years back, the cross-over point of 50% might occur next quarter. For the year 2013, we are expecting $90 Billion in mobile data service revenues for the US market making it the number one market in mobile data revenues ahead of Japan and China. Q4 2013 is looking to be another record breaking holiday quarter for the industry at many levels, which is setting up 2014 quite nicely.

For the quarter, the market added 2.2M new connections, a strong reversal from the paltry 139K last quarter. T-Mobile continued to impress after its strong reversal in industry metrics last quarter on the back of a series of marketing and pricing initiatives that seem to be gaining traction and having an impact on its image and fortune.

Given that Apple didn’t launch the device until Sept and then had severe supply-chain constraints, Android had its best quarter against iOS with 54% share in the US market.  However, iOS is likely to catch-up in Q4.

Smartphones are now past the 64% mark in the US and continue to sell at a brisk pace accounting for almost 90% of the devices sold in Q3 2013. Apple led the smartphone sales amongst the top 4 operators with 42% share for the quarter. While the US penetration of smartphones is 64%, the 64% of the sub base is concentrated in only 40% of the households thus leaving plenty of growth in the marketplace. Overall, connected devices remains the highest growth segment with 6% Q/Q growth.

Smartphone and Connected Device Growth

Though China has overtaken (primarily because of the sheer size of its population) US in terms of the overall smartphone penetration, US remains the market where OEMs have to be really successful in order to be consider a serious player on the larger canvas. Though the likes of Xiaomi and the Micromax have had good success in their local markets (and still have a great amount of growth left), the prized market to make a sizable dent in their overall revenue and margins is the US market. This is primarily due to handset subsidy that allows consumers to easily own premium brands at bargain-basement prices in addition to the higher disposable incomes. This has helped the ASPs to go up in this market unlike some of the other markets where they have been going down.

US also boasts four leading-edge LTE networks that allows the ecosystem to innovate at the edge, literally. Having access to fast mobile broadband impacts human behavior, application and service development and everything in between. As such, US has become the laboratory for many experiments that benefit the larger ecosystem. This absolutely doesn’t mean that innovative things are not happening in other parts of the world. Far from it. But the “enabling layer” of networks, devices, and platforms is in its most advanced stage in the US. This layer allows folks to build applications and services that will power the global economy.

So, in order to be considered credible in the smartphone space, one must have a decent scorecard in the US today. The pendulum could of course swing and China could take the lead. In fact, US and China are the G2 nations of the mobile world.

While there have been murmurs in the market about smartphone saturation, the upgrade cycles will keep up the demand for more devices in 2014.

Like any ecosystem or a market, there are winners and there are companies who couldn’t perform to their potential. Enough ink has been spilt on Blackberry to reiterate what was quite predictable. The only interesting tidbit that emerged was that as we expected, Lenovo made a serious run for it and the Canadian government stopped it. It is ok for Canadians to use Lenovo laptops but not the smartphones? Of course, the reasons were complicated and different from what have been generally reported. Can Blackberry make a comeback under a savvy CEO? If they continue with the same OS, it is hard to see how?

Apple for the first time launched two models – 5s and a slightly lower priced 5c. It seems like the strategy might have been two fold a) get the supply-chain ready for more than one new model at a time and b) given an additional option to the consumers (in the US) who used to go for a level down version. Since the supply chain was under pressure, it is hard to get a clear picture of what might be happening but the iPhone 5s/c launch allowed Apple to raise the percentage of new devices sold. In fact, based on the weekly sales data from ITG Research, they might have managed to flip the ratio. For e.g. in Sep and Oct 2012, the old models sold 3:1. During Sept-Oct 2013, the new models outsold the old models by 1.7:1. 5s outsold 5c 1.6:1.

The big block-buster deal of Q3 was Microsoft’s acquisition of Nokia. It was clearly one of the outcomes Nokia was on the path of the day it chose Windows Phone OS. Microsoft got an effective OEM distribution and design system for really cheap but how long will it take to turn things around? Its mobile fate might largely depend on who the new CEO is.

Tablets are making a tremendous impact in the post-pc era. In the US market, we are already approaching 100M unit sales/year run rate. While Android tablets have taken market share from iPad, Apple remains the undisputed king of the category primarily because of superior hardware and a more robust ecosystem. Android tablets can be cheap but also unreliable, the life expectancy of such tablets can be 50% or so compared to the iPad. The usage is even less. Microsoft launched a credible challenger in Surface but there have been so many missteps that it is not (yet) in the picture of the post-pc transition. 

There has also been quite a bit of excitement about smart watches, smart glasses, smart cars, smart homes, and on and on. However, we must remember that just because device is growing in the era of the smartphones, it doesn’t makes them smart. In fact, most of these devices are where smartphones were in the late nineties – basic, functional, and full of possibilities. The evolution, however, will be much quicker. Google is one company that is pushing the boundaries of across multiple dimensions. Regulators and policy makers better come up to speed on the emerging landscape quickly.

A good test of a platform’s importance is to find out what happens if the platform shuts down for 5 minutes – how much panic and revenue drop does that create in various parts of the world? Another measure of the platform is the value it creates by launching new companies and ideas. For mobile, the answer is fairly obvious.

The Fourth Wave and the shift towards services

It is evident that there is a subtle shift from devices/access to services/solutions. In our paper on the topic “Operator’s Dilemma (and opportunity): The Fourth Wave”, I proposed that we need a new framework to think about the next generation of revenue opportunities. The fourth curve opportunities are massive but require a different skill set and strategic approach than the past three curves. As predicted, we are starting to see the impact of the 4^th wave on a global scale and some operators have started to break out the 4^th wave revenues in their financials. Operators with better balance sheets will also look for global expansion especially in Europe where economic impact on the telecom operators has been severe, however the M&A efforts will be complicated by respective governments desire to keep control of the national infrastructure provider.

We had a very successful Mobile Future Forward Summit last quarter. It was dedicated to exploring the 4^th wave in more detail across multiple dimensions and verticals. The dialogue was incredible and validates the march towards the 4^th wave that is redefining industries across the spectrum including the wireless industry itself, at its core. Some of these tectonic shifts aren’t very apparent and visible but as I have spent time working with some of the leaders in New York, Silicon Valley, London, Abu Dhabi, Barcelona, Hanoi, Singapore, Dallas, New Delhi, and Seattle this year, it has become abundantly that mobile industry is at a key inflexion point that is changing industries and the power structures, creating new opportunities and new revenue streams. In my interview at Mobile Future Forward, Ralph de la Vega, CEO of AT&T Mobility indicated that the ARPU from Digital Life customers is higher and the churn is lower. So, the fourth wave services have a direct impact on existing revenue streams as well. Conversely, absence of such services doesn’t yield a pretty picture.

FCC chairman and regulations

Amidst all the cacophony of device launches, acquisitions, and investments, FCC finally got its new chairman. Tom Wheeler is one of the savviest operative in the space with better grasp of the ecosystem, policy, law, and politics than most of his predecessors, so it will be interesting to see what the next FCC era brings over the next 3 years. Clearly, Incentive Auctions will be one of the most critical items on the agenda but some other issues like the potential T-Mobile acquisition and net-neutrality issues are likely to become important as well. Regardless, we are in for an interesting ride.

What to expect in the coming months?

2013 has been quite a year for the mobile industry and as we head into the holiday season, it’s a consumer’s market with plenty of choice and competition.

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 Q3 2013 US wireless data market is:

Service Revenues

• The US mobile data service revenues grew 5% Q/Q and 15% Y/Y to $22.8B in Q3 2013.For the year 2013, US mobile data market is on track to reach our original forecast of $90 billion in 2013.
• Verizon and AT&T dominated the quarter accounting for 71% of the mobile data services revenue and had 68% of the subscription base.
• As expected, China Mobile went passed both Verizon and AT&T to claim the #1 operator in mobile data service revenues. Verizon and AT&T slipped to #2 & #3 mobile data revenue ranking respectively in Q3 2013. Sprint and T-Mobile also maintained their rankings in the top 10 global mobile operators.

ARPU

• The Overall ARPU increased by $0.82. Average voice ARPU declined by $0.38 while the average data ARPU grew by $1.19 or 5% Q/Q.
• The average industry percentage contribution of data to overall ARPU is now at the 48% mark in Q3 2013 and is likely to exceed the 50% next quarter. The top three operators are hovering over the 50% mark and T-Mobile is slowly catching up.

Subscribers

• The US operators added 2.4M net-adds a sharp reversal from the lowest net-add in history last quarter. Verizon and T-Mobile led with over 1M subs, closely followed by AT&T while Sprint slowly emerges from the Nextel shutdown.
• T-Mobile’s postpaid continued to see the positive growth for the second straight quarter, though Verizon was a clear leader of the quarter with 927K net-adds.
• Sprint continued its losses in the postpaid segment. In the last couple of quarters, T-Mobile has started to break-away from Sprint in cumulative postpaid net-adds with positive growth.
• AT&T continued to lead the connected device segment with 48% market share.

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 with more consumers opting for cellular tablets and connected devices. In fact, at AT&T, tablets are performing 2-3 times better than smartphones in postpaid net-adds.
• Some more granular data plans for tablets have also spurred interest as the cellular broadband is becoming available on demand vs. expensive premise WiFi solutions.

4^th Wave Progress

• The number of players making $100M/quarter on mobile continues to increase rapidly and these aren’t your traditional wireless players. Facebook is now doing 50% and touching a billion dollars in quarterly revenue from mobile. Latest addition to the club is Twitter which is now doing $117M/quarter or 60% in 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”)
• We are also seeing continued investments from the operators especially AT&T and Verizon in non-traditional segments like home security, healthcare, insurance, automotive, enterprise mobility 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.

Handsets

• Smartphones continued to be sold at a brisk pace accounting almost 90% of the devices sold in Q3 2013.
• The smartphone penetration in the US is now 64%.
• Android easily went past iOS in smartphone sales in Q3 13 by a 54% – 42% margin. However, iOS is expected to bounce back in Q4 after the release of new devices in late Q3.
• At the end of Q3 2013, Samsung continued its lead in 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 on 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. It renewed its entry into the battlefield with Windows phone last year but sales have been poor. Q3 was better than Q2 but insignificant in the larger scheme of things. So, while the sales surged over 400% from Q3 2012, the market share barely budged at 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 38M making it the leading LTE operator in the world. AT&T’s and Sprint’s LTE rollouts are gathering steam. T-Mobile is also ramping up its LTE deployment. Expect the “fastest network” marketing to continue for at least another seven quarters. Verizon reported that 64% of its total data traffic is on the LTE network now, clearly the fastest technology transitions we have seen in the US wireless industry.
• There is always a beauty contest amongst operators as to who sold more iPhones. AT&T again bested its rivals by selling roughly 42% of the iPhones in the US.
• In terms of Q/Q growth, Connected Devices segment grew 6%, Wholesale -1%, Postpaid 1%, and Prepaid 2%.

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 March 2014. The next Global Wireless Data Market update will be issued in February 2014.

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