US Wireless Market Update Q1 2013

http://chetansharma.com/usmarketupdateq12013.htm 

Summary

The US mobile data market grew 2% Q/Q and 14% Y/Y to reach $21 billion in mobile data revenues. Data is now almost 45% of the US mobile industry service revenues and as we had forecasted a few years back, the cross-over point of 50% might occur later this year. For the year 2013, we are expecting $90 Billion in mobile data service revenues for the US market.

For the quarter, the market added a paltry 1.1 million new connections, a decline of 60% from Q1 2012. It was the lowest net-adds Q4 quarter in the US mobile history (barring the early days of tepid growth). The postpaid category added only 200K subs largely on the back of Verizon’s 677K net-adds.

AT&T sold more iPhones but Verizon sold more smartphones. With T-Mobile joining the iPhone bandwagon, iOS lead in the US market is likely to continue.

T-Mobile continued to lose their postpaid subs for the 11^th straight quarter. Sprint also lost over half a million postpaid subs primarily due to the Nextel business. Once Nextel is sunsetted mid-2013 for good, we can expect a pick-up of net-postpaid subs at Sprint.

The see-saw battle between Softbank and Dish for Sprint/Clearwire continued as expected but as expected Softbank is likely to prevail when it is all said and done. After completing the Metro acquisition, T-Mobile started to integrate the 8M+ base into the company. We can expect that the next round of M&A will continue once we are done with the Sprint decision.

As we mentioned in our previous updates, smartphones are now past the 50% mark in the US and continue to sell at a brisk pace accounting for almost 85% of the devices sold in Q1 2013. Apple led the smartphone sales amongst the top 4 operators with 50% share for the quarter. While the US penetration of smartphones is over 50%, the 50% of the sub base is concentrated in only 30% of the households thus leaving plenty of growth in the marketplace.

In terms of Q/Q growth, Connected Devices segment grew 17%, Wholesale 5%, Prepaid 4%, and Postpaid was flat.

Verizon and AT&T maintained their top positions in the global rankings by mobile data revenues. A survey of the entire ecosystem shows that the US companies dominate the top 5 rankings of profit share. China Mobile leads the industry with Apple, Verizon, AT&T, and NTT DoCoMo completing the rankings.

What really drives mobile device performance?

Will a 3rd mobile ecosystem emerge this year? Is it necessary? Specifically, what problem does it solve? What factors influence the purchase behavior of the consumer? And can OEMs change their strategy to impact sales? Why have Microsoft and Nokia not been able to make a dent in the trajectory despite having a compelling OS, range of devices, consumer-friendly price-points, better distribution, and increased level of advertising dollars? Will Blackberry be able to recover? Why hasn’t HTC One been able sell in similar numbers as the Galaxy S4 despite being better by most accounts? What will it take for LG to increase share? Can Motorola stay relevant? Can new entrants disrupt the waters? Can ZTE and Huawei come from the bottom and disrupt the top players? Will Apple and Samsung be able to protect their position on the top?

These questions have been a matter of intense debate in the media and in the ecosystem. We try to address these questions in some detail in our recent paper “What Really Drives Mobile Device Performance?” As I mentioned to the New York Times, it is no longer good enough to have a great product, an OEM needs to perform well across multiple variables.

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. It is being widely adopted in the operator community around the world and some operators have started to break out the 4^th wave revenues in their financials.

We will be discussing fourth wave in much more detail at our annual thought-leadership summit – Mobile Future Forward with the incredible leaders who are making billion dollar decisions every day.

OTT impact on legacy businesses and models

In the last 12 months, Whatsapp moved around more messages than all the mobile operators combined in any country and that includes US and China. US and China collectively have approximately 1.5 billion subscriptions. Whatsapp with its 200M base has moved more messages in the last 12 months than all the operators in both US and China combined. Ok, let that sink in for a few minutes. For a significantly small fraction of the cost, Whatsapp moves around more messages than every single telecom operator on the planet. Of course, Whatsapp makes a tiny fraction of the revenue compared to the operators. What Whatsapp and similar players lack in ubiquity and interoperability, they make it up by being the commodity utility provider at a low cost to the consumer. The notion of designing by a standards committee above the IP layer is just no longer needed in majority of the cases. Once you have the IP connection, consumers will gravitate towards innovative solutions and be willing to fragment their communication behavior across multiple apps. SMS will stay relevant for the foreseeable future but the growth is in IP communication. We will also see more cooperation between the IP app players and the operators as they find common strategic grounds.

We will see the same impact of IP and mobility on the various verticals like Retail, Energy, Education, Entertainment, Travel, etc. Some operators have been preparing for this shift and going outside their traditional products and services to launch services like AT&T’s Digital Life to address opportunities in the home, Verizon’s efforts in health and public safety and Sprint’s steps in mobile advertising and analytics.

Operator M&A – The Rule of Three Strikes Back

The M&A game continued with intense frenzy in the ecosystem. T-Mobile completed the Metro acquisition which gives it more heft and scale to compete as a value-player. However, the real drama has been going on with the Softbank and Sprint merger with Dish playing the role of the spoiler. Our original thesis has been that Softbank is a better fit than Dish and Dish’s strategic intention might actually be T-Mobile not Sprint. It was a masterful decoy to raise the cost and pain for Softbank and Sprint. It is likely to be all sorted out in the next few weeks.

There have been some interesting twists and turns but as we have stated before, the US market competitive equilibrium will be complete when Sprint and T-Mobile get together at some point down the road. As outlined in our research paper on the subject, market forces find their way to get to 3 dominant operators that compete for attention and revenues, rest becomes noise. While the regulators might scoff at the idea, the inevitable market forces will find their way around.

Operators with better balance sheets will also look for global expansion especially in Europe where economic impact on the telcom operators has been severe, however the M&A efforts will be complicated by respective governments desire to keep control of the national infrastructure provider.

The Patent Battles

In 2012, Samsung had a strong showing not only in the market place but also in the patents area. It edged past Nokia to become the overall mobile patents leader in the industry. IBM and Microsoft also improved their rankings. Nokia, Ericsson, and Alcatel-Lucent slid in rankings. Motorola dropped out of top 10. Not surprisingly, companies who have been around for a while especially in the infrastructure and the platform space lead the overall mobile patents. Samsung has been fiercely building its patent portfolio in both Europe and the US and the efforts have paid off as it has built a significant portfolio and a formidable lead that is likely to serve it well in the coming years.

A more startling observation is the mobile patent grants as a percentage of the total patent grants in a given year have risen significantly for the US market indicating the importance innovators attach to mobile in their business. In the US, one out of every five patent granted in 2012 was related to mobile. Less than a decade ago, this number was less than 10%. The European market has seen lower growth relative to the US market. Roughly one out of every ten patents granted in Europe are mobile related.

Samsung was the leader in the mobile patents granted in 2012 in the US and that propelled the company to the top ranking in overall patents (1996-2013). Samsung was followed by IBM, Sony, Microsoft, RIM, LG, Qualcomm, Ericsson, Panasonic, Alcatel-Lucent, and Nokia for the top 10 companies by mobile patent grants in 2012. The top 5 categories for patents grants in the US for 2012 were Telecommunications, Digital Multiplexing, Digital Processing – Data Transfer, Digital Processing – Financial, and Digital Processing – Databases. The top 5 filers of mobile patents in the US were IBM, Microsoft, Samsung, Qualcomm, and Sony. Apple made it to top 10 for the first time on the strength of its patents filed in the computer graphics processing category.

For more detailed analysis, please refer our research paper on the subject – Mobile Patents Landscape – An In-Depth Quantitative Analysis.

SMB leading indicator of mobile adoption

Small businesses are at the heart of the US economic engine. They represent roughly 45% of the non-farm GDP. Every administration, every president focuses on small business growth and job creation. In our paper “The ABCs of SMB Transformation: Apps, Broadband, and the Cloud,” we explored how mobile is transforming the SMBs. The main conclusions were: a) SMB segment is a leading indicator of technology adoption and we can learn a great deal about the broader trends by understanding how SMBs adopt technology b) there are tangible gains in productivity – on average SMB workers save 40 minutes per worker per day which translates into significant impact on profits and c) there is a tangible impact on computing, enterprise software and services as the business processes are shifting towards iOS and Android.

What to expect in the coming months?

All this has setup an absolutely fascinating 2013 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems. Players who firmly attach themselves to the 4^th wave will reap benefits while the ones who miss it will see their fortunes dwindle. We are gearing up for our annual Mobile Brainstorm Summit – Mobile Future Forward on Sept 10^th, hope you can join us.

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 2013 US wireless data market is:

Service Revenues

• The US Wireless data service revenues grew 2% Q/Q and 14% Y/Y to over $21B in Q1 2013 thus exceeding $20B for the second straight quarter.. For the year 2013, we are forecasting that mobile data revenues in the US market will reach $90 billion.
• Verizon and AT&T dominated the quarter accounting for 70% of the mobile data services revenue and had 66% of the subscription base.
• Verizon and AT&T maintained its #1 & #2 mobile data revenue ranking in Q1 2013. Sprint and T-Mobile also maintained their rankings in the top 10 global mobile operators.

ARPU

• The Overall ARPU increased $0.35. Average voice ARPU declined by $0.42 while the average data ARPU grew by $0.87 or 3% Q/Q.
• The average industry percentage contribution of data to overall ARPU is now at the 45% mark in Q1 2013 and is likely to exceed the 50% in 2013. All the top three US operators are over the 45% mark. (For reference, all three major Japanese operators are now over the 65% mark).

Subscribers

• The US operators added 200K postpaid subs and approximately 1.2M total.
• T-Mobile’s postpaid woes continued for the 11th straight quarter.
• Verizon led the market with 720K net-adds. It was followed by AT&T at 291K, and T-Mobile at 5K. Verizon and AT&T accounted for 86% of the market’s net-adds Nextel continues to drag Sprint’s postpaid additions. Sprint is expecting the transition from Nextel to Sprint to be complete in the next few months.
• 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 saw positive results. The tablet and other device attachment rate has gone up by 60%.
• Shared data plans moved tablet session based consumers to postpaid tablet plans with more predictable revenue stream. The $10 surcharge for every device is still an inhibitor for many consumers. Over time, we expect this fee to go away to bring in many more consumers experience data services across devices other than their smartphones.

Applications and Services

• The market is seeing a lot of activity in the mobile commerce and payment services as well as in various industry verticals like healthcare, retail, and education. We will be discussing how mobile is changing all the vertical industries at our fall summit Mobile Future Forward where industry leaders in each of these vertical segments will convene to share their experiences and expectations.
• The cloud and security segments have also gained significant traction with incumbents as well as startups launching new initiatives and technologies.

OTT and the impact on legacy services

• In the last 12 months, Whatsapp has moved around more messages than all the mobile operators in the US and China combined. Those of you who have read our Fourth Wave paper shouldn’t be surprised by this shift.

Handsets

• Smartphones continued to be sold at a brisk pace accounting to almost 85% of the devices sold in Q1 2013.
• iPhone dominated smartphone sales for Q1 2013. In Q1, iPhone accounted for 50% of the total smartphone sales at the top four operators.
• At the end of Q1 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. In Q1 2013, Windows device sales were less than 0.5 million despite heavy marketing (read our paper to get more insights into why Windows hasn’t been able to make a dent so far).
• Apple finally launched its iOS 7 update with the hardware unit to be launched later this year.
• Verizon continues to sell more LTE smartphones as its LTE sub tally rose to 27.5M 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 50% of its total data traffic is on the LTE network now.
• 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.

Mobile Data Growth

• The smartphone data consumption at some operators is averaging over 1 GB/mo. Some devices are averaging close to 2-3 GB/mo. As we move into 1GB range along with the family data plans kicking in, you can expect the data tiers to get bigger both in GBs and dollar amount.
• 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.

Your feedback is always welcome.

Chetan Sharma

We will be discussing a number of issues raised in this research update at our annual mobile executive thought-leadership summit – Mobile Future Forward on Sept 10th in Seattle. Thought-leaders include: Biju Nair, EVP and CSO, Synchronoss; Curtis Kopf, VP – Customer Innovation, Alaska Airlines; Danny Bowman, Chief Sales and Operating Officer, Samsung; David Small, Chief Platform Officer, Verizon Enterprise Solutions; Erik Moreno, EVP, Fox Networks; Fay Arjomandi, CEO – Vodafone Xone, President/Chairman – Vodafone Americas Foundation; Geeta Nayyar, Chief Medical Information Officer, AT&T; Glenn Lurie, President, AT&T Wireless; Hank Skorny, VP and GM – Software Services, Intel; Henning Schulzrinne, CTO, FCC; Jef Holove, CEO, Basis; Jude Buckley, President – Mobility, Best Buy Co; Kevin Packingham, Chief Product Officer, Samsung; Manish Jha, GM – Mobile, NFL; Marianne Marck, SVP – Consumer Products, Starbucks; Marios Zenios, VP – Uconnect, Chrysler Group; Matt Carter, President – Emerging Solutions, Sprint; Raj Toleti, CTO, Patient Point; Ralph de la Vega, CEO, AT&T Wireless; Rowland Shaw, VP – Strategy, Ericsson; Stephen David, former CIO, P&G; Steve Elfman, President, Sprint; Terry Myerson, Corporate Vice President – Mobile, Microsoft; Tracy Isacke, Head, Telefonica Digital Americas

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 August 2013. The next Global Wireless Data Market update will be issued in July 2013.

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