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US Wireless
Data Market Update - Q2 2009
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Executive Summary
The US wireless data market grew 7% Q/Q and 30% Y/Y to exceed $10.6B
in mobile data service revenues and thus exceeded $10B for the
second straight quarter. As we mentioned in our Q1 2009 research
note, given the strong growth in data revenues shown by the top
carriers and the increase in service revenues overall, the worst is
over for the US mobile industry. In summary, the recession has been
all but a tiny blip in its growth trend and the US mobile market has
weathered the downward spiral in economy better than its
counterparts in other developed nations. Of course, recession
doesn't treat all players equally, so, some have had a negative
impact and will need more resources and effective strategies to claw
back to the their previous market position.
The US subscription penetration was approximately 90.4% at the end
of Q209. The current rate of net-adds (subscription) is
approximately 3 every second (compared to a net gain in population
of one person every 10 seconds). While the flailing economy hit
certain segments of the wireless ecosystem hard esp. the
infrastructure and handset segments, consumers haven’t really pulled
back on the mobile data overall spending. Additionally, the CAPEX
spending will stay strong in 2009 given the activity around 3G/4G
deployments and trials. As expected, there was an increase of
prepaid subscribers which dropped the overall revenues for some of
the carriers.
As we mentioned in our last two research notes that this time
around, the fate of the US mobile industry is more closely tied to
the overall economy compared to the previous recessions. As the
consumer sentiment improved over the last 3-4 months along with
better than expected Q1-2 2009 earnings from corporations, the
mobile industry is back on track. While the structural flaws in
various industry segments remain, and the economy is a crisis away
from the double dip, the outlook for the remainder of 2009 remains
bright and we are expecting the overall data revenues to now
increase by 32% compared to 2008 with a record-setting Q4.
US Wireless Industry in Recession - The light at the end of the
tunnel is indeed not from the oncoming train
Note: For
a detailed discussion of the US wireless industry in recessions,
please see 2008 US Wireless Market Update.
Q2 2009 reported a much better 1% decline (compared to 6.4% in Q1). On
an yearly basis, the GDP is expected to change by 3.2% for 2009 and
the service revenues are expected to account for 1.13% of the US
economy by year-end.
As mentioned in the previous reports, while in the past, the
recession hardly impacted the wireless industry, this time around;
it is going to be more tied to the recession. In the past couple of
months, the consumer sentiment has improved and the Q109 earnings
have been better than expected. While there are still many
structural flaws in the financial and housing industries and the
unemployment is at a 25 year high of 9.4% (though it dropped in July
from 9.5% in June), consumers are feeling better about the economy
and their own prospects in it.
So, what does this mean? Well, the markets can still be volatile,
but overall the market seems to be feeling better about the economy
than it was in February. The
Conference Board Consumer Confidence Index though
retreated from June is at a healthy 46.6.
Given that consumer sentiment is improving, it is clear that the US
mobile data market is all but back from the recession. While some
segments within the mobile industry might be suffering, there has
been an increase in spending overall.
What to expect in the coming months?
We noted in our Q3 2008 note that
we will get a better picture of the impact of the recession on the
wireless industry in Q109 as it was the first full quarter after the
seasonal holiday quarter. There are two micro trends that are clear.
First, as expected, due to the high unemployment, the data card
segment took a hit. It is starting to recover in due course as more
of the workforce comes back over in the next 18 months.
Also, as expected, there was a shift from postpaid to prepaid in
some user segments. For example, for T-Mobile, prepaid constituted
82% of the net-adds in Q209 up from 61% in Q109 and 21% in Q208. It
is not clear if the good times will bring back the prepaid
subscribers to the postpaid realm or like the consumers who are
canceling their landline connections and moving to mobile, these
customers will get used to savings and the prepaid lifestyle. The
fight for the low-end customer is also having an impact on the
traditional prepaid players and the price pressure is reducing their
margins.
It is quite likely that 50-60% of such consumers don’t go back to
postpaid thus permanently lowering the ARPU base for such customers
and carriers who have experienced more postpaid to prepaid shift
will have to make up for the lost revenues elsewhere.
The landline replacement by Mobile trend continued now reaching
almost 24% by Q209. Messaging continues to grow. The messaging
volume was up 15% and messaging revenue was up 11% QoQ. The data
access (excluding data card) including flat rate data plan
subscriptions have also show significant strength lately. In
addition to smartphones, we are also seeing increased mobile data
activity amongst feature phone users. With its expanding 3G network,
T-Mobile like its peers has started to benefit from smartphone
penetration reaching to 6% of its subscriber base. Overall, the US
market will exceed 25% penetration of smartphones in Q3 2009.
The increased use of smartphones and datacards is putting a pressure
on carrier networks and accelerating their strategies to deploy LTE/WiMAX.
We estimate that by end of 2009, the US mobile data traffic is
likely to exceed 400 petabytes, up 193% from 2008. To truly tackle
the problem head-on, operators will need to adopt a multi-pronged
strategy to manage their traffic more effectively. We discuss mobile
data traffic in much more detail in our paper "Managing
Growth and Profits in the Yottabyte Era."
(I will be giving keynotes on the subject at the
Mobile
Innovation Week
in Sept and at the ISACA meeting in Oct)
The positive factors are helping negate the negative factors and
given the strength of 3G and smartphone adoption, the increase in
activity on the appstores front, and in general, a better awareness
of mobile data services and applications amongst consumers, any
decline due to the loss of data card revenue and postpaid transition
to prepaid accounts has been taken care off. In particular, Verizon
and AT&T have done really well. Smartphones remain a bright spot,
which in turn has a direct positive impact on the data revenues.
Even with the decline in handset sales, smartphone segment will
continue to increase in 2009 accounting for almost 30% of the
overall device shipments.
There is also a concerted effort underway to move beyond the
traditional subscriptions and expand the mobile universe to
wireless-enable other consumer devices (What did your refrigerator
say to your microwave while you were gone?).
Coming back to the 2009 forecasts, we are raising our estimates for
the mobile data service revenues to $45B for the year. 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 Q209 US wireless data
market is:
Service Revenues (Slides 11-12, 17-18)
-
The US
Wireless data service revenues grew 7% Q/Q to $10.6B in Q209.
Compared to Q208, the data service revenues grew 30%.
-
Verizon
and AT&T accounted for 90% of the increase in data revenues in
Q2 2009.
-
The US
mobile data service revenues crossed $10B for the second
straight quarter and stays ahead of Japan and China by a
distance.
-
Verizon
and AT&T experienced the most growth with over 8% increase Q/Q
followed by T-Mobile at 6%.
-
Verizon's
data revenues are now almost $4B/quarter only inches behind the
global leader of over 10 years NTT DoCoMo.
-
AT&T and
Verizon now account for 69% of the market data services revenues
and 61% of the subscriber base. Sprint had the fifth consecutive
quarter of data revenue growth.
-
The
average industry percentage contribution of data to overall ARPU
is now $27%. US market is likely to touch the 30% mark in 2009.
-
The top
four US carriers are now a permanent fixture in the top 10
global operators by mobile data service revenues occupying #3,
#4, #6, and #8 spot respectively. Apart from NTT DoCoMo and
China Mobile, Verizon Wireless and AT&T are the only two other
operators generating more than $3B in quarterly mobile data
service revenues.
ARPU (Slides 13-15)
-
Overall
ARPU decreased by $0.23 thus reversing the trend of the last
three quarters. Average voice ARPU declined 13-15by $0.45 while
average data ARPU grew by $0.68 or 5% and easily negated the
drop in voice ARPU.
-
Sprint led
in data ARPU with $15.5 followed by Verizon at $14.96. In terms
of % contribution, Verizon led with 29.28% followed by AT&T at
28.74%.
Subscribers (Slides 16-17)
-
In Q209,
the US market added approximately 2.8 M new subscriptions down
6% from Q109.
-
The number
of data subscribers has been on the rise with Verizon leading
the way. At the end of Q209, 65% of US subscribers were using
some form of data services.
-
The
messaging volumes in the US market now average almost 540
messages/subscriber/month or at the frequency of almost at a
message/hour/sub thus reaching close to the messaging leader
Philippines.
-
In terms
of net-adds, thanks to the boost from the iPhone, ATT led in
Q209 with 1.4M net-adds, edging its friendly rival Verizon which
added 1.1M net subscriptions. T-Mobile net-adds reduced to 325K
while Sprint lost 214K.
-
The 3G
penetration in the US stays at a healthy 40%+ in Q209. Verizon
led the pack while T-Mobile is slowly expanding its 3G coverage.
The growth in 3G and smartphones is helping offset some of the
downward pressure on the data revenues and overall ARPU. (I
will be moderating a panel
"Ultraband:
A Fast Platform For Innovation"
at GigaOM's Mobilize in Sept. We will discuss the future of
broadband and its implications)
Applications and Services
-
Non-messaging services continue to grab 50-65% of the data
revenues for the US carriers.
-
The
flat-rate pricing movement that was started by Willcom in Japan
which moved to Europe became more prevalent in the US market
with industry wide flat-rate pricing plans that included data.
All the major carriers seem to be offering flat-fee access plans
for most of the new smartphones being introduced in the market.
Approximately 18% of the consumers have flat-rate data plans.
-
There are
probably 18-20 sub-segments within mobile data services and
consolidation looms. While the valuations are still high for
rapid consolidation, we think that due to recession pressure,
the M&A scene is starting to heat up.
-
The usage
and data consumption trends are enabling carriers to accelerate
their 4G plans and develop long-term business and technical
strategies (We
will be discussing the state of the industry and what lies ahead
at the inaugural
"Mobile
Breakfast Series"
on Sept 22nd in the panel discussion "State of the Union: Where
do we go from here")
-
The
appstores battle is intensifying with OEMs and carriers are
announcing their plans and some of them are opening their wares
to woo the developer community. In the midst of the appstores
hoopla, Apple announced the passing of the 1.5 Billion download
mark with increasing number of developers participating the
ecosystem. The new functionality being released with 3.0 is
taking the battle up a notch. The clear-cut business model of
30/70+ split is attractive to the long-tail of developers. While
there is no dearth of applications, findability remains a
challenge. Also, appstores are changing the monetization
strategies for content and application developers and the
industry is trying to figure out what "Open" means in the
long-term. (Will be discussing this and more at CTIA in Oct)
-
The App
vs. Mobile Web discussion reached a surprisingly new crescendo.
The evolution is pretty clear - for the applications that don't
require significant UI resources, it will be better to develop
in for the browser, for intensive games, the native platform
will be ahead of the browser advances. The location API access
on the iPhone browser is breakthrough to have developers start
thinking about the webapps. But, what does it do to the revenue
model? (I will be moderating two panels on the subject in
Nov at the
Open
Mobile Summit)
Handsets
-
After
falling below the 100M/quarter level in Q1, Nokia rebounded to
sell 103M units in Q2 09. Samsung also exceed 50M with a strong
second finish at 52M. LG finished a strong third with almost 30M
in its bag and Motorola showed signs of strength by selling
close to 15M units.
-
The second
quarter was dominated by two blockbuster launches of iPhone 3GS
and Palm Pre. While iPhone continued to attract new customers,
Pre suffered from a less than stellar launch strategy. By
lowering the 3G device price to $99, Apple set the new bar in
smartphone pricing leaving the rivals scrambling for response.
T-Mobile launched another Android device last month.
-
The growth
in smartphone usage is also putting pressure on the networks
which are not able to handle the load during peak times in
certain cities thus forcing carriers to look for alternate
strategies to satisfy the demand for broadband - usage billing,
UMA, Femtocells, Hotspot buys, WiMAX, LTE, and others.
-
Rest of
2009 is eagerly awaiting the release of Palm Pre, several
Android handsets from HTC, Samsung, Motorola, and others,
Windows devices along with follow on of Danger devices, new
model(s) of iPhone, and other touch screen devices.
Misc.
-
Not
surprisingly, Venture capital market experienced a continued
decline in thefirst half of 2009, with companies announcing
$1.2B in financings vs. $1.6B for 2H08 and $2.1B for 1H08.
(Source: Rutberg)
-
In a sign
of convergence battles to come, T-Mobile’s @Home and various
Femto cell initiatives are taking hold. Cable operators are also
aggressively seeking triple-play by providing the wireless
component of the service.
-
China
crossed the 700M subscription mark last month. In terms of
net-adds, India has outpaced China for every single month of the
last one year. The Indian market added almost 140M vs. 100M in
China during the last four quarters. (more discussion on the
international market in our global market update next month)
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 Oct
2009. The next Global Wireless Data Market update will be issued in
Sept 2009.
Your feedback is always welcome.
Should you have any questions about navigating or understanding the
economic and competitive icebergs, please feel free to drop us a
line.
Thanks.
Chetan Sharma
Disclaimer: Some of the companies mentioned in this note are our clients.
