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US Mobile Market Update - Q4 2013 and 2013

 

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US Mobile Market Update - Q4 2013 and 2013

Summary

The US mobile data service revenues grew 5% Q/Q and 20% Y/Y to $24.8B in Q4 2013. For the year 2013, US mobile data market reached $90 billion in 2013. In Q4 2013, the mobile data revenues also eclipsed the 50% mark meaning that more than 50% of the mobile services revenues is now coming from data services – an important milestone. In 2014, we expect US to become the first country to cross the $100B mark in mobile data services revenue. We have also started to see digital services appear in the revenue maps as more companies rely on mobile to generate their revenues.

The US operators added 12M+ new subscriptions in 2013 with a majority of them coming from non-phone devices. Verizon led with 36% share followed by T-Mobile at 34%.

As expected, iOS bounced back and edged past Android with 49% share of smartphones sold in Q4 2013. For the year, iOS and Android were practically even at 48% each with crumbs left for the rest. Smartphone penetration increased to 66% and roughly 92% of the devices sold now are smartphones.

US Mobile Data Services Revenue: The Journey to $100 Billion

The US mobile market is by far the most dominant right now in terms of revenues and innovation across the stack. It wasn’t always like that. After inventing the industry, US lost the initiative to Japan and Europe until 2006-7 when the confluence of the iPhone, broadband networks, and robust applications ecosystem tilted things towards the US. Ever since, the US market has been on a rampage. And mobile data has been fueling this resurgence. In 2002, the mobile data market was approximately $1B. In 2014, US will become the first nation to cross the $100B mark in mobile data revenues. The next two nations are China and Japan, which are quite a bit behind. Having a 22% share of the data revenues gives US quite a bit of leverage over the ecosystem.

In 2004, mobile data contributed only 4% to the overall services revenues. In Q4 2013, the industry crossed the 50% mark for the first time. In the process, it became the 7th nation to do that. Japan was the first to cross in 2011 (Philippines has been outlier and a unique case study where approximately 50% of the revenue come from messaging).

Japan clearly showed the way with iMode, 3G, and digital services but US has taken over the mantle in data services. It doesn’t mean that US is most progressive on every metric. South Korea is much further ahead in the LTE network performance while some other nations score better on pricing (though on the metric of consumer mobile spend as a percentage of GDP per capita, US is #2 behind UK). Comparing nations in mobile often becomes a political, emotional, and irrational exercise in the industry. Like Hawking’s Black Hole theory, it’s complicated. Perhaps, it is a topic for a future paper.

The T-Mobile Effect

The US mobile services market hasn’t seen many skirmishes until T-Mobile “uncarrierized” the industry with a series of pricing adjustments that has made everyone take notice. We have been witnessing new pricing plans virtually every week in Q1 2014 and consumers (and media) love it. T-Mobile also changed the device subsidy equation in operator’s favor and OEMs saw the impact first-hand in Q4 2013. More of that will happen in 2014 as consumers start to do the math of decoupling the device cost with the services expense. It helps lower the subsidy burden for the operators but then “churn management” becomes a big issue.

In a saturated market, once a player decides to operate at a lower operating margin, it triggers the value destruction in the industry, which can be sometimes devastating to incumbents. Good examples are: Reliance, Softbank, and Free. Reliance in India changed the landscape in 2002 by introducing really low voice plans and the industry is still recovering from that disastrous dip (Indian market is obviously far complicated due to a host of other reasons but Reliance pricing changed the market). Similarly, in 2012, Free in France decided that it doesn’t need to operate at 30-40% margins and can change the industry by operating at 20% margin. Result, in the first year, it gained 8% market share and all the three incumbents had a net-10%+ decline in revenues in 12 months. In 2008, Softbank in Japan managed to snag iPhone exclusivity and lowered its data pricing to undercut the two incumbents and over the last 3-4 years has completely changed the market – a strategy it is trying to replicate in the US market.

While operators had to work harder for every dollar they earned in 2013, the impact of T-Mobile’s strategy wasn’t really felt in the financials in 2013. AT&T’s revenue increased 5% and the ARPU was stable. Verizon was the one least impacted in 2013 with 6% increase in revenue and over $64B in postpaid revenue. Sprint which is going through its own resurgence story while undertaking a massive network upgrade plan probably saw the most impact with flat overall revenue growth.

However, T-Mobile’s strategy isn’t without risks. One of the most fundamental problems is that it is not that defensible in the long-term (compared to say a better network, exclusive handsets, or new products). Right now customers are primarily switching to T-Mobile based on pricing, meaning once other operators (of course a big IF) get close to their pricing, other factors start to matter again like network quality and coverage. In 1-2 years, all four operators are likely to have similar LTE coverage and reliability. Devices are no longer a differentiating factor for the operators, so it might come down to the their investments in the 4th wave. Operators left standing without any strategy or investment will be exposed. Paraphrasing the oracle of Omaha - “When the pricing tide goes out, it will be clear who’s been swimming naked.”

Next 2-3 quarters will be critical to see how close other operators want to come to T-Mobile’s pricing (and cost structure) which will depend on how much are they hurting on a Q/Q basis. If and when others match T-Mobile in pricing, T-Mobile will have to lower the prices further else the influx of net-adds could stop. To get a sense of the risk, consider this – just to be able to maintain the same level of postpaid revenues every quarter, T-Mobile might have to add 800,000 customers every quarter (assuming same level of decline in ARPU every quarter and stable churn rates). If it doesn’t, it will start to see the erosion in revenue. To maintain its margin, it will have to further pressure the operations and its vendors.

This leads to another observation – the coming squeeze on the infrastructure and OEM space. Given that operator’s margins and revenues are under tremendous pressure, it will have a natural trickle down effect. Lot of infrastructure and OEM contracts will be up for renegotiation and operators will be rethinking their strategic roadmaps. We got some glimpse of that at MWC where operators are asking for more flexible SDN/NFV deployments at every level, which will put pressure on traditional box providers and provide new opportunity for innovative startups.

T-Mobile’s impact is not only being felt in the US but also around the world as other operators (typically #3 or below) look to shake things up. The roaming revenue is likely to take a hit everywhere.

Of course, all this shouldn’t be a surprise to the students of the 4th wave.

What’s Next For Microsoft?

Once Steve Ballmer announced his retirement, Satya was the only choice for the top job. An outsider would have been a disaster, and others within Microsoft had perceived or real issues in leading an organization of the size and impact of Microsoft. The support from Bill Gates pretty much sealed the deal early in the process. Rest was just formality. But what next? How does Microsoft reassert itself in the “Mobile First, Cloud First” world where the landscape is constantly shifting and Microsoft doesn’t have the control, the loyalty, or the product roadmap to keep the developers, users, and partners focused on the windows story. Having acquired Nokia cheaply, how does it ensure it is an asset and not a burden? As I have mentioned several times before, Microsoft made a series strategic blunders but is learning and course adjusting to the new reality where it is no longer the center of the tech universe. It won’t be easy and it will require Satya to articulate a 5-10 year vision that enables to become a key participant in the mobile economy.

Microsoft has significant assets and leverage in the enterprise world; it has been making steady progress in some regions with the windows devices. I have seen large organizations slow down on their research->prototype->product cycles. There are too many committees, too much frivolity around launching the perfect product in a perpetually beta world. Microsoft needs to unleash its Research into Products and bring partners and consumers into the process early in the process. If it isn’t able to manage that transition, despite generating one of the biggest profit streams in the industry, it will be relegated to the status as an old grumpy man catering to the niches. Unlike the desktop world, mobile ecosystem is big enough that having a base of 1B+ can generate good revenue and goodwill streams. 

Facebook, Whatsapp, and the future of communications

I covered this in my MWC note last week so won’t spend too much time discussing the reasons and the ramifications except that if the deal was a surprise to you, you haven’t been paying attention or internalizing the implications of the 4th wave.

Google’s love affair with Motorola

Google is a brilliant strategist. It is often misunderstood but even the mighty Google can get infatuated with strategies that don’t bear fruit. Motorola’s acquisition was circumstantial and done to defend Android, which feeds lucrative revenue streams to the mothership. In the process, it developed the itch to become a device maker without having much appreciation of what does it actually take to be an OEM. Google satisfied its itch and have better appreciation of the work its partners do for Android. The lesson cost a mere $2B and it acted decisively to unload Motorola to Lenovo, which needed a break to make a move into the US market.

The Sprint-TMO merger

I have maintained for many years that Sprint and T-Mobile will merge. The timing is uncertain because it depends on multiple variables. It also doesn’t help the case that T-Mobile has been busy changing the industry which regulators and customers love. So, will it happen? Short answer is yes but we might have to wait for a bit.

One of the lifelines thrown recently was that from Comcast-Time Warner proposed acquisition. The probability that it will be blocked is lower than the Jamaican bobsled team winning the Olympic Gold in PyeongChang (though it will receive serious scrutiny from different quarters). Granted the cable and mobile industries are quite different in their structure, if regulators start allowing 1-2 combinations, how can they stop 3-4 mergers. Looking at the merger equation strictly through HHI can also lead to incorrect conclusions. It is a multi-dimensional question which we covered in our paper “Competition and the Evolution of Mobile Markets” and will have more to say in the coming days.

What to expect in the coming months?

2013 has been quite a year for the mobile industry and 2014 promises to be full of action as well. 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 Q4 2013 and 2013 US wireless data market is:

Service Revenues

  • The US mobile data service revenues grew 5% Q/Q and 20% Y/Y to $24.8B in Q4 2013. For the year 2013, US mobile data market reached $90 billion in 2013.
  • In 2014, we expect US to become the first country to generated $100B from mobile data services.
  • Verizon and AT&T dominated the quarter accounting for 68% of the mobile data services revenue and had 67% of the subscription base.
  • Verizon and AT&T are at #2 & #3 global mobile data revenue ranking respectively in Q4 2013. Sprint and T-Mobile also maintained their rankings in the top 10 global mobile operators.
  • Revenue from new subs has declined to roughly 2%.

·         ARPU

  • The Overall ARPU declined by $0.39. Average voice ARPU declined by $1.51 while the average data ARPU grew by $1.13 or 5% Q/Q.
  • As predicted, the average industry percentage contribution of data to overall ARPU is now at the 50% mark in Q4 2013. US became the 7th nation to achieve this feat. Japan at 70% leads the industry.

Subscribers 

  • The US operators added 4.6M net-adds a sharp reversal from the first half of 2013. Verizon and T-Mobile led with over 1.6M subs, followed by AT&T and Sprint.
  • T-Mobile’s postpaid continued to see the positive growth for the third straight quarter, though Verizon was a clear leader of the quarter with 1.6M net-adds. However, T-Mobile had more postpaid net-adds than both AT&T and Sprint.
  • Sprint continued its losses in the postpaid segment. In 2013, 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. 46% of postpaid accounts at Verizon are now on shared plans. 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 Wi-Fi solutions.
  • The mobile data consumption per capita grew from 690 MB to 1.2 GB

4th Wave Progress

  • The number of players making $100M/quarter on mobile continues to increase rapidly and these aren’t your traditional wireless players. Mobile is now contributing 53% or $1.24 Billion to Facebook’s quarterly revenues. Latest addition to the club is Twitter which is now doing $165M/quarter or 75% in mobile (of the total advertising revenue). There are now dozens of such players and the list is just growing. (for more discussion on the topic please see: “Mobile 4th Wave: Evolution of the Next Trillion Dollars”)
  • In 2013, 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.

Connected Devices

  •  Connected devices (non-phones) accounted for a whopping 89% of the net-adds in 2013. 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 quite low, in fact, the phone net-adds declined by 78% YoY while the connected segment (including tablets) grew 42%.

  • Tablets form 49% of the connected devices sold.

  • For the year, connected devices segment grew 13%.

We will be hosting two sessions on IoT: IoT Americas in Seattle on March 18th and IoT Europe in London on June 17th.

Handsets  

  • Smartphones continued to be sold at a brisk pace accounting almost 92% of the devices sold in Q4 2013.

  • The smartphone penetration in the US is now 66%.

  • As expected, iOS bounced back and edged past Android with 49% share of smartphones sold in Q4 2013.

  • Due to changing operator policies, smartphone sales declined YoY for the first time since 3Q 2012.

  • 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 2%. (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 43M 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 69% 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 it is 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. AT&T again bested its rivals by selling roughly 39% of the iPhones in the US (Source: ITG Research).

  • In terms of Q/Q growth, Connected Devices segment grew 6%, Wholesale -1%, Postpaid 1, and Prepaid 2%.

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.

Your feedback is always welcome.

Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in our blogtwitter 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 May 2014. The next Global Wireless Data Market update will be issued in May 2014.

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


 

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© Chetan Sharma Consulting 2001-2014. All Rights Reserved.
Chetan Sharma Consulting is a management consulting and advisory firm helping companies in the mobile and voice communications sector. Our expertise is in developing innovation-driven product, business, and IP strategy. We've helped companies like NTT DoCoMo, China Mobile, Samsung, KDDI, Motorola, Alcatel-Lucent, Sony, Microsoft, Virgin Mobile, KTF, Sprint Nextel, Reuters, Disney, Qualcomm, Reliance, BEA, HP, Merrill Lynch, Cincinnati Bell, Bain, SAP, Vulcan, American Express, and many others. What can we do for you? www.chetansharma.com

 

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