us wireless market_2015_update_mar_2016_chetan_sharma_consulting

US Wireless Market Update 2015

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Page Title Goes HereUS Mobile Market Update 2015

Highlights of the US Mobile Market 2015The overall mobile market expanded by 18% increase in revenues.

Mobile data revenues increased by 17% YoY and now contribute 72% of the overall service revenues. In terms of data contribution,US is catching up with Japan which has been a leader in data % since the iModedays.

For the first time in its history of the US market, the service revenues declined.

For 2015, the voice revenues declined by 24%, messaging revenues declined by 18%, tablets saw the dip by 18%, handsets saw anincrease of 5%, access revenues by 23% and 4th wave services dominated with an increase of 60%.

The Capex contracted for a second year in a row.

Device revenues are now 21% of the overall.

EBITDA and Net Income saw double digit gains indicating operators are running a much tighter ship than before.

Churn is at historic lows. Despite all the commotion in the market, 7% fewer customers churned in 2015.

After falling sharply in 2014, the data prices remained pretty stable throughout the year.

Mobile data traffic grew again with per sub smartphone consumption at 3.9 GB/user/mo (see note below on data traffic)

In the first 10 weeks of Binge-on, T- a traffic on T-T-Mobile experienced a net traffic reduction of 10-15% but given that consumers are consuming 3x than before, overall traffic will rise again.

AT&T added 4 million cars to their network. While postpaid business has its challenges, the connected devices business showedsignificant strength in 2015.

Connected Intelligenceactivities, growth, and continued experimentation.

Apple again dominated the device market with over 45% revenue share, 81% profits share with only 16%-unit share.

Android ecosystem revenues grew by 5% but the profits declined by 2%

There were more tablets added to the network than phones in 2015. Cars outperformed M2M by a good margin.

T-Mobile edged past Verizon in postpaid netadds, AT&T was ahead in Prepaid, Verizon in Connected devices, Sprint in wholesale, and Verizon overall had the most netaddsin 2015.

AT&T and Verizon on average made $16 per sub/mo, T-Mobile turned into positive territory with $1 profit/sub/mo while Sprint stayed in negative territory with a loss of $0.55 per sub/mo.

The valuation of Uber surpassed the combined market cap of T-Mobile and Sprint. Chetan Sharma Consulting, 2016. All Rights Reserved
http://www.mobilefutureforward.com/History_and_Future_of_Connected_Intelligence_Chetan_Sharma_Consulting.pdf


What to expect in 2016? Questions for 2016.

We expect the overall US mobile market to pass the half a trillion-dollar mark in 2016.

US will cross 400M in subscriptions in 2016.

After the pause of dropping data prices in 2015, we could see intense price wars in 2016.

The upcoming auction could be the big story of the year.

What new 5G test results will be announced and will industry converge on some 5G standards ahead of the 2019 deadline?

Will Comcast MVNO follow Google-Fi as a niche endeavor or does it have elements to fundamentally impact the market. 2016 will hopefully answer the question about the future of WiFi-first network strategy.

Will the upcoming eSimintegration in devices go far enough to disrupt the market?

Will IoT gain sufficient steam to justify the forecasts?

Can Android OEMs turn around the decline in profits in 2016?

Will the service revenue decline in the US reverse itself or are we seeing the start of the decline in revenues in the industry?

Autonomous driving was a big story last year; what progress are we going to make in 2016? How will Uber shape the autonomous driving business models?

AT&T and Verizon have bet big on video. How will the respective strategies pan out in 2016?

The Apple-FBI is going to be one of the most watched cases in the world. Whichever way the final ruling lands has huge implications for the tech industry and consumers.

We will be doing an in-depth analysis of the future of the mobile industry at our 7th annual mobile executive summit Mobile Future Forwardin Sept 2016. Hope you can join us.

http://www.mobilefutureforward.com/


Service Revenue Decline, what does 2016 hold in store?

The overall service revenue, postpaid revenue, overall and postpaid ARPU all declined. In general, the net-service revenue decline is not a good sign if it is market induced. In Europe, we saw net-revenue declines but the impact of the economic crisis was a big factor in determining the trajectory. After the economy has improved, we have seen the net revenue in effected countries rise again. In the US, the net-revenue decline is more market induced. The calculation of service revenue is a bit more complicated because device revenues are no longer part of the mix and as customers are weaning off the contracts, we have to adjust the service revenue for this accounting change. If we take the accounting distortion into account, service revenue is still in the positive growth territory but in terms of how operators report service revenues, this was the first year the category saw a decline. Regardless of the accounting distortions, there is continuous pressure on the postpaid revenues whichiswhat is impacting the overall numbers.

Given the competitive state of the market, we might see further service revenue declines in 2016. The reversal might come down to consolidation in the industry in 2017 and beyond. The pressure on the revenues has had a positive impact though operators are running far tighter ships than before. Thenet income surged in 2016.

The licensed vs. unlicensed: frenemies

haps it was never designed to be. Given that WiFi is carrying 75-80% of the traffic, it is easy to make the business case for a national WiFi operator. Companies like Republic Wireless have shown that this can be done. Keeping aside some of the technical challenges with WiFi, there are two major business challenges with the WiFi strategy. First, evenwith the rise of WiFi usage, the cellular usage

-70% YoY. As such, consumers will have to rely on cellular when they are out and about which means the economics comes down to the wholesale rate the MVNO has for cellular. The second big problem is the lack of handset choices. For consumers, handset choice is paramount. They want both iOS and Android devices to go with their data plans. WiFi operators generally have limited handsets. Over time this willchange but to have a WiFi network of scale, economics, choice, and pricing are critical. By contract, cellular operators will always have a leg-up on the MVNOs unless access regulations are in place which of course are nowhere in sight.

Seeing the success of WiFi, FCC has rightly made more unlicensed spectrum available and it will be interesting to see how theecosystem around 3.5GHz and other bands mmwavefor 5G deployments. Technologies and business models that take into account benefits and

drawbacks of both types of spectrum bands across a different uses cases will win out in the end. Despite advances, WiFi calling still has quality issues so the need for traditional networks is not going away anytime soon.



M&A 2016

As we mentioned last year, the service provider M&A window for 2016 pretty much closed late 2015 given the upcoming auctions andthe presidential cycle. There might still be some cross border opportunities but for any major transactions, it is better to wait it out to have a reasonable chance of success.

IoT Revenue Streams and what it means for the ecosystem

Service provider IoT revenue passed the important $1B mark back in 2013. So far it is tracking the growth of the early days of mobile data. However, they are different curves influenced by different factors. Mobile data was relatively an easier curve to climb as the revenues went up as more data handsets came online. The sales, business case, and ROI was straight forward. IoT is a bit more complicated as it across multiple vertical areas and it is not just about the data network, it is about the complete solution. The sales cycle and execution strategy is different and requires patience and resilience.

AT&T already had an active IoT developer program. Verizon introduced its ThingSpaceplatform to the developers last year. It is already selling complete IoT solutions in energy, transportation, security, and several other industry segments. As we mentioned before, Verizonis on track to crack the billion-dollar mark in IoT this year. For trivia buffs, Verizon passed the billion-dollar mark in mobile data revenues back in 2004 which at the time made only 5%of the overall wireless revenues for the operator.

We will be doing an in-depth analysis of the IoT Opportunity at our upcoming Mobile Breakfast Seriesin April and May.

Mobile data growth Correcting the Cisco Numbers

Mobile data consumption (cellular) continues to grow as devices and networks continue to improve. There are 13 countries now with at least 1GB/mo/sub consumption. US is amongst the top three. At the end of 2015, the average consumption per sub in the US was at 3.9GB/mo/sub.

Earlier this quarter, Cisco released its annual VNI report that forecasts data consumption and growth around the world. However, they did something roborated by the data

l be worthwhile providing the reasonable estimates for data growth in the US market. These estimates match well with the data growth numbers in the Ericsson report.

Our estimates are that the US data consumption last year was close to 10.9 Exabytes. Ericsson reported approximately 10.5 Exabytes. Cisco adjusted its numbers from 9.2 Exabytes to 6 Exabytes. Chetan Sharma Consulting, 2016. All Rights Reserved
https://thingspace.verizon.com/developer/http://www.mobilebreakfastseries.com/


Android vs. iOS: The fight for profit continues

Amongst the prominent Android OEMs, HTC, Sony, LG, and Lenovo all lost money in their device business in 2015. This again highlights the difficulty in differentiating on an open platform. Some of these players might give up on their handset business in 2016. Apple again dominated with 81% of the profit share, 45% of the revenue share, with

ttom end of the spectrum.

4th Wave Revenues

5 years ago, we put forth the theory of 4th waveto explain the upcoming changes in the mobile ecosystem. For the most part, the industry changes and tribulations have tracked the 4th wave curves. Last year, voice revenues fell down by 23%, messaging revenues declined by 18%, while data revenues grew by 23%.4th wave revenues which now dominate the ecosystem now grew by a 60% YoY. We will have more analysis of the state of the 4th wave ecosystem later in the year.

In its Q4 15 earnings call, Verizon laid out its 3-Tier strategy which is similar to the 4th wave digital strategy we have been working on with many operators around the globe since 2011 (see paper and slides for details). Without moving up the stack, eventually, operators will run out of the data steamthat is powering their revenues today.

Regulations for the new age

Some of the regulations in the communications space are over a 100-year-old. Communications itself has drastically changed though the principle of transferring the bits from point A to B remains the same. T-Mobile reported that 50% of its voice calls are areon VoLTE. IP messaging is many times the SMS global volume. Gradually, almost all voice and messaging will be on the IP layer voice and messaging will just become apps on the data layer. So pretending and regulatinhelp. An ideal strategy for consideration should be that the IP layer gets regulated for fair pricing, competition, and consumer good while everything on the top of the IP layer gets regulated on a principle. The interconnection between apps to deliver services like connection to PSTN, E911, etc. can be addressed by fair market pricing principles. VR is going to become the next communication platform; IP messaging the next application development and commerce platform. To keep the regulatory regime simple and in with the times, by focusing on the access layer, one can guarantee that whatever takes place on the top has the opportunity to grow as the market desires. Similarly, data rules across all apps and services on top of the IP layer should be the same irrespective of the provider. This market shift is required to make the market more competitive and fair.

Connected Devices Resetting the target

The 50B number by 2020 has gotten into the industry lexicon since 2010 when Ericsson first suggested that we are likely to reachthis target by the end of the decade. Others picked up the number and either copied it or even went further by suggesting even 75B+ numbers. By the middle of this decade,it looks unlikely, we will hit 50B. Our research shows that we were at approximately 16B last year. It is tall order to make up 34B in 5 years. Given the new evidence and assumptions, Ericsson also revisedits estimates down to 28B by 2021 (the 2020 number is just over 25B). 25B+ is still an excellent target and something the industry can be proud of. The 50B number still gets thrown around a lot by vendors and media. We will be better off as an industry if we adjust the forecasts based on ground realities and notunnecessarily hype things.

http://www.chetansharma.com/OperatorsDilemmaFourthWave.htmhttp://www.ericsson.com/res/docs/2015/mobility-report/ericsson-mobility-report-nov-2015.pdf


Apple

n $76B revenue was truly astonishing. Yet, the markets were disappointed. What gives? First, the markets care about growth more than they care about the size of the profits or revenue. If the growth number matches or exceeds the expectations, the stock price responds positively otherwise it moves in the other direction. Second, for the first time since2003, Apple issued a negative guidance on sales.

-end market for smartphones is starting to saturate, Apple needs a new narrative that can tie to growth. Apple took a shot at it by releasing some new details around services revenue. In any othercompany, this would have been received very well. With Apple, expectations of the market are supersized so it is not clear if the pivot towards services will help reshape the basicna

Connected Consumer

On average, each US household spent approximately $3800 on access and devices in 2015.

Roughly 80% or $3000 of the US household spend went to access of services such as cellular voice, mobile data, cable, landline voice, and broadband internet.

Roughly 20% or $800 of the US household spend went to devices such as computers, smartphones, feature phones, wearables, tablets, e-readers, connected cars, drones, robots, connected home, and other connected devices.

41% of the household access spend went to cellular phones (for voice and data services).

As a standalone category, mobile data is the biggest category approaching $1000 in yearly household spend.

In the last 5 years, mobile data spend has risen the most and landline voice has declined the most. Cellular voice spend has also gone down while cable and broadband spend have seen relatively modest uptick.

In devices, smartphone is by far the biggest spend category. Consumers spend almost 3x on smartphones than they spend on personal computers. Smartphones accounted for more than 50% of the US household connected spend in 2015.

New categories such as wearables, connected cars, drones/robotics, and connected homes have started to make a tangible impacton consumer spend.

US consumers spent more on wearables than feature phones in 2015.

Chetan Sharma Consulting conducted its annual Connected Consumer survey of 1000 US households. The results confirmed the ongoingincrease in the number of connected devices/household.

Quad Moves

AT&T is integrating its DirectTVacquisition. Verizon acquired AOL and launched Go90. Similar moves are afoot in Europe and other regions. Regular readers wonbe surprised. Video is a key offering for many service providers and by bundling quad plays, operators can further lower the churn. Content will continue to play a big role in how various offerings get bundled. The traditional cable bundle is being pulled apart in favor of more al carte OTT offerings. Media companies will have to figure out how they play in the new converged world. The ones that have been sitting on the sidelines will have to make some moves in the wireless ecosystem to stay relevant in the long-term.



Android vs. iOS: The fight for profit continues

Amongst the prominent Android OEMs, HTC, Sony, LG, and Lenovo all lost money in their device business in 2015. This again highlights the difficulty in differentiating on an open platform. Some of these players might give up on their handset business in 2016. Apple again dominated with 81% of the profit share, 45% of the revenue share, with

ttom end of the spectrum.

4th Wave Revenues

5 years ago, we put forth the theory of 4th waveto explain the upcoming changes in the mobile ecosystem. For the most part, the industry changes and tribulations have tracked the 4th wave curves. Last year, voice revenues fell down by 23%, messaging revenues declined by 18%, while data revenues grew by 23%.4th wave revenues which now dominate the ecosystem now grew by a 60% YoY. We will have more analysis of the state of the 4th wave ecosystem later in the year.

In its Q4 15 earnings call, Verizon laid out its 3-Tier strategy which is similar to the 4th wave digital strategy we have been working on with many operators around the globe since 2011 (see paper and slides for details). Without moving up the stack, eventually, operators will run out of the data steamthat is powering their revenues today.

Regulations for the new age

Some of the regulations in the communications space are over a 100-year-old. Communications itself has drastically changed though the principle of transferring the bits from point A to B remains the same. T-Mobile reported that 50% of its voice calls are areon VoLTE. IP messaging is many times the SMS global volume. Gradually, almost all voice and messaging will be on the IP layer voice and messaging will just become apps on the data layer. So pretending and regulatinhelp. An ideal strategy for consideration should be that the IP layer gets regulated for fair pricing, competition, and consumer good while everything on the top of the IP layer gets regulated on a principle. The interconnection between apps to deliver services like connection to PSTN, E911, etc. can be addressed by fair market pricing principles. VR is going to become the next communication platform; IP messaging the next application development and commerce platform. To keep the regulatory regime simple and in with the times, by focusing on the access layer, one can guarantee that whatever takes place on the top has the opportunity to grow as the market desires. Similarly, data rules across all apps and services on top of the IP layer should be the same irrespective of the provider. This market shift is required to make the market more competitive and fair.

Connected Devices Resetting the target

The 50B number by 2020 has gotten into the industry lexicon since 2010 when Ericsson first suggested that we are likely to reachthis target by the end of the decade. Others picked up the number and either copied it or even went further by suggesting even 75B+ numbers. By the middle of this decade,it looks unlikely, we will hit 50B. Our research shows that we were at approximately 16B last year. It is tall order to make up 34B in 5 years. Given the new evidence and assumptions, Ericsson also revisedits estimates down to 28B by 2021 (the 2020 number is just over 25B). 25B+ is still an excellent target and something the industry can be proud of. The 50B number still gets thrown around a lot by vendors and media. We will be better off as an industry if we adjust the forecasts based on ground realities and notunnecessarily hype things.

http://www.chetansharma.com/OperatorsDilemmaFourthWave.htmhttp://www.ericsson.com/res/docs/2015/mobility-report/ericsson-mobility-report-nov-2015.pdf


The Upcoming 5G wars?

nt to be perceived as being behind). However, there is some real progress being made in short-range ecosystem of 5G. As I noted, in my MWC note, some of the demos coming out of the labs are exciting. In the US,

-Mobile announcement their version of 5G trials. Verizon was out with the first batch of results from its experiments indicating 10Gbps throughput at short-distances. Given the momentum behind cm/mm wave, it is possible that some consensus is built around the spectrum bands by country (and not wait till WRC 19) to get the device ecosystem going.

A lot is still unknown about 5G, specifically, what will be the economics of 5G and the business case for new capex and ROI. We hope to explore this topic in more detail in the coming months.

Our paper on 5G covers the past, present, and future of the network evolution.

What to expect in the coming months?

2015 was a tremendous year for mobile industry thus far as it becomes omnipresence in every industry. We saw some massive moves,astounding acquisitions, and interesting strategic endeavors. The final quarter which is typically the biggest in terms of revenue will lay the foundation for an exciting 2016.

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 2015 and 2015 US wireless market is:

Service Revenues

The US mobile data services revenues in Q4 2015 increased 3% QoQand 16% YoY.

After crossing the $100B in data revenues for two straight years, the US market is set for another excellent mobile data services year though some slowdown has started to occur as predicted by our 4th wave thesis.

Verizon and AT&T dominated the quarter accounting for 69% of the mobile data services revenue and had 67% of the subscriptionbase.

Verizon and AT&T are at #2 & #3 global mobile data revenue ranking respectively in Q4 2015. Sprint and T-Mobile also maintained their rankings in the top 10 global mobile data operators.

ARPU

The Overall ARPU fell by 2.2%.

Data contribution to the overall revenues is now at 72%.

After a minor blip of positive growth in postpaid ARPU by T-Mobile and AT&T earlier this year, all operators saw declines in postpaid ARPU in Q4 with Sprint showing the sharpest decline with 18% change YoY.

http://chetansharma.com/5G.htm



Subscribers

The US market increased its net-adds to 6.7M. AT&T, Verizon, and T-Mobile all added approx. 2M or more subs. Sprint also showed positive net-adds though at a fraction of the top 3.

Verizon again led in postpaid net-adds though a bulk of the net-adds are coming from tablets.

AT&T has approximately 7M connected cars on their network probably the highest of any mobile operator in the world.

4th Wave Progress

players. For example, Mobile is now contributing generating meaningful revenues from mobile. There

Mobile 4th Wave: Evolution of the Next Trillion Dollars

The cloud and security segments have also gained significant traction with incumbents as well as startups launching new initiatives and technologies.

Verizon reported $200 million revenue from M2M and Telematics. At the current run-rate, this will be a billion dollar business by 2016. The current annualized run rate is $800M.

Connected Devices

Connected devices (non-phones) accounted for almost 66% of the net-adds in Q4 2015. 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.

Handsets

Smartphones continued to be sold at a brisk pace accounting almost 97% of the devices sold in Q4 2015. The feature phone category is practically becoming extinct in the US market.

The smartphone penetration in the US is now at 83%.

Verizon continues to sell more LTE smartphones as its LTE sub tally rose to 84M making it the #2 LTE operator behind China Mobile which has more than three times the LTE subs. Other three operators are also deep into their LTE deployments. Verizon reported that 90% of its total data traffic is on theLTE network now, clearly the fastest technology transitions we have seen in the US wireless industry.

Your feedback is always welcome.

Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in ourblog, 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 April 2016.

Disclaimer: Some of the companies mentioned in this update are our clients.
http://chetansharma.com/4thwaveandthenexttrillion.htmhttp://www.chetansharma.com/bloghttp://www.twitter.com/chetansharmahttp://www.chetansharma.com/research.htmhttp://www.chetansharma.com/media.htmhttp://www.mobilefutureforward.com/http://www.chetansharma.com/clients.htm

Page Title Goes HereUS Mobile Data Services Revenue


Page Title Goes HereSummary of the US Mobile Market Revenue Streams


Page Title Goes HereMarket will consolidate into 3 players


Page Title Goes HereRevenue will be made from existing customers, new customer

revenue approaching ZERO


Page Title Goes HereUS Mobile Market: Data Dominant


Page Title Goes Here


US Mobile Market: Subscriber Distribution

Chetan Sharma Consulting, 2016

Segment Ledby

Postpaid Verizon

Prepaid T-Mobile

Connected AT&T

Wholesale AT&T

Page Title Goes HereNet-Adds: Non-Phones continue to dominate


Page Title Goes Here4th


Ne

t R

eve

nu

e

Subscriber Penetration

Revenue Growth Curves and Strategies

Voice

MessagingData Access

OTT/ Digital Services

C

he

tan

Sh

arm

a C

on

sult

ing

, 20

13

Utility

Enabler

Digital Lifestyle Solution Provider

Delay the Decline

Extend the Peak

Move up the value chain in Digital Services

Sources: Verizon 4Q 15 Earnings Call, 2016th Wave, 2012,

Chetan Sharma Consulting

Strategic Objectives

Page Title Goes HerePostpaid ARPU continues to fall


Page Title Goes HerePostpaid Net-Adds of Top 4 operators


Page Title Goes Here US: Pickup in Net-Adds


Page Title Goes HereApple running away w/ profits


Page Title Goes HereChinese OEMs dominate the unit sales, Apple the revenue
