us wireless market_q3_2015_update_nov_2015_chetan_sharma_consulting

US Wireless Market Update Q3 2015

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Page Title Goes HereUS Mobile Market Update Q3 2015


Summary

• The US mobile data market grew by 3% QoQ and 14% YoY. The overall services revenue declined again by 2%. The device revenue increased by 26% which helped the overall revenue to grow by 3%.

• Of the top 5 mobile operators in the world by revenues, US occupies three spots. And mobile data is the key reason why. Mobile data has powered the industry growth over the last decade and it continues to enable operators to differentiate themselves. The most recent twist in the industry skirmishes was T-Mobile’s Binge-On offering to make video streams free. Given that 60% of the traffic on their network is video, that’s substantial free traffic. FCC gave its blessing to the strategy encouraging others to tinker at the edges.

• The strategies for operators is revealed in their financials. Verizon and AT&T have optimized their business on margins while T-Mobile and Sprint on net-adds. In 2015 so far, Verizon and AT&T have earned roughly $17/subscription/month while T-Mobile and Sprint have collectively lost $0.39 on every subscription/month.

• All four operators maintained their historic low churn rates and are running much tighter operations now. Net income improved 12% YoY.

• After seeing steep declines in 2014, the mobile data pricing has stayed pretty stable in 2015 with no major declines or changes. The emphasis of unlimited is paving way for shared data plans and the data buckets per account keep on inching up. In fact, many low-to-mid tiers have seen a price increase. Some of the upper enterprise tiers have seen the prices double in 2015.

• Smartphone penetration increased to 81% and roughly 97% of the devices sold now are smartphones. The smartphone penetration amongst postpaid users is now 87%.

• The iPhone again dominated with 80% of the smartphone profits. The Android profits declined by 22% QoQ, the smartphone business remains a challenge for a number of Android OEMs.

• 4th wave services continue to grow at a very past face around the globe. IoT as a category is also making steady progress with a number of players reporting multi-million dollar revenue quarters. There are at least 8 companies making a billion dollars or more in revenues from IoT.

WiFi First

Comcast is expected to launch its WiFi first MVNO with Verizon fairly soon. 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, even with the rise of WiFi usage, the cellular usage hasn’t slowed down. Cellular data usage is still growing 70-80% 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. Remember, Google Fi while creative is not actually cheaper for most active users. 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 will change 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.



M&A Window is closing

Given that the spectrum auction is coming up and the US presidential cycle in 2016, the window of any major M&A in the service provider segment is almost closed and we might be looking at 2017 and beyond for any major transactions. This means, T-Mobile and Sprint who were hoping for some form of a transaction by now will have to keep on competing and outdueling rivals for the next few quarters.

IoT Revenue Streams and what it means for the ecosystem

Time for a pop quiz

When did voice revenues pass the $1B mark in the US?

If you said 1987, you would have been right.

How about for mobile data? When did it cross the $1B mark in the US?

Did you say 2002? Right again.

What about IoT and related services (mobile operator’s revenues only)?

2016? Nope, it was 2013.

Back in 2002, very few in the industry saw what was coming in mobile data. IoT is at the same stage though mobile data was growing faster – mobile data was almost doubling in revenue every year. IoT is growing at a quarter of that rate currently. But the big two are pushing to create a larger ecosystem to accelerate the growth. AT&T already had an active IoT developer program. Verizon introduced its ThingSpace platform to the developers last month. It is already selling complete IoT solutions ]in energy, transportation, security, and several other industry segments. The sale of IoT solutions is quite different than selling mobile data which sells itself for most part. As we mentioned before, Verizon is on track to crack the billion-dollar mark in IoT next 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.

Mobile data growth

Mobile data consumption 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. By the end of 2015, the average consumption per sub in the US will be at 3.9 GB/mo/sub. T-Mobile with its liberal data consumption offerings is doing much higher than the national average. Even though its market share is only 16%, its share of the national data traffic is substantially higher.

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. If you take out Samsung, Android OEMs barely made a billion dollars despite over $26 billion in revenues. This again highlights the difficulty in differentiating on an open platform. Some of these players could give up on their handset business in 2016. Apple again dominated with 80% of the profit share, 40% of the revenue share, with only 14% of the unit share. Samsung’s revenue improved a bit but it continues to face challenges both on the top and bottom end of the spectrum.

https://thingspace.verizon.com/developer/



4th Wave/IoT Revenues

There are at least 8 companies doing over a billion dollars in IoT revenues. Intel is on track to exceed $2B in IoT revenue this year. Fitbit is likely to eclipse $1.5B in revenue with an astonishing 48-50% margin. AT&T’s IoT business is over a billion dollars. Verizon’s annual run rate is over $675M now. Google is approaching half a billion in IoT revenues. There are numerous other players who are doing sizable IoT revenues. We haven’t even gotten to the Industrial part yet where the savings and earnings are into billions (we will cover them in a future paper).

In other 4th wave segments, the number of players making $250M/quarter on mobile continues to increase rapidly and these aren’t your traditional wireless players. For example, Mobile is now contributing 78% (up from 30% in Q1 2013) to Facebook’s quarterly revenues. Latest addition to the club is Twitter which is now doing 86% in mobile (of the total advertising revenue) up from 60% in 2013.

Connected Consumer

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

• Roughly 80% or $3000 of the US household spend will go 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 will go 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 will go 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, smartphones is by far the biggest spend category. Consumers spend almost 3x on smartphones than they spend on personal computers. Smartphones will account 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 impact on consumer spend.

• US consumers will spend 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 ongoing increase in the number of connected devices/household.

• The number of connected devices per US household is now 5.3 with over 37% of the households in the 4-8 range.

• Almost 6% of the households have 15 or more connected devices.

• More details are available at: http://chetansharma.com/connectedconsumer15.htm

http://chetansharma.com/connectedconsumer15.htm



Quad Moves

AT&T is integrating its DirectTV acquisition. Verizon acquired AOL and launched Go90. Similar moves are afoot in Europe and other regions. Regular readers won’t be 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.

The Upcoming 5G wars?

I started my career when 1G was all the rage. My first 4G project was back in 2002. By some measures, we are already behind on the 5G discussions. In general, it takes 7-10 years before the standards are finalized and then the network technology lasts for approximately 20 years before a market moves onto the next generation of technology. US led in the growth of 1G (AMPS, TACS) followed by Europe on 2G (GSM, CDMA). Japan took the leadership role with 3G (WCDMA, EVDO) and US wrestled it back on 4G (LTE). Japan, China, Korea, and EU are determined to lead on 5G and have been making very public statements and R&D investments about their ambitions on 5G. Japan of course has a very clear goal of having 5G by Tokyo Olympics in 2020. Am sure some operator(s) somewhere will jump the gun and start calling LTE-A+ as 5G around 2017-18 or sooner. You can expect a lot of activities both in public and private on 5G as companies and governments try to figure out a way to claim the 5G leadership mantle.

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

The biggest news in 5G recently was Verizon’s announcement that it will have commercial deployment of 5G in 2017. Of course, everyone in the industry knows that it is not technically possible as the standards won’t be done until late 2019 so the first standards compliant networks can’t be up until late 2020. Even Tokyo might only have a quasi-5G network for the Olympics. However, there is a loop-hole. 5G will come in different flavors and one could implement portion of IMT 2020 (ITU-R Recommendation M.2083-0) and call it 5G. In fact, some of the requirements can be completed today. If you have enough spectrum, one can use carrier aggregation and get to 1Gbps as was recently demonstrated by Telstra by aggregating five 100 MHz channels earlier this month. At higher frequencies, companies like SiBeam have already shown the capability to reach 1Gbps easily. While there are efforts to introduce new waveforms that straddle the two worlds, it is quite likely that for the traditional lower bands, we will be using carrier aggregation (along with WiFi) to gain higher throughput and for higher-bands (and for indoor use), we will use cmwave and mmwave to get high throughput but for very specific use cases. Nokia and Ericsson have demonstrated this in different trails.

What the surprise Verizon proclamation did was to force other operators to have a stance and accelerate their own thinking and positioning on what 5G means. Hopefully, this would mean that industry will come to a consensus on definitions and guidelines and there will be less confusion though that might be wishful thinking at this point.

Is Microsoft getting its Mojo back?

In the last 12 months, Microsoft has made several decisive moves that show a new determination to matter in the mobile world. For the first time, it introduced a PC – Surface Book which received with nervous trepidation by its partners but a pleasant surprise by the press. For the first time in many years, it looks like a PC that people actually want to own. Surface book also helped people realize just how inadequate the designs have been from the traditional PC industry. Will the Book be just a showcase device as its partners hope for or is there a vertical integration strategy afoot here? Whatever maybe the case, Microsoft showed its intent and is going full steam ahead on several fronts. Though its mobile strategy is too little too late, the all-around approach to computing could catapult the old giant back into the forefront.

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

http://www.cnet.com/news/verizon-to-hold-worlds-first-crazy-fast-5g-wireless-field-tests-next-year/

https://exchange.telstra.com.au/2015/11/09/1gbps-the-future-is-here/



What to expect in the coming months?

2015 has been 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 Q3 2015 US wireless market is:

Service Revenues

• The US mobile data services revenues in Q3 2015 increased 3% QoQ and 16% YoY.

• After crossing the $100B in data revenues last year, 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 subscription base.

• Verizon and AT&T are at #2 & #3 global mobile data revenue ranking respectively in Q3 2015. Sprint and T-Mobile also maintained their rankings in the top 10 global mobile data operators.

ARPU

• The Overall ARPU fell by 2.6%.

• Data contribution to the overall revenues is now at 67%.

• After a minor blip of positive growth in postpaid ARPU by T-Mobile and AT&T last quarter, all operators saw declines in postpaid ARPU in Q3 with Sprint showing the sharpest decline with 11% change YoY.

Subscribers

• The US market increased its net-adds to 7.2M. AT&T, Verizon, and T-Mobile all added 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 added 1M cars to its tally to reach 5.4M in connected cars on their network – probably the highest of any mobile operator in the world.

4th Wave Progress

• The number of players making $250M/quarter on mobile continues to increase rapidly and these aren’t your traditional wireless players. For example, Mobile is now contributing 78% (up from 30% in Q1 2013) to Facebook’s quarterly revenues. Latest addition to the club is Twitter which is now doing 86% in mobile (of the total advertising revenue) up from 60% in 2013. Even traditional players like Hertz, Sears, and Starbucks are generating meaningful revenues from mobile. 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”)

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

• Verizon reported $175 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 $675M.

http://chetansharma.com/4thwaveandthenexttrillion.htm



Connected Devices

• Connected devices (non-phones) accounted for almost 60% of the net-adds in Q3 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.

• For AT&T, connected cars started to form a significant base of the connected devices segment with 40% of the new connections coming from cars.

Handsets

• Smartphones continued to be sold at a brisk pace accounting almost 97% of the devices sold in Q2 2015. The feature phone category is practically becoming extinct in the US market.

• The smartphone penetration in the US is now at 78%.

• Verizon continues to sell more LTE smartphones as its LTE sub tally rose to 80M making it the #2 LTE operator behind China Mobile which has more than twice LTE subs. Other three operators are also deep into their LTE deployments. Verizon reported that 89% of its total data traffic is on the LTE 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 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 Feb 2016.

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

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Page Title Goes HereUS Mobile Data Services Revenue


Page Title Goes HereSummary of the US Mobile Market Revenue Streams


4th wave revenuessurpassed access revenues

YoY Growth

21%

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 HereUS Market: Carrier Marketshare (2015)


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


Page Title Goes HerePostpaid ARPU stabilized some


Page Title Goes HerePostpaid Net-Adds of Top 4 operators


Page Title Goes Here US: Pickup in Net-Adds


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


Page Title Goes Here

Page Title Goes Here5G: The history of the future


Page Title Goes HereWe look forward to hearing from you


Chetan Sharma

[email protected]

TW: @chetansharma

http://www.chetansharma.com

Mobile Future Forward

[email protected]

TW: @mfutureforward

http://www.mobilefutureforward.com

Research. Technology. Strategy. Intellectual Property. Thought Leadership Summits.

mailto:[email protected]

http://www.chetansharma.com/

mailto:[email protected]

http://www.mobilefutureforward.com/