U.S. Mobile Market Remains Unstable, No Chance of Stabilization Yet

Is the U.S. mobile market anywhere close to stable? Almost certainly not.

T-Mobile US unveiled a new set of initiatives aimed at attracting business customers, and an expanded program to take consumer share from other U.S. mobile carriers, as part of its Uncarrier 9.0 announcement.

Where T-Mobile US had been offering to pay early termination fees for customers who switched, T-Mobile US also now is offering to pay off any remaining phone payments owed as part of device installment payment plans.

Sprint earlier this month launched new programs to encourage switching as well, moving before T-Mobile US to offer reimbursement of early termination fees and remaining payments for device installment plans.

All of that is only the latest examples of profit margin compression in the telecom business, earlier seen in the long haul capacity and long distance voice segments of the business.

With some observers wondering how long the U.S. price and promotion war might moderate, or end, the answer seems to be “not yet,” even if no price war lasts forever.

Under other circumstances, a reasonable expectation might be that we face at least another year of unusual efforts at price disruption, to be followed by a period when the leading contestants have adjusted enough to show they can weather the attack, and the attacker or attackers find they have gained share, but now have to switch to improving profits.

The reason is that, at some point, firms find they must concentrate on profits, and have to scale back profit-losing efforts to add customers and gain market share.

So under other circumstances, one might argue the price war will last as long as T-Mobile US and Sprint believe they can continue to add net new customers every quarter, gaining market share, while tolerating margin compression.

Under other circumstances, another likely predictor of stability is a shift in market structure with a clear number one, a number two that has no easy way to displace the top provider, and a number three provider large enough to sustain itself in that position, with the number four supplier far behind the other three.

The reason for that prediction is that, In a classic oligopolistic market, stability occurs when the market structure features a pattern featuring a top supplier with about 40 percent share; a number two supplier with about 30 percent share and a third supplier with about 15 percent.

We are not too far from that pattern, in one respect.

In terms of revenue share, Verizon in early 2015 has about 39 percent share, while AT&T had 33 percent.

One might argue both Verizon and AT&T will lose much incentive to engage in promotional behavior when AT&T no longer believes it can catch Verizon, and the number three contestant no longer really believes it can catch number two, for example.

The number-three supplier, in terms of revenue, is Sprint, at about 15 percent revenue share. It is almost precisely where one would predict the number-three supplier would be.

The issue is that T-Mobile US has about 12 percent share, and is fighting to grow.

Of late, T-Mobile has been rapidly gaining share, with the intention of supplanting Sprint at the number three position.

The problem is that U.S regulators seem unwilling to allow an acquisition of T-Mobile US by Verizon, AT&T or Sprint. That means only a new contestant could do so. And that means the classic oligopoly structure cannot form.

Among the variables are Dish Network’s need to enter the market or sell its spectrum; Comcast’s expected entry and then any future moves by a large Internet player (Google, Apple or another firm). The point is that the U.S mobile market does not presently resemble a stable oligopoly market, not do the medium term competitive prospects suggest the market will assume such a form.

That means, no matter how long the immediate marketing war lasts, the market will remain unstable, unable to assume a stable market share structure.

Strategically, Comcast is expected to enter the market, at some point.

Dish Network also either must enter the market as an operator, or forfeit the rights to spectrum that presently accounts for as much as 80 percent of its total market value.

And then there are the other contenders, including Google, which it is believed soon will be entering the mobile market, and Apple, a perennial potential actor in the market as well.

Regarding Dish Network’s possible moves, none would seem to reduce the leading suppliers from four to three, which would allow a stable structure to emerge.

Even if Dish simply sells its spectrum (and if regulators allow it to sell to Verizon or AT&T, something that is questionable), there is no net change in the number of suppliers.

In fact, Dish Network might yet actually move ahead and become a service provider, adding one more contestant.

Were Dish to become a wholesale capacity supplier, the number of retail suppliers would not be reduced.

And most observers believe Comcast will enter the market within a couple of years, at the very least. And then there are the “wild card” scenarios, where a firm such as Google or Apple decides to enter the business–either by acquiring one of the top four suppliers or by creating a new retail venture.

The point, one might note, is that no stable structure can emerge until the top three market share spots represent 85 percent market share, with a generalized 40-30-15 pattern.

It is hard to see that happening any time soon. For that reason, the U.S. mobile market is likely to remain unstable, with margin compression a continuing reality.

Unexpected Net Neutrality Consequences

Unintended consequences are a constant reality for any specific piece of legislation, or any specific rule making. So it will be with network neutrality.

“Managed services,” or “specialized services” (think carrier voice,  linear video subscriptions or text messaging) now might emerge as a key development for service providers, should network neutrality rules become more popular, or survive legal challenge. The reason is that such services are exempted from the rules.

Oddly enough, the argument that network neutrality is needed so the “Internet doesn’t become cable TV” will have the perhaps-unintended consequence of increasing the value of such managed services for Internet service providers.

In other words, it is likely a rational Internet service provider, with the requisite scale, can make higher profit margins on a managed service than from commodity high speed access.

It therefore makes sense that rational actors will shift effort towards managed services.

Consider that, from 2010 to 2013, U.S. mobile data pricing (per unit sold) declined by only single digits year over year. In the first nine months of 2014, data pricing dropped by 77 percent, according to industry analyst Chetan Sharma.

Whatever profit margins might once have been, one can argue those margins are dropping, even if suppliers are selling more units.

Average (mean) mobile data consumption increasedto about 2 Gb a month in 2014. That single-year increase is unusual. Sharma notes it took 20 years for consumption to reach 1 Gb per month usage levels.

In addition to plunging prices (less revenue per unit sold) and higher usage (more network cost), marketing costs have grown as competition has become more intense.

Overall U.S. operating expense rose 20 percent, year over year. Income was flat while earnings grew three percent.

That is likely to convince larger ISPs to create new products where bandwidth is simply an enabler of a service, and not the actual product sold to an end user. Linear video services and carrier voice services or text messaging require bandwidth and network services, but the product purchased by the customer is not “bandwidth.”

Ironically, March 1 to 7, 2015 is “National Consumer Protection Week” in the United States, a time when the Federal Trade Commission and 89 partners including nonprofit groups, businesses, and federal, state and local government agencies across the country will spotlight their efforts to protect consumers.

The irony comes because new Federal Communication Commission rules on network neutrality, regulating Internet access as a common carrier service will have the effect of ending the FTC’s ability to apply consumer protection rules to Internet access services.

“We do not have authority over common carriers,” said FTC Commissioner Maureen Ohlhausen. “There are significant issues about our ability to protect consumers under Title II.”

In the past, “to the extent network neutrality is an issue, the FTC has been able to address them,” said Ohlhausen. “We are consumer protection enforcers; we can do that.”

The FTC recently took action against a mobile service provider advertising “unlimited access” that actually throttled users of the plan, after a certain threshold of usage was reached, for example.

Under Title II, the FTC is barred from acting, however.

That is likely only the first “unintended consequence” that will surface once the 332-page document is formally released. The FCC has argued the new rules will not lead to rate regulation.

FCC Commissioner Ajit Pai does not agree. “For the first time, the FCC will regulate the rates that Internet service providers may charge and will set a price of zero for certain commercial agreements.”

Of course, much hinges on whether the new rule survives legal challenge, and whether Congress acts to restore a Title I framework.

Unintended consequences are highly likely.

AT&T Transformation Means More Market Competition is Coming

Diversification is a time-tested way for suppliers, investors or buyers to reduce business risk. Diversification also now is a major growth strategy for most service providers.

Consider the significant ways AT&T is about to change, assuming the acquisitions of DirecTV, Iusacell and Nextel Mexico are approved.

Facing huge competition in the U.S. mobile market, AT&T reduces its reliance on U.S. mobile revenues.

In the face of mounting pressure in the U.S. consumer markets, AT&T would–arguably for the first time ever–become a company whose revenues are lead by business customers and services.

Also, AT&T would reduce exposure to declining voice revenue and increase the scale of its video entertainment business, a product segment where telcos are gaining share, rather than losing share.

Where today U.S. mobile operations are the single biggest revenue generator, after the transactions AT&T consumer mobility will be only the third-biggest revenue contributor.

“Our transactions with DIRECTV and Mexican wireless companies Iusacell and Nextel Mexico will make us a very different company, said AT&T CEO, Randall Stephenson. “After we close DIRECTV, our largest revenue stream will come from business-related accounts , followed by U.S. TV and broadband, U.S. consumer mobility and then international mobility and TV.”

Consider the magnitude of the changes. In 2014, AT&T reported earning nearly 60 percent of total revenue from mobile services. AT&T meanwhile earned about a quarter of its revenue from business customers.

Consumer landline revenue was less than 20 percent of total.

Assuming AT&T’s acquisitions of Iusacell, Nextel Mexico and DirecTV are approved, AT&T will earn about 45 percent of total revenue from business customers and about 20 percent from consumer mobility services.

About 30 percent of revenue would be earned from U.S. consumer high speed access and video entertainment.

All of that has key implications. AT&T will reduce reliance on U.S. market revenues. From this point forward, AT&T growth arguably will come from geographic expansion outside the U.S. market.

At the same time, AT&T will reduce its exposure to highly-volatile U.S. consumer fixed line and mobile markets, while increasing the weight of the higher-margin, higher gross revenue business markets.

Video entertainment becomes a much-bigger portion of total revenue. In fact, high speed access plus TV will the second-biggest revenue contributor.

So think about the possible implications. Where will AT&T be willing to invest more, and where will it make sense to invest less? How hard will AT&T fight to protect particular lines of business?

What products will be easier to “merchandise” because profit margins are low, and which will have higher profit margins?

As one might have argued that AT&T has had less and less incentive to invest in its fixed network, given the growth of its mobile services, so now AT&T might have even less long term incentive to invest in the consumer portions of its U.S. fixed network.

That might create new opportunities for domestic competitors, as AT&T and Verizon see the need to “strategically disinvest” in fixed assets, in favor of mobile assets. In AT&T’s case, there now also is the necessity of investing in assets outside the United States.

In other words, AT&T will have diversified its revenue sources towards business, toward video and towards international segments, and conversely away from consumer and domestic.

So some U.S. Internet service providers and some mobile operators might find AT&T more vulnerable in parts of its consumer services portfolio.

At the same time, AT&T might be more inclined to allow competitors to take consumer market share, especially at the low end, since AT&T will be more focused on global and business revenue sources.

AT&T’s moves are part of a diversification pattern happening elsewhere, and for obvious reasons.

“Overall, growth in telecom revenue continues to slow in every geographic region,” according to Stéphane Téral, Infonetics Research principal analyst. That puts a premium on discovery of brand new revenue sources, geographic expansion and product line expansion.

Europe’s five largest service providers—Deutsche Telekom, Orange, Telecom Italia, Telefónica, and Vodafone—continue to experience declining revenue, though less pronounced than in the past three years, he noted.

Global mobile service revenue barely budged in the first half of 2014, up just 0.5 percent from the same period a year ago, Infonetics says.

But mobile data services (text messaging and mobile broadband) rose in every region in the first half, driven by the increasing usage of smartphones. The obvious corollary is that voice revenues have fallen nearly as much as mobile data revenues have grown.

Mobile broadband services grew 26 percent year-over-year, enough to offset the decline of text message revenue declines, Infonetics reported. On the other hand, that sometimes was not enough to offset losses of voice revenue.

In Latin America, mobile data will not replace lost voice revenues. Orange voice revenue declined 3.3 percent in 2014. In Japan, DoCoMo says a change in voice tariffs might mean NTT does not make money on voice until 2017.

High speed access revenue still drives growth in mobile and fixed line segments, but revenue will “begin to stabilize” between 2015 and 2016, if “our competitors behave, said Ramon Fernandez, Orange CFO.

Vodafone now is focusing on fixed network broadband for revenue growth, as its mobile business is declining.

The larger point is that diversification moves are going to continue, allowing many service providers to recast themselves.

At the same time, that is going to create new space for competitors to enter markets where leaders are less likely to put up as stiff a fight as they might have in the past.

Ironically, as competition grows in US. consumer services, at least some major contestants, including AT&T, are essentially redeploying effort and capital away from the fight.

That means market share shifts are going to accelerate in U.S. consumer markets.

“Sustainability” is the New Telco Challenge, Globally

“Sustainability” was not an issue in the old monopoly telecommunications world. With profits guaranteed by “rate of return” regulations, service providers literally could not lose money, and also were guaranteed a fixed rate of return on invested capital.

Also, in many cases, since the firms were directly owned by national governments, there was an implied financial backstop provided by the national government, as well.

All that has changed as firms have been privatized and deregulated, exposing all the former incumbents to market pressures and the risk of failure. Now, sustainability–the ability to stay in business–is everything.

Virtually every legacy service faces product maturation, product substitutes are more plentiful than ever and new competition is growing. Ignoring for the moment the issues of product maturation and product substitutes, the amount of competition is growing.

In the U.S. market, Cablevision Systems Corp. has launched the first-ever mobile service based exclusively on the use of Wi-Fi access. That s a challenge to the notion that a “mobile network” is required to provide mobile services.

At the same time, in the midst of a mobile marketing war, additional competitors might be coming.

Google is starting a mobile service of its own, Dish Network either will enter the market or sell its spectrum holdings and Comcast likewise is preparing its own future mobile operation.

Dish Network bid $13.3 billion to buy AWS-3 spectrum (but might have to pay only about $10 billion), adding to prior spectrum holdings ostensibly amassed to build a new Long Term Evolution mobile network.

By some estimates, Dish Network’s mobile spectrum is worth perhaps $20 billion.

The issue now becomes whether Dish Network will commit to building a new mobile network, or will sell the spectrum rights to another company.

The point is that three additional national contestants might become part of the U.S. mobile market. The implications for gross revenue and profit margins of existing suppliers is not hard to imagine.

But changes also are coming in many other markets. In Europe, there is a present trend towards mobile consolidation and triple-play or quadruple-play offers made possible by ownership of both fixed and mobile assets.

That could relieve some competitive pressure in the short term. Oddly enough, the long term outcome could well be more competition, not less.

It is possible that a smaller number of stronger contestants will lead to a greater ability to compete, long term, raising gross revenues and profit margins enough to entice new players into the market. We sometimes forget that vicious competition and low profit margins are a deterrent to new entrants.

Bigger revenue opportunities and better profit margins will tempt new providers to enter a market.

Globally, even if the expectation is that mobile service providers are best positioned to provide Internet access to new customers, two big groups of investors are planning to launch new satellite constellations to provide Internet access to billions of potential new customers.

As skeptical as some might be, the new constants include Elon Musk and Richard Branson, plus Google and entrepreneur Greg Wyler, using new launch technologies and architectures that will increase capacity and make possible lower costs than possible using a geostationary satellite approach.

The biggest change is the use of low earth orbit for the new fleets. That implies much-larger numbers of satellites, but also using new, lower-cost technology, with much-higher capacity (the analogy is small cells used in a mobile network).

The LEO approach is not a new idea. But history is why some might be skeptical.

Iridium, which lost perhaps $5 billion, was among the biggest failures in the low earth orbit satellite communications business. Teledesic arguably lost less, because it failed earlier. And then there was Globalstar. And ICO. And Orbcomm.

But Thuraya succeeded.

So can Elon Musk, Richard Branson and Greg Wyler successfully create two new satellite communication networks that are sustainable? Some might argue the odds are far better, and for the same reason the odds of creating a successful application startup are higher than 15 years ago.

The information technology components of the business arguably are an order of magnitude lower.

And both the WorldVu Satellites and SpaceX ventures have access to backers who have their own launch technology, likewise with launch cost profiles substantially lower than what has been possible in the past.

All the contestants–legacy and upstart–will face sustainability issues. For incumbents, the issue is how to survive markets becoming more competitive.

For upstarts, the issue is whether the new platforms–even when using new lower-cost approaches–can attract enough consumers to achieve cash flow and profits large enough to keep them in business.

Nothing can be taken for granted in such scenarios.

Cablevision Launches “Wi-Fi Only” Mobile Service: Big Test of Rival Platform

How big is the market for Wi-Fi-only smartphone service? We are about to find out, as Cablevision Systems, the U.S. cable operator based on Long Island, New York, has launched Freewheel.

The new Wi-Fi-only mobile service will provide a real-world test of a theory, speculated about for a couple of decades, that Wi-Fi can be a full substitute for a mobile network, at least for some customers, with some use cases.

Nobody seems to doubt that Wi-Fi access is, and can be, a huge part of the smartphone access infrastructure.

Fully 80 percent of all global Internet traffic now is generated by smartphones and untethered devices. Fully 66 percent of all mobile device data consumed uses Wi-Fi as the connection, and the percentage will keep growing, Cisco predicts.

But the “Wi-Fi only” approach to mobile device access will test the degree of demand for a service that has no ability to use the mobile network.

That mimics, in many ways, the way most tablet users gain Internet access, and will test the ability for a new platform to compete directly with mobile operators.

The big drawback will be the lack of ubiquitous access, the key feature of traditional mobile service. Even if the majority of device use now occurs in Wi-Fi zones, the ability to connect from anywhere, on the go,  remains the unique value of mobile service.

So the new value proposition to be tested is whether a “works sometimes” approach, priced right, will appeal to a big segment of the “works everywhere” market.

Right now, nobody knows. To be sure there are some advantages Cablevision will build upon, including the consumer tendency to buy a triple play, quadruple play or multiple-user service plan. The majority of consumers buy their fixed network services in a bundle, and most mobile accounts also are purchased on multi-user plans.

That might especially be true for present buyers of Cablevision high speed access, who can get the new service for $10 a month. As a relatively small incremental cost item, one might argue the biggest single group of users will be high speed access customers who want a low-cost mostly-mobile smartphone service to be used locally.

Some might argue a classic disruptive attack is underway.

Often, attackers enter the market with products that are “not fully featured.” Offered at significantly lower prices, the value proposition trades functionality for cost. Recall the way MCI entered the long distance voice market, the way Skype entered the voice calling market, or the way WhatsApp entered the messaging market.

In each case, observers could well have noted functionality, quality or feature limitations of the attacking service. But, over a period of time, features, functionality and quality increased.

That might well be the thinking behind Freewheel. Whatever the present limitations, all that will change within a decade, and in the meantime Cablevision will have built a brand, customer base and revenue stream that can grow into the new market.

At the same time, Freewheel gives Cablevision a quadruple play offering including mobile service, even if there are some limitations. Right now, there is just one handset available, and there is no fallback to mobile service when Wi-Fi access is unavailable.

The upside is unlimited use and a $10 a month recurring service charge. But Cablevision reasonably might expect that this classic “attack from the bottom” would be followed by an expected development of the service to mirror the quality and features of a standard nationwide mobile service.

At the same time, the number of scenarios under which “Wi-Fi only” makes sense are growing.

In addition to Cablevision’s Freewheel, Spectra Wireless, an African Internet service provider, uses Wi-Fi as the only connectivity mechanism, if primarily because it is an education-focused ISP primarily serving campus locations, for the moment

Spectra Wireless also is the first company in Africa to offer a consumer Internet access service leveraging TV white space technology, as well.

So we now get an enlightening test of how well Wi-Fi can become a mobile services platform, not as a complement, but as an alternative.