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US Wireless
Data Market Update - Q3 2008
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http://www.chetansharma.com/usmarketupdateq308.htm
Recession:
Nice to meet you.
US_Wireless_Data_Market:
I don’t know who you are but I won’t mind a bailout package.
The US wireless data market shrugged off the economic doldrums in Q3
2008 and grew 7.3% Q/Q and 37.5% from Q307 to reach $8.8B in data
services revenues. The total for the year (for first 9 months) stands at
$24.5B which is equal to the revenues generated in 2007 (full year).
While the flailing economy has started to hit hard on the wireless data
ecosystem esp. the infrastructure and handsets segments, consumers
haven’t really pulled back on mobile data spending, just yet.
But will they? That is a $700B question. It is likely that more people
will be willing to downgrade their Internet services, wireline usage,
cable premium channels, restaurant eating frequency, energy consumption,
vacation trips, and the gas mileage every week than reduce their
wireless usage. But what about data services - broadly, they are divided
into messaging, web and information access (includes data cards and
subscriptions) and downloadables (games, ringtones, etc.). It is highly
unlikely that people will change their messaging (which now accounts for
approximately 40% of the revenues) habits overnight though we might see
more subs going for package deals and family plans to save. We might
also see growth in prepaid subscriptions in the US market. In fact, Q3
saw a jump in messaging volumes in the US by 38% and messaging revenues
grew 6%.
Wireless WAN data card access is very useful for road warriors though
some corporations might start limiting the number of employees using
such services, we don’t think it will make substantial impact in most
cases except for the fact that the layoffs in various sectors will start
to ripple into the mobile sector and will start cutting into some of the
enterprise mobile data revenues. The downloadables have already been in
the declining mode for the last 9 quarters and we might see acceleration
of that trend.
Next question is - will the increase in the subscriber base nullify the
loss in data subscriptions and the answer seems to be - likely yes. But,
if the job loss rate increases substantially, more than it has been in
Q3 and into Q4, we might, just might, start to see flattening of data
revenues in Q109 and gradual decline over the course of the year.
Despite the unprecedented bailout from the US Treasury to abort a long
recession, we are likely to be in for a longer winter than most
anticipate because current efforts don’t even start to address the
fundamentals of the financial crisis. The basic industry structure is
still flawed. Unless the new administration strikes at the root cause of
this mess, wireless data segment won’t be completely immune to the wider
economic crisis. We have already started to see infrastructure
(operators are slowing down 3G/4G investment) and device segments
(replacement cycles are getting longer) getting hit pretty hard.
Another factor at play is the growth in 3G and smartphone penetration in
the US market, both of which have been responsible for increasing the
usage and hence the revenues. At the end of Q308, 3G penetration was
approximately 37% and the data penetration had reached 56%. Smartphone
penetration has been inching up as well. In fact, all the service
providers and OEMs have been targeting sub-$200 price point, which seems
to be a good sweet spot for consumer adoption. The above two factors
will also help negate any cancellations or downgrading of data plans.
However, we are likely to see price pressure on subscription plans and
as a result, voice ARPU will continue its downward trend and data ARPU
will become a more dominant factor of the overall ARPU mix by the end of
2009. The percentage contribution from data is likely to exceed 25% by
the end of 2008 and 30% by the end of 2009.
Operators in Europe have already started to feel the pinch starting with
Vodafone and Telefonica who experienced decline in revenues (due to the
decline in MOU and price pressure) some of which is a function of the
heavy prepaid penetration. But, it should be noted that for Vodafone,
though overall service revenues declined 1.7%, data revenues grew 30%.
As we have been saying for years, data-mindset is needed for strategy,
infrastructure design and investment to stay competitive in the changing
landscape. Better offer packaging and lower price plans will also help
in reducing service churn. Operators will also look to reduce their opex
to boost profits.
Coming back to the 2008 forecasts, we still think that the US wireless
data market is likely to come close to hitting our original estimate of
$34B for the year given the seasonality of Q4 which is likely to negate
any decline experienced by the industry. So, it might not be until Q109
before we know where the various data sub-segment are trending. If
consumer confidence starts to reverse its trend in early 2009, we are
likely to see slower growth but the data revenues will continue to grow
from the current levels. However, the lack of policies or correction
will further downgrade consumer sentiment, then, we might start to see
decline in the US wireless data market for the first time probably
starting around late Q209.
Against this backdrop, the analysis of the Q308 US wireless data market
is:
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The US Wireless data service revenues grew 7.3% Q/Q to $8.8B in
Q208. Compared to Q307, the data service revenues grew 37.5%.
-
Overall ARPU decreased by $0.04. Average voice ARPU declined by
$0.94 while average data ARPU grew by $0.90 or 8% almost negating
the drop in voice ARPU.
-
Sprint led in data ARPU with $13.50 (or 24.11% of the revenues,
followed by Verizon at$13.30 (or 25.49% of the revenues - first
carrier to cross the 25% threshold), AT&T at $12.29 (or 24.20%), and
T-Mobile at $9 (or 18%).
-
All the top four carriers experienced approximately 8% increase in
data revenues compared to the Q208 levels. Verizon with $2.8B in
data revenues led AT&T at $2.7B, Sprint at $1.6B and T-Mobile at
$850M. Both AT&T and Verizon are on target to be two of the three
operators to exceed $10B in data revenues for the year for the first
time by (global) operators besides NTT DoCoMo (the two US carriers
are already over 75% of the target). China Mobile is the other
operator which is going to cross the $10B mark in 2008.
-
AT&T and Verizon now account for 62% of the market data services
revenues. Sprint had a second consecutive quarter of data revenue
growth after falling behind its peers for the past couple of years.
-
The average industry percentage contribution of data to service
revenues exceeded 23%. A year ago, the percentage contribution stood
at approximately 17.7%. US market is likely to exceed the 25% mark
in Q408.
-
The number of data subscribers has been on the rise with Verizon
leading the way. At the end of Q308, Verizon had 74% of its
subscribers using some form of data services. The messaging volumes
in the US market now average over 105B messages/month or at the
frequency of a message/sub every 2 hours. In comparison users in
Philippines average routinely send on an average, a message every
hour.
-
In terms of net-adds, Verizon continued to lead in Q308 with 2.1M
net-adds (aided by an acquisition), again edging AT&T which had 2M
net-adds for the quarter. Sprint continues to lose subscribers at an
alarming rate, loosing another 1.3M in Q308.
-
T-Mobile USA moved to number 9 in the top 10 rankings of global
mobile operators by data revenues. For the quarter, Verizon and AT&T
improved their rankings to #3 and #4 respectively at the expense of
KDDI which dropped to #5. Sprint Nextel maintained its # 6 spot.
AT&T and Verizon are in the select group of five global operators
who are now generating $2B or more in data revenues/quarter (the
other three are NTT DoCoMo, China Mobile, and KDDI).
-
Non-messaging continues to grab 50-60% of the data revenues for the
US carriers.
-
The flat-rate pricing movement that was started by Willcom in Japan
which moved to Europe started to take firm roots in the US market
with industry wide flat-rate pricing plans that included data.
Sprint has been the most aggressive with its “Simply Everything”
plans that include data services. 30% of its $100 plan is assigned
to data revenues (for accounting purposes). All the major carriers
seem to be offering flat-fee access plans for most of the new
smartphones being introduced in the market. Approximately 13% of the
consumers have flat-rate data plans.
-
As expected, the blockbuster acquisition of Alltel by Verizon got
approved and the deal will close in the next few weeks making
Verizon the top carrier in the US market with close to 85M subs by
the end of year.
-
Q3 also saw the launch of the fabled G-phone as G1 Google phone
launched by T-Mobile in the US market and it is slowly making its
way into Europe. While G1 is no iPhone, it introduced long-awaited
features such as multiple processes, more open APIs, and others.
Motorola is said to be planning to launch Android devices in 2009.
The smartphone segment has clearly shaken up the market with Apple,
Google, RIM, and Nokia being the main competitors. Microsoft keeps
misreading the market and is heavily under leveraging its strength
and experience.
-
There are probably 18-20 sub-segments within mobile data services
and consolidation looms. Who will be the last man standing post the
nuclear winter? While the valuations are still high for rapid
consolidation, we think that by Q209, the M&A scene is likely to
heat up.
-
Will Mobile Advertising be the rising star from the crisis or one of
its victims? Clearly, there are a number of advertisers and brands
that are scaling back on the experimental dollars thus shrinking the
mobile ad spend. On the other hand there are some savvy brands who
are pulling back from the traditional mediums like print which don’t
really work and putting more money into digital including mobile. It
will be interesting to see if operators use the opportunity to lay
the foundations of a long-term mobile advertising strategy. Stay
tuned for some of our thoughts on the subject.
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Venture money in the mobile sector experienced a rapid decline.
Compared to Q307, venture financing declined by 88%, and the yearly
totals are 35% lower than what they were a year ago. (Source:
Rutberg)
-
Nokia eclipsed 100M unit sale in Q308 for the sixth straight
quarter. It sold over 111.7M handsets in the quarter, more than the
next three players combined. Nokia’s global market share declined to
37%. Samsung surged to 52M handset sale. Apple surpassed RIM in
smartphone sales. For the year, the industry looks to again eclipse
the 1 billion handset mark for 2008 but the overall handset sales
will decline in 2009 (though still easily exceeding 1B).
-
The 3G penetration in the US went past 35% in Q308, with Verizon
leading the pack with over 61% 3G subscriber penetration compared to
the 30% 3G subscriber penetration at AT&T. T-Mobile is slowly
expanding its 3G coverage. 3G subs have over $23 in data ARPU. The
growth in 3G and smartphones is helping offset any downward pressure
on the data revenues and overall ARPU.
-
As we had mentioned back in July,
Apple easily surpassed its 10M target in Q308 buoyed by its 100
country expansion plan. The broadband and appstore capabilities are
quite attractive to consumers and it shows. VPN and direct access to
Exchange is helping in getting many more users into the mix and
making IT folks less apprehensive. The clearcut business model of
30/70 split is also attractive.
-
T-Mobile also launched its own Appstore (and so did Google and RIM,
even Microsoft) along the lines of Apple’s initiative with promises
of greater control to the application developers.
-
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 - metered billing,
UMA, Femtocells, Hotspot buys, WiMAX, LTE, and others. We deal with
the whole topic of Wireless Broadband in great detail in our
recently released book
“Wireless Broadband - Conflict and Convergence”
(Co-authored with one of the leading entrepreneurs in the space -
Vern Fotheringham, published by IEEE Press and John Wiley). We will
have more to say on the subject in the coming days and months.
-
After raising $14.5B from friends and family, Clearwire’s net-adds
continued to drop in Q308. While the deal got approved, the economic
climate is putting pressure on a comprehensive rollout strategy.
Sprint did launch WiMAX in the Baltimore market with initial
feedback from the sparse usage to be as advertised.
-
In a sign of convergence battles to come, T-Mobile’s @Home and
Sprint’s Femto cell initiatives started to take hold. Cable
operators are also aggressively seeking triple-play by providing the
wireless component of the service. Don’t be surprised by some
acquisitions in 2009.
Global update
-
China and India added approximately 52M subscriptions combined in
Q308 with India edging out China. In Sept, India added more than 10M
monthly subscriptions for the second time this year and its net-adds
total for the first 9 months stands at 82M. By comparison China
added 77M and US increased its tally by 11M.
-
NTT DoCoMo continues to dominate the wireless data revenues rankings
with almost $3.9B in data services revenue in Q308, thus exceeding
the $10B mark in just 9 months. Almost 41% of its revenue now comes
from data services. DoCoMo also crossed 86% in 3G penetration in
Q308 and is expected to cross the 90% mark by early 2009.
-
Most of the major carriers around the world have double digit
percentage contribution to their overall ARPU from data services.
Many operators are consistently exceeding 30% with DoCoMo and
Softbank being over 40%.
We will be keeping a close eye on the trends in the wireless data sector
in our
blog
and future research reports. The next US Wireless Data Market update and
the Global Wireless Data Market update will be issued in March 2009. We
will be doing an end of the year piece with forecasts and predictions
for the coming year in Dec 2008.
Your feedback is always welcome.
Happy Thanksgiving and Happy Holidays.
Thanks.
Chetan Sharma
Disclaimer: Some of the companies mentioned in this note are our clients.
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