US Mobile Data Market
Update Q3 2012
http://www.chetansharma.com/usmarketupdateq32012.htm
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Summary
The US mobile data market grew 3% Q/Q and 17% Y/Y to reach
$19.9B in Q3 2012. Data is now almost 43% of the US mobile
industry service revenues. For the year 2012, the market is on
track for mobile data revenues in the US market to reach our
initial estimate of $80 billion.
Largely due to the strong postpaid performance by Verizon, the
US operators added a net of 2.4M new subscribers. Sprint and
T-Mobile saw further postpaid declines. For T-Mobile, Q3 marked
the nine straight quarters of postpaid losses.
The quarter also saw a couple of block-buster operator M&As that
took many in the industry by surprise. T-Mobile found a soul
mate in MetroPCS while Softbank showed up at the altar for
Sprint. Once the mergers are executed, Sprint is likely to
emerge as the stronger of the two.
The two horse OS race got a new participant entry last month –
Windows 8. Microsoft and its partners launched a worldwide
campaign for a chance to compete. Microsoft also made a splash
with the first computing device in its history – Surface. Both
got a mixed reception from the market. We will find out how
consumers will react in the Q4 numbers. Of all the OEMs, Q4 will
be the most critical for Nokia who is running out of runway in
its turnaround effort.
Despite setbacks in the IP battles, Samsung continued its march
of being the undisputed unit leader in mobile device space.
After displacing Nokia in Q1 2012, it continued to dominate in
units shipped in Q3 2012. However, Apple dominates both the
smartphone revenues and more importantly just crushes the
competition on device profits. It has only 6% of the global unit
shipment share but over 70% profit share. In tablets, Apple
completely dominates the landscape in both shipments and
revenue. In fact, 95% of the profits in the tablet segment go to
Apple with the remaining ecosystem fighting for the crumbs.
Apple has the complete stronghold on the supply chain and has
sucked out the oxygen from the OEM world.
Amazon hasn’t been shy about its ambitions in the mobile space.
While the world awaits an Amazon smartphone, the company
launched a slew of tablets to compete primarily with Google
though its eyes are on Apple. Apple also launched iPad mini a
mid-tier tablet to ward of threats coming from the bottom tier
of the market.
As we mentioned it in our
last
update,
smartphones are now past the 50% mark in the US and continue to
sell at a brisk pace accounting for over 75% of the devices sold
in Q3 2012.
While the US penetration of smartphones is over 50% as we
reported last quarter, the 50% of the sub base is concentrated
in only 30% of the households thus leaving plenty of growth left
in the marketplace.
In terms of Y/Y growth, Connected Devices segment grew 19%,
Prepaid 10%, Wholesale 6%, and Postpaid was flat. The connected
devices segment picked up some growth after two straight
quarters of sub-5% performance growth (Q/Q).
Verizon and AT&T maintained their top positions in the global
rankings by mobile data revenues. A survey of the entire
ecosystem shows that the US companies dominate the top 5
rankings of profit share. China Mobile leads the industry with
Apple, Verizon, AT&T, and NTT DoCoMo completing the rankings.
Postpaid Doldrums and evolution of metrics – ARPU to ARPA to
AMPA
The US market has added roughly 400K postpaid subs in the last
two quarters. Verizon has added 2.4M, AT&T 400K, and Sprint and
T-Mobile have lost a million each. Clearly, Verizon’s
performance is far superior to its competitor and its relentless
focus on postpaid has yielded significant benefits. Typically,
the postpaid ARPU is roughly 2-3 times that of a prepaid
subscriber. So, while other operators have been adding prepaid
subs, the improvement to the bottom line has been tepid
especially for Sprint and T-Mobile. Sprint’s losses have been
primarily due to the bleeding of the Nextel customers. The iDEN
network should turn off sometime next year and the continuous
loss of overall postpaid subs might stop. T-Mobile faces a
deeper challenge. Its net-revenue has declined in every quarter
since Q4 2008, which is 15 straight quarters of revenue decline.
In fact, its current revenue levels is at the Q2 2006 levels –
that was six years ago. Though the company has done a terrific
job upgrading the network to HSPA+ and doing blocking and
tackling until it upgrades to LTE to come at par with its peers,
the continuous bleeding of the postpaid subs needs a new
strategy. Metro PCS helps gain new subs and spectrum but doesn’t
help with postpaid. In fact, one can expect that the churn will
rise as consumers migrate from Metro to T-Mobile. 2013 will be a
critical transition year for the company as it tries to compete
with its larger competitors. Just being a “value” provider is
the race to the bottom.
We have been advocating shared data plans to create more
consumer demand for over two years. When I talked to CNBC
earlier this year (Jan),
I said that in all likelihood the family data plans will be
introduced in the US market in 2012. I discussed this more with Bloomberg and USA
Today and
suggested that most likely Verizon will launch them first.
Verizon and AT&T launched the shared data plans this summer with
AT&T getting the benefit of launching it second. New types of
plans also evolved the decades-old operator metric of ARPU to
ARPA (Average Revenue Per Account) given that we are seeing a
strong influx of multiple devices per individual/household.
Verizon was first to transition and we expect others might
introduce new matrices to measure progress and performance. AMPA
(Average Margin Per Account) will also become an important
metric in the coming days, first internally, and then for the
markets.
Messaging Decline
Most western markets have seen the
net
revenue in the messaging segment decline.
The US market has resisted the decline thus far. In Q3 2012, for
the first time, there was a decline in both the total number of
messages as well as the total messaging revenue in the market.
It might be early to say if the decline has begun or the market
segment will sputter along before the decline takes place. As we
had outlined in our
fourth wave paper,
once the market segment reaches the 70-90% penetration mark, the
decline begins and we might be seeing the start of the decline
in messaging revenue. The decline is primarily due to the rise
in IP messaging and operators have been slow to evolve their
strategies in the segment.
Operator’s Dilemma (And Opportunity): The Fourth Wave
In our paper “Operator’s
Dilemma (and opportunity): The Fourth Wave”
earlier this year, I proposed that we need a new framework to
think about the next generation of revenue opportunities. The
fourth curve opportunities are massive but require a different
skill set and strategic approach that the past three curves. We
are starting to see operators becoming more focused and
aggressive (my
interview with WSJ based on the research paper). It is being widely adopted in the operator community
around the world and some operators have started to break out
the 4th wave revenues in their financials. We will
have more discussion about how things are shaping up in future
research papers.
AT&T has been better prepared in the US market and has embraced
the ride on the fourth curve. It is investing in the areas of
Digital Life, Mobile Premise Solutions, Mobile Payments, and
Connected Vehicles. We discussed the subject at length in our
recently concluded annual thought-leadership summit –
Mobile Future Forward.
Operator M&A – The Rule of Three Strikes Back
Just when you thought the prospects of any major operator M&A
slowed down due to the impending US election, T-Mobile announced
its acquisition of Metro PCS giving it more spectrum, access to
public markets, a good chunk of subscriber base to become a more
competitive number 4. Sprint and Softbank followed the
announcement with an absolutely brilliant maneuver. Sun Tzu
would have been proud. It provides Sprint access to capital,
economies of scale, and becomes a much stronger number 3, and a
global telecom player with scale and ambition. There have been
some interesting twists and turns but as we have stated before,
the US market competitive equilibrium will be complete when
Sprint and T-Mobile get together at some point down the road.
As
outlined in our research paper on the subject,
market forces find their way to get to 3 dominant operators that
compete for attention and revenues, rest becomes noise. While
the regulators might scoff at the idea, the inevitable market
forces will find their way around.
Connected Devices
In Q3 2012, we released some research around connected devices.
If we just look at the active connected devices which can
connect to the Internet directly either by wireless or wired
means, either using cellular or WLAN, the total number of
connected devices in the globe just crossed the 10 billion mark
which means that the connected device to human ratio is now 1.3.
-
70% of the connected devices use some form of wireless
connection.
-
In the US, roughly 80% of the devices use some form of
wireless connection.
-
For the US Household survey, we asked 1014 HHs about the
number of connected devices in their households.
-
The average number of devices/HH was 5.
-
Over 6% of the HHs had 15 or more devices.
-
Splitting the respondents by gender, the results were about
the same.
-
Splitting the respondents by age group, the 65+ age
demographics had the highest number of devices/HH followed
by the 18-24 age group.
-
The Northeast region of the US had the highest number of
devices/HH.
-
Suburban HH had the highest number of devices/HH.
More details
available here.
Device ecosystem
Windows 8 arrival – Sept was a big month in Microsoft’s attempt
to regain its lost mobile decade. It went from a dominant
position to virtually zilch coinciding with the remarkable
ascend of iOS and Android. To make any device sell – one needs
good and competitive device, distribution channel and marketing
muscle, and brand loyalty. I think Windows 8 is genuinely good,
is different, and for the first time can stand with its peers
(obviously it needs to build a robust apps portfolio and a
stronger developer ecosystem).
In the past, while operators, OEMs, and Microsoft announced
significant advertising spend, it had almost negligible impact
on sales. The actual $ amount spend was tepid, operators didn’t
want to be guinea pigs just to prop up a third ecosystem. With
Windows 8, things might get better. We can see many more
awareness campaigns, more OEMs are launching some quality
devices, and operators are warming up to the idea as well. The
brand loyalty index for Microsoft Mobile is fairly low and it
will take a heavy lift and a few billion dollars of advertising
spend to move the needle. The good news is that the devices are
shipping and it is not thanksgiving yet.
However, Nokia, once propped at every Windows Phone rally isn’t
getting any special love from Microsoft anymore (in public) and
it has become one of the many OEMs on the conveyer belt. Its
ability to differentiate itself enough in Q4 will decide its
2013.
Last week, Qualcomm eclipsed Intel in market cap marking another
milestone in the progression of the mobile ecosystem.
Surface, mini, and the tablet market
Apple launched the iPad mini for some of the same principles
that Microsoft launched Surface. It is better to be cannibalized
by self than by the enemy. Microsoft saw the notebook market
shrink and needed a product to stem the bleeding while Apple saw
Amazon and Google attack the bottom tier with a different model
that poses a credible threat. Tablet market is indeed
fundamentally altering computing in many ways. The changing
landscape of computing also has impact on the ecosystem and the
application development environment. Developers flock to
platform reach, ease of access to the marketplace, and the basic
economics of a viable business model. Windows a percentage of
computing platform is shrinking which threats not only the
platform but also Microsoft’s other software franchises. Surface
is classic blocking and tackling to provide a jolt to the
shifting ecosystem. With iPad mini, Apple is attempting to lock
the mid-top tier of the tablet market and daring its competitors
to just play in the bottom tier that leaves no profit on the
hardware and revenue stream from services for a very select few.
Apple is getting a lot of grief for its maps app. While the
strategic decision to take control of a key application was spot
on, it faltered on communications. The half-baked endeavor was
nowhere close to being the “best mapping app.”
Infrastructure segment faces a tough road ahead
The infrastructure segment of the wireless industry is facing
turbulent and interesting times. The business model for many
vendors hasn’t evolved much in the last few years and some of
the disruptive forces are bound to have a deep impact on the
segment. ALU is facing serious headwinds and will need to figure
out its strategic options going forward. Ericsson’s margins are
under pressure but more interestingly its services and support
revenue exceeded its hardware revenue for the first time. Huawei
and ZTE reported decline in revenues but they are making gains
in the infrastructure markets outside US and in handsets in the
US market. Until Premier Xi Jinping and President Obama sort out
their geopolitical differences, the Chinese vendors remain
shutout of the US infrastructure market.
What to expect in the coming months?
All this has setup an absolutely fascinating 2013 in the
communication/computing industry. Convergence is everywhere and
is leading to a fundamental reset of the value chains and
ecosystems. Players who firmly attach themselves to the 4th
wave will reap benefits while the ones who miss it will see
their fortunes dwindle. We will be discussing Mobile 2013 with
some of the experts in our upcoming
Mobile Breakfast
Series event on Dec 11th.
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 2012 US wireless
data market is:
Service Revenues
·
The US Wireless data service revenues grew 3% Q/Q and 17% Y/Y to
$19.9B in Q3 2012. For the year 2012, we are forecasting that
mobile data revenues in the US market will reach $80 billion.
-
Verizon and AT&T dominated the quarter accounting for 69% of
the mobile data services revenue and had 66% of the
subscription base.
-
Verizon and AT&T maintained its #1 & #2 mobile data revenue
ranking in Q3 2012. Sprint and T-Mobile maintained their #5
and #9 rank in the top 10 mobile data operators list for Q3
2012.
ARPU
-
The Overall ARPU declined by $0.15. Average voice ARPU declined
by $0.58 while the average data ARPU grew by $0.43 or 2% Q/Q.
-
The average industry percentage contribution of data to
overall ARPU is now at the 43% mark in Q3 2012 and is likely
to exceed the 50% mark early next year. All the top three US
operators are around the 45% mark with Verizon leading the
trio. (For reference, all three major Japanese operators are
now over the 60% mark).
Subscribers
-
The US operators added 400K postpaid subs and over 2.4M
total. It was the lowest net-adds quarter in the US mobile
history (barring the early days of tepid growth)
-
T-Mobile’s postpaid woes continued for the ninth straight
quarter.
-
Verizon led the market with 1.7M net-adds followed by AT&T
at 678K, and T-Mobile at 160K. Sprint returned to the
negative net-add territory after nine straight quarters of
positive growth.
-
For the twelfth straight quarter, AT&T reported more
net-adds from connected devices than postpaid subs.
Applications and Services
-
Q3 2012 data suggests that the messaging revenues in the US
market might have peaked. For the first time both the overall
messaging volume and the revenues declined Q/Q. The task to
prolong the access revenue curve and investment in the fourth
curve has become all the more urgent.
-
The market is finally starting to see activity in the mobile
commerce and payment services as well as in various industry
verticals like healthcare, retail, and education.
-
Q3 2012 again saw tremendous activity in the mobile commerce
and payments space with a lot of announcements from the
operators, Internet players, and startups as well as the
retailers and the ecommerce players. All are vying for a
piece of the mobile wallet. Much more to come in the next 12
months. On
the retail side, Starbucks is a player to watch as it tries
to become a more active participant in the digital
ecosystem.
Handsets
-
Smartphones continued to be sold at a brisk pace accounting to
almost 80% of the devices sold in Q3 2012 with Android
dominating though iPhone leads in revenue and mindshare.
-
Samsung now leads in every major unit sale category both on
the world stage as well as in the US. However, profits are a
different equation where Apple overshadows its rivals like
Gulliver on the Lilliput land.
-
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 8 last quarter.
-
Apple’s iPhone sales improved marginally in Q3 but the OEM
was more plagued by the supply-chain constraints than
demand.
-
US continues to sell over 40% of the world’s smartphone
every quarter thus making it the most attractive market for
OEMs.
-
AT&T continues to dominate the connected devices segment
with over 46% market share.
-
Verizon continues to sell more LTE smartphones as its LTE
sub tally rose to 15M making it the leading LTE operator in
the world. AT&T’s and Sprint’s LTE rollouts are gathering
steam. T-Mobile announced that it is putting the cash and
spectrum it got from AT&T to good use and deploying LTE by
2013. Expect the “fastest network” marketing to continue for
at least another seven quarters. Verizon reported that 35%
of its total data traffic is on the LTE network now.
-
There is always a beauty contest amongst operators as to who
sold more iPhones. AT&T again bested its rivals by selling
roughly 48% of the iPhones in the US.
Mobile Data Growth
-
The
overall data consumption in the US market in 2012 is
expected to exceed 2000 Petabytes or 2 Exabytes. The
smartphone data consumption at some operators is averaging
close to 900 MB/mo. Some devices are averaging close to 2
GB/mo. As we move into 1GB range along with the family data
plans kicking in, you can expect the data tiers to get
bigger both in GBs and dollar amount.
-
The
Signaling traffic has increased 3x.
-
Mobile data traffic growth is likely to slow down to roughly
80% after doubling for the last five years. Voice traffic
will dip below 10% of the overall traffic in 2012.
-
While the spectrum debate rages on, in addition to the
network and backhaul upgrades, policy management and data
offload have emerged as top two solutions that operators
deploying around the world. Signaling management solutions
like Diameter routing are also getting good traction.
However, a long-term video solution is still elusive. As we
have been saying in our Yottabyte series of research papers,
a comprehensive solution strategy is needed to effectively
manage margins/bit.
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,
and articles.
The next US Wireless Data Market update will be released in Feb
2013. The next Global Wireless Data Market update will be issued
in Mar 2013.
Disclaimer: Some of the companies mentioned in this research
note are our
clients.
