Highlights of the US Mobile Market Q2 2016
· 12 years ago, US mobile data revenues were less than 5% of the overall revenues. In Q2 2016, mobile data revenues crossed the 75% threshold becoming the second country after Japan to do so.
· Service revenue declined again, down 2% YoY. Overall revenue was flat as device revenue made up for the decline.
· Mobile data revenues increased 8% YoY while Voice revenues declined 31%.
· The overall ARPU was below $40 again.
· Net income saw a nice bump, increasing by 10% YoY with AT&T leading the way with 14% increase.
· Sprint’s capex was lowest in recent memory dropping almost 80% YoY.
· Device revenues declined sharply as consumers are upgrading at a slower pace than before and new device launches haven’t really motivated consumers to upgrade.
· The postpaid upgrade cycle was the slowest in recorded history reaching over 4.4 years in Q2. The overall industry upgrade cycle is over 2.5 years now.
· For the first time, IoT (including connected cars) net adds exceeded phone and tablets combined.
· There were more connected cars net-adds than there were phone net-adds. For the 7th straight quarter, AT&T added more cars than phones and tablets combined.
· AT&T is dominating the IoT Revenues and with Verizon, the duo is pretty much cleaning up the IoT revenue stream in the operator segment.
· AT&T’s connected car onboarding pace is 2x that of its connected tablets pace. Operator is expected to reach 10M connected car subscriptions very soon in roughly 12 quarters compared to 25 quarters it took for the tablets.
· Verizon and T-Mobile have captured the bulk of the postpaid growth in the last three years.
· 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, fewer customers are churning each quarter. Next churn opportunity is coming next month with the new iPhone release.
· US is well positioned to cross 400M in subscriptions in 2016. As of Q2 2016, the subscription tally stood at roughly 390M.
· The mobile data consumption continues to rise. US is third behind Finland and Korea in terms of GB consumed per sub/month and first amongst nations with more 60M population.
· Verizon’s IoT+Telematics rose 25% YoY to $205M inching towards a $1B/yr run rate.
· Apple’s service revenue is now consistently greater than iPad and Mac revenue streams making it the number two revenue stream behind the gargantuan iPhone bucket.
· AT&T and Verizon on average made $17 per sub/mo while T-Mobile and Sprint roughly $1.6/sub/mo.
· Android ecosystem revenues and profits improved slightly primarily on the back of Samsung’s quarterly results. As expected, iPhone units and revenues dipped again.
· FCC’s Incentive Auction created a massive $86B clearing hurdle which is likely to translate into some issues with the process.
· Pokemon Go became the latest app sensation growing at almost 4x the rate of the last rocket ship- Angry Birds2
What’s next for the mobile broadband industry?
The logical conclusion is that mobile data growth will continue. The usage growth supports that view. In fact, we believe, that mobile data will subsume voice and messaging revenue streams and they will disappear from operator financials soon. It has already happened for some.
If you have been paying attention to our 4th wave analysis, you would have noticed that 4th wave already supplanted mobile data in terms of share. Mobile data revenue share peaked in 2012 and as expected, the industry is now completely dominated by the 4th wave. US became the first country to have 4th Wave revenue exceed access revenues in 2014 and in 2015, 4th wave revenues were greater than all the three major operator revenue streams – voice, messaging, and data.
Of course, operators like AT&T and Verizon haven’t been sitting idle. They have created new revenue streams, AT&T in particular has diversified its revenue stream to become a more complete “solution provider.” Verizon’s recent forays into digital with acquisitions of AOL and Yahoo are classic 4th wave execution plays. The intent shows a clear shift in management thinking on creating new revenue streams and look beyond their own subscriber base. IoT is also serving the top two operators well and the revenue curves in the early days mimic the early growth days of mobile data.
4th Wave Index
5 years ago, we put forth the theory of 4th wave to 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 declined by 23%, messaging revenues by 18%, while data revenues grew by 23%. 4th wave revenues which now dominate the ecosystem now grew by a 60% YoY.
The 4th Wave thesis captures the underlying shifts in industry dynamics that the value is shifting dramatically from access to applications. The quality of networks, the power of devices, the sophistication of applications and services have upended the industry landscape. The competitive dynamics are changing right in front of our eyes, predictably, but dramatically. Consider the fact that Uber is valued more than T-Mobile and Sprint combined, Facebook is valued more than AT&T or Verizon, and Google is valued more than all the US wireless operators combined. The success of the 4th Wave economy is not limited to a handful of Internet players from the US but rather it is a global phenomenon and it is happening across all industry verticals.
So, how does one value an operator vs. an app, a leading device manufacturer vs. a new wearable entrant. If you had a dollar to invest, where would you invest? Infrastructure, devices, platforms, or in services? It was clear that the industry needs a better way to benchmark progress of various companies as well as understand the competitive dynamics. It is also useful to understand the positioning of these companies in a very complex ecosystem. We need to assess a corporation’s strengths across multiple key dimensions in various sub categories and understand how these companies are prepared to compete in the 4th Wave economy.
Our 4th Wave Index offered first view on how a complex ecosystem can be studied. We took a look 29 key variables across four key dimensions: Infrastructure, Devices, Platforms, and Services and calculates the 4th Wave index. It is a useful benchmarking exercise to see if companies are slipping competitively or are making progress. Additionally, the model provides a view into what it will take these players to move from aspirants to challengers to leaders.
5G is gaining steam. All the major players have outline their preliminary plans to do trials on 5G with Verizon being the most aggressive in its intent. FCC become the first major regulator to set aside spectrum for 5G. There has been a lot of discussion on 5G from the technology point of view but not much from an economics point of view. We are taking a deeper look at the economics questions that the industry ought to be asking. Stay tuned for our research paper on the subject. We will discuss – what will be the cost structures, ROI, and the TCOs that will make it worthwhile for the operators to deploy 5G profitably. 5G is going to be a different ecosystem than the first four generations and the current cost model of building out networks might not be sustainable given the demand.
US is likely to be the key driving force in setting the standards and pushing the trials to deployments even though there is no Olympics as a motivator. But competition sure is.
Service Provider to Solution Provider
In our 2012 paper, “Operator’s Dilemma: The 4th Wave,” we argued that to stay relevant in the next phase of industry evolution, mobile operators need to focus on becoming digital lifestyle solution providers else their role will be relegated to access providers. While we are still early in the cycle, in the US, AT&T and Verizon are making investments to diversify their revenue streams. AT&T in particular has done a better job across multiple streams – content, home, IoT, health, transportation, retail, security, and other verticals. Some of the progress is visible in the financials and for others, one must dig deeper.
Verizon’s strategy has been two fold – IoT/Telematics and Media (advertising). It is clearly making excellent progress on the former while it is early to opine on the latter. Sprint has mostly retreated from its early 4th initiative to focus on nuts and bolts of the business. T-Mobile’s Binge-on strategy gives it a media play but something that prevents churn rather than generates “new” revenue.
Cable players have been reluctant participants in the mobile ecosystem but given the pressure on their core content business, wireless is their best bet to ensure the next decade of growth and sustainability. Comcast is expected to launch its MVNO later this year. How far will it go remains to be seen? Over the long-haul, cable service providers will have to become solution providers too.
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 with more data handsets coming 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.
FCC’s incentive auction began last quarter and ended with an $86 billion price tag. There isn’t that much reserve laying around to bid for the spectrum so we are likely to see more rounds of speculation and intrigue. No non-traditional player made it to the second round. The next round of action begins next week.
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 54%+ of its voice calls are on 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 regulating these services as if it were 2000 doesn’t help. 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 “same service, same rules” 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.
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