US Wireless Market Q2 2012 Update Aug 2012 Chetan Sharma Consulting

US Wireless Market Update Q2 2012
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Copyright 2012, All Rights Reserved. Copying w/o permission is prohibited. 8/2012
US Mobile Data Market Update Q2 2012

Summary
The US mobile data market grew 5% Q/Q and 19% Y/Y to reach $19.3B in Q2 2012. Data is now almost 42% 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. The US operators reversed the postpaid decline in last quarter to add almost 400K postpaid subs largely due to the strong performance of Verizon Wireless. Sprint and T-Mobile saw further postpaid declines. For T-Mobile, Q2 marked the eight straight quarters of postpaid losses. In terms of Y/Y growth, Connected Devices segment grew 21%, Prepaid 12%, Wholesale 4%, and Postpaid was flat. AT&T, AT&T, Sprint, and Verizon are number one respectively in these categories. The connected devices segment has been an area of growth for the industry but for the second straight quarter, the Q/Q growth fell below 5%. This is largely driven by lower growth in the M2M segment. Driven largely by the economy, the prepaid subscriptions went past 100 M for the first time in the US market. Given that the revenue from new subscribers has fallen below the 5% mark for the first time, the revenue growth will be primarily driven by services to the existing subscriber base. The new revenue will be dominated by data access revenues for the next couple of years. As has been obvious for some time, the device ecosystem has become a two horse race iOS and Android. Apple and Samsung. Googles acquisition of Motorola finally closed and everyone is watching as to what comes next. Amazon showed off its ambition with Kindle Fire and is now getting ready to launch a new set of devices in time for the holiday season. Apple launches its iPhone 5 with LTE and gives some more polish to iOS next month. Microsoft will start selling its Surface tablet in a matter of weeks. The only one left out of the launching musical chairs is RIM which has pushed out its launch into 2013. 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 Q2 2012. However, Apple dominates both the device 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, 97% 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. Nokias Lumia launch in Q2 fizzled in the US and elsewhere. It will get another shot at glory and perhaps its last with the Windows 8 launch in Sept. If we exclude the M2M subscriptions and just look at the human subscriptions, the smartphone penetration went past 50% for the first time in the US market. Smartphone sales continued at a brisk pace crossing the 70% mark (of the devices sold) in Q2 2012. 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.
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Zuned Out Apple launched iPod in 2001. During the early days, Microsoft ignored it until it realized it better start paying attention to the growing phenom. It asked its suppliers to build them a Microsoft iPod. One by one, they all failed. Depressed and frustrated, it took matters in its own hand and introduced Zune in 2006, full five years after the first iPod came into the market. By that time, Apple had already sold 66M units and still hadnt hit its peak. As is customary, Microsoft took another few iterations to get it right. By the time a competitive product came out, it didnt matter. The main reason was that the customers were Zuned Out. They had already made their choice, invested their time and money into a platform and it will take more than a crowbar to move them onto something new. Microsoft retired Zune in 2011 Fast forward to 2007. iPhone came out. Nokia, RIM, Microsoft and others dismissed it and more importantly failed to understand and acknowledge its impact. Their corporate schizophrenia is well documented. Microsoft wisely realized that it cant just keep paring down the mothership OS for mobile and took time to rewrite it. The new OS was actually good and well designed, it was quite fresh. iOS and Android would do well to borrow some ideas from it to enhance the user experience. However, Microsofts partners by this time were more enamored with Android. So in Nokia, Microsoft found a partner who can help shine the light on its new shiny OS. By the time initial credible versions of the new windows OS started to ship, Apple had already shipped over 200M units of iPhone. By the time RIM ships devices with the new OS (if it gets to that point), Apple would have shipped over 300M units. Consumers have already invested their time and money into platforms and ecosystems. Will Microsoft, Nokia, and RIM get a second chance or will they be Zuned Out? Then came the iPad that completely took Microsoft by surprise. It pioneered the concept a decade earlier but was completely outflanked by the wily Apple. Zune wasnt significant to Microsofts core business. It had ignored mobile as well for the better part of the decade as it didnt disturb the Office and Windows PC franchises. But tablets are different. Apple singlehandedly created a new category in 2010 and has dominated it ever since. It is altering the basic notion of computing. Enterprises are dumping their PCs and moving to iPad. We have seen that in our work as well. All of a sudden, there is a direct threat to Microsofts core business. This time the implications are very serious. It can no longer afford a misstep. So, instead of letting partners produce mediocre products that have no chance of success in the market, Microsoft is taking the matters in its own hands early on and produce something that on surface looks a pretty compelling product. If it can get the pricing right, it can make a dent and be a contender in the new computing landscape. It can use its products, distribution power, developer ecosystem, and the bank balance to alter the scales. But Apple has a big lead. By the time Surface comes out, Apple would have sold over 100M iPads. If Microsoft executes, maybe there is a chance to not get Zuned Out this time around. If it fails, the company itself might be Zuned Out in due course along with many of its longtime partners. In the theory of market entry, fast follower is actually a smart strategy. Microsoft was a master at it. However the strategy has its limitations. Against an agile and ruthless competitor like Apple or Google, you better be a really fast follower (Samsung) else time starts to work against you. A slow follower strategy only works if you have something truly innovative (iPhone) or the incumbents are asleep at the switch (Xbox) or the business model is disruptive (Netflix). Also, the fast follower strategy is only sustainable when you are adept at anticipating competitors future chess plays.

Shared Data Plans 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. While it is a great start, to be truly effective, some of the fees need to be reduced or completely eliminated. Operators Dilemma (And Opportunity): The Fourth Curve While the European operators are feeling the heat from the OTT players (which is further compounded by an abysmal economy), the impact on the US operator revenues hasnt been significant, yet. Last quarter we released our Mobile Future Forward Research 2012 Paper that took an in-depth look at the evolving landscape. The first of its kind study looks at the revenue curves over the course of the mobile history and discusses the need to invest in the fourth curve. The paper results were discussed in WSJ, The Economist, GigaOM, Seattle Times, and many other fine publications around the globe. The fourth curve will define the fate of many providers. Earlier this year, we discussed the topic in-depth in our Seattle and London forums and we will go even deeper into the subject at our annual brainstorm - Mobile Future Forward on Sept 10th with all major participants. mCommerce > eCommerce: Mobile First to Mobile Only In the last couple of years, the realization in the industry set in that mobile is going to really dominate the world. Very quickly, we are at another pivot point wherein the mobile first doctrine is going to move to mobile only. It is not that the desktop world will disappear into oblivion. Far from it. But, the investments, strategy, and execution will be driven by mobile. As we said in our global research update earlier this year, in 3-5 years, with few exceptions, if a company is not doing majority of its digital business on mobile, it is going to be irrelevant. There are already several data points to support the theory. Leading apps and services like Facebook, Twitter, Pandora are already operating in the world where mobile is driving majority of their user engagement. Expedia, Fandango and others are seeing the early signs of migration into the mobile dominated world. Starting soon we will start to see businesses with mCommerce Revenues > eCommerce Revenues. Postpaid Doldrums The prepaid subscriber base exceeded 100M in the US for the first time. As postpaid growth sputters, prepaid is picking up the net-adds. So, the question emerges, where will the net-sub and net-revenue growth going to come from in the next few years. The smartphone penetration in the US is at 50% (excluding M2M), so the significant opportunities are in the upgrades and non-data to data conversion. Family data plans (see above) will help in bolstering data revenues as well. Multiple devices/consumer will increase the sub penetration which is at 110%. Mobile Data Growth The Gigabyte Generation The overall data consumption in the US market in 2012 is expected to exceed 2000 Petabytes or 2 Exabytes. Since the advent of the iPhone five years ago, the US market has seen triple digit growth in mobile data consumption. In 2012, we expect the mobile data growth to be around 80%. This has largely been driven by the introduction of data tiers, the use of WiFi offload, more developer education, throttling in some instances, and some compression and offloading solutions. However, as LTE becomes more widespread in the US, we expect the traffic growth to pick up again.
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Market Consolidation Even though the regulators have indicated their distaste for big mergers, it hasnt stopped the industry to play the M&A speculation parlor game. Except for a few impossible scenarios, all sorts of deals are being contemplated. The market economics is clearly crying out for more consolidations. The smaller M&As wont move the needle and bigger M&A are not going to be on the table until we get into a new calendar year. New Revenue At the turn of the century, roughly 15% of the service provider revenue came from new subscribers. By the end of the year, we expect this will drop down to 3%. This means that the new revenue will have to come from a) converting non-data to data subs and b) launching new services in different verticals for the existing subs. Connected Universe, Monetizing Opportunities While 2011 was the year of figuring what the opportunities are in the new connected era, 2012 is starting to focus on how to monetize those opportunities. That will be the theme of our Mobile Future Forward Thought-leadership summit on Sept 10th. Almost all the vertical industries are benefiting from the connected devices and ubiquity of broadband networks security, health, retail, utility, transportation, entertainment, and others. We will take a deep dive into the issues, the best case studies, the opportunities, and the players. We are assembling industries whos who to help you figure out where the industry is headed next. What to expect in the coming months? All this has setup an absolutely fascinating 2012 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems. 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 Q2 2012 US wireless data market is:
Service Revenues The US Wireless data service revenues grew 5% Q/Q and 19% Y/Y to $19.3B in Q2 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 68% 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 Q2 2012. Sprint and T-Mobile maintained their #5 and #9 rank in the top 10 mobile data operators list for Q2 2012. ARPU The Overall ARPU declined by $0.03. Average voice ARPU declined by $0.63 while the average data ARPU grew by $0.60 or 3% Q/Q. The average industry percentage contribution of data to overall ARPU is now at the 42% mark in Q2 2012 and is likely to exceed the 50% mark early next year. All the top three US operators are above the 40% mark with Verizon leading the trio. (For reference, all three major Japanese operators are now over the 60% mark).

Subscribers The US operators bounced back from its first ever decline and added 400K postpaid subs. T-Mobiles postpaid woes continued for the eight straight quarters. AT&T and Verizon both added more than a 1 M subs while Sprint added 283K. For the eleventh straight quarter, AT&T reported more net-adds from connected devices than postpaid subs. Applications and Services While many of its brethren are seeing messaging volume declines, messaging in the US market grew by 5% YOY and 1% Q/Q. US consumers are now sending messages at the rate of 696 messages/sub/mo. However, most operators are seeing decline in messaging revenue growth due to IP messaging. As expected, this transition will continue around the world at different rates. In the US, while the change is underway, we dont expect any dramatic declines like in Philippines or the Netherlands in the near-term. 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. Q2 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 over 70% of the devices sold in Q2 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 renews its entry into the battlefield with Windows 8 next quarter. Apples iPhone sales declined in Q2 but with iPhone 5 round the corner, it is all set to dominate the remainder of the calendar year. US continues to sell over 40% of the worlds smartphone every quarter thus making it the most attractive market for OEMs. AT&T continues to dominate the connected devices segment with over 47% market share. Verizon continues to sell more LTE smartphones as it added another 3.2M subs in Q2 2012 making it the leading LTE operator in the world. AT&Ts and Sprints 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. There is always a beauty contest amongst operators as to who sold more iPhones. AT&T again bested its rivals by selling roughly 47% of the iPhones in the US. However, iPhone sales in the US declined as consumers await iPhone 5. T-Mobiles date with Apple is starting to look like a possibility in the near future.

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 850 MB/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. Global Update Race to a billion China became the first nation to go past a billion subscriptions. See our detailed analysis of the Chinese and Indian mobile market. For more details, please see our Global Mobile Wireless Market Update released in April 2012. Your feedback is always welcome. Chetan Sharma We will be discussing a number of issues raised in this report in our annual mobile executive thought-leadership summit - Mobile Future Forward on Sept 10th in Seattle. Confirmed speakers include: Abhi Ingle, VP, Advanced Solutions, AT&T; Antonio Benjamin, Global CTO, Citi; Brad Duea, SVP Products, T-Mobile; Biju Nair, EVP and Chief Strategy Officer, Synchronoss; Bobby Morrison President, Verizon; Carlos Domingo, President and CEO, Telefonica R&D; Dan Deeney, Partner, New Venture Partners; Dave Whalen, VP/GM, Intel; Ed Cantwell, SVP, West Wireless Health Institute; Erik Ekudden, Head of Strategy, Ericsson; Erik Moreno, EVP, Fox; Frank Meehan, Executive, Horizons Ventures; Glenn Lurie, President, AT&T Mobility; Gus Hunt, CTO, CIA; Hank Skorny, VP/GM, Intel; Houk Reed, VP, Tekelec; Jana Messerschmidt, VP, Twitter; Jeff Smith, CTO, Numerex; Kevin Fitchard, Senior Reporter, GigaOM; Kevin Packingham, SVP Product Innovation, Samsung; Marianne Marck, VP Engineering, Starbucks; Mark Anderson, CEO, Future in Review; Mark Young, VP Mobile and Connected Devices, NBC Universal; Michael Bayle, SVP and GM, ESPN Mobile; Mike Woodward, President - Americas, HTC; Neville Ray, Chief Network Officer, T-Mobile; Nick Wingfield, Reporter, New York Times; Oke Okaro, Global Head of Mobile, Bloomberg; Renee James, SVP, Software and Services Group, Intel; Stephen Bye, CTO, Sprint; Stephen David, former CIO, Proctor & Gamble; Steve Elfman, President, Sprint; Todd Simpson, Chief Innovation Officer, Mozilla; Wim Sweldens, President, Alcatel-Lucent Wireless. 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 Nov 2012. The next Global Wireless Data Market update will be issued in Oct 2012. Disclaimer: Some of the companies mentioned in this paper are our clients.
US Wireless Data Services Revenue
US - Segment Growth Rates
US Wireless Carriers: ARPU Trends
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US Wireless Carriers: Data Revenue Trends
11
US Wireless Carriers: Data ARPU Trends
12
US Wireless Carriers: Data ARPU Trends
13
US Market: Carrier Marketshare (Q2 12)
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US Wireless Carriers: Net Adds Share
15
Connected Device Growth
16
Smartphone growth continues unabated
17
Smartphones Rule
2012 figures are for 1H 2012

Samsung on top of the hill in market share
19
Apple and Samsung control 50% of the unit smartphone sales
20
US Tablet Market
21
US Companies dominate mobile industry profits
22
Connected Devices: Overall growth slowing down
23
Revenue from New Subscriptions dips below 5%
24
AT&T Connected Devices Still Driving Growth
25
SMS Growth US
26
US Mobile Data Traffic continues to grow at a rapid pace
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Data traffic dominates total traffic
28
MOBILE FUTURE FORWARD

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Renne James, SVP Software & Services, Intel Steve Elfman, President, Sprint Jorge Espinel, EVP Digital Strategy, News Corp Glenn Lurie, President, AT&T Mobility Kevin Packingham, Chief Product Officer, Samsung Ed Cantwell, SVP, West Wireless Health Institute Antonio Benjamin, Global CTO, Citi Erik Ekudden, Head of Strategy, Ericsson Stephen David, Former CIO, Proctor & Gamble Erik Moreno, EVP, Fox Frank Meehan, Executive, Horizons Ventures Todd Simpson, Chief Innovation Officer, Mozilla Wim Sweldens, President, Alcatel-Lucent Wireless Gus Hunt, CTO, CIA Jana Messerschmidt, VP, Twitter Marianne Marck, VP Engineering, Starbucks Michael Bayle, SVP and GM, ESPN Mobile Mike Woodward, President - Americas, HTC Neville Ray, Chief Technology Officer, T-Mobile Oke Okaro, Global Head of Mobile/ Connected Devices, Bloomberg Bobby Morrison, President, Verizon Carlos Domingo, President and CEO, Telefonica R&D Stephen Bye, CTO, Sprint Mark Hillman, SVP Strategy, Compuware Biju Nair, EVP and Chief Strategy Officer, Synchronoss
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Contact info@mobilefutureforward.com for sponsorship and speaking opportunities www.mobilefutureforward.com
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Chetan Sharma chetan@chetansharma.com TW: @chetansharma http://www.chetansharma.com
Mobile Future Forward info@mobilefutureforward.com TW: @mfutureforward http://www.mobilefutureforward.com
Research. Technology. Strategy. Intellectual Property. Thought Leadership Summits.
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US Wireless Market Q2 2012 Update Aug 2012 Chetan Sharma Consulting

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US Wireless Market Update Q2 2012

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

US Mobile Data Market Update Q2 2012

US Mobile Data Market Update Q2 2012

US Mobile Data Market Update Q2 2012

US Mobile Data Market Update Q2 2012

US Mobile Data Market Update Q2 2012

US Mobile Data Market Update Q2 2012

US Wireless Data Services Revenue

US - Segment Growth Rates

US Wireless Carriers: ARPU Trends

US Wireless Carriers: Data Revenue Trends

US Wireless Carriers: Data ARPU Trends

US Wireless Carriers: Data ARPU Trends

US Market: Carrier Marketshare (Q2 12)

US Wireless Carriers: Net Adds Share

Connected Device Growth

Smartphone growth continues unabated

2012 figures are for 1H 2012

Samsung on top of the hill in market share

Apple and Samsung control 50% of the unit smartphone sales

US Companies dominate mobile industry profits

Connected Devices: Overall growth slowing down

Revenue from New Subscriptions dips below 5%

AT&T Connected Devices Still Driving Growth

US Mobile Data Traffic continues to grow at a rapid pace

Data traffic dominates total traffic

MOBILE FUTURE FORWARD

Join us and we will give you 25 more reasons

Next 5 years in mobile in 1 day

Contact info@mobilefutureforward.com for sponsorship and speaking opportunities www.mobilefutureforward.com

We look forward to hearing from you

Chetan Sharma chetan@chetansharma.com TW: @chetansharma http://www.chetansharma.com

Mobile Future Forward info@mobilefutureforward.com TW: @mfutureforward http://www.mobilefutureforward.com

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

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