Industry Analysis-Telecommunication-Wireless Macro-environment: I.

Economic Forces

Source: U.S. Census Bureau, 2009 Population Estimates, Census 2000, 1990 Census ____ 1

GDP is a strong indicator of growth in consumer markets. According to the estimate released by the Bureau of Economic Analysis, the real GDP in United States increased 2.9 percentages in 2010. Private service-producing sector increases 3.2 percentages. (Reference 1) Especially, Information-communications-technologyproducing industries increased 16.3 percent, returning to double-digit growth for the first time since 2005. Compared to 2009, the United States economy is growing much more steadily and healthily. Furthermore, the unemployment rate compared to 2009, which is the highest of 10%, it decreases 11% to the average of 9% in 2011. These factors cause household consumption expenditures in telecommunication service increasing by 6.7%, from $216,753(000) in 1st quarter in 2010 to $231,470(000) in second quarter in 2011. (Reference 2) Nowadays, many people have not only one type of phone in their household. The growing economic provide a favorable climate for wireless carriers to extent their business and generate higher profits.

II.

Social Forces

Source: U.S. Census Bureau, 2009 Population Estimates, Census 2000, 1990 Census

Social change comprises demographic and lifestyle trends. Demand for telecommunication service is related to population growth. More people in a region or country tend to generate a greater need for phone service, particularly telecommunication ____ 2

wireless phone service. We can see in the table, by the end of June 30, 2009, the total population in United State had reached 307 million, and from 2000 to 2009, the total population in United States had raised by 9%; we can image that there will be one new addition subscriber in every ten people in the community. (Reference3) Lifestyle trend is also a critical factor that affects the industry. In 2010 we saw exponential growth of social media with which becoming an acceptable form of communication. People begin to address their socialization process by focusing on social network, text messaging. Facebook, twitter etc. become the popular platforms for people to socialize and entertain. Many studies show that the social media usage rate is ever-accelerating ; in response to growing demands for usage of social media, wireless carriers shift their competition from lower priced plans to the technological innovation, increasing the speed and quality of Internet access. Standard & Poors believes that the availability of 3G and 4G wireless data products, as well as integrated electronic devices for music, pictures, and Internet access, are generating consumer excitement. (Reference4)

III.

Cultural Forces

Cultural change refers to changes in the values and beliefs of a society. Nowadays, a cellar phone is perceived not only as a device that transmit voice, but also as a calculator, a GPS, a television, a dictionary, a book reader, a media player, a game player etc. Telecommunication devices are becoming one of the basic necessities. People cannot survive without a cellar phone in everyday life. The wireless telecommunication penetration rates in the U.S hit 96% by the end of December2010, and we believe it has increased since then, to near 100% by the end of May 2011. (Pg1, Standard & Poor Analysis, James Moorman) Penetration rate represents how deeply wireless service has entered a market. Furthermore, in current century, Americans become more and more concerned about efficiency and productivity. People expect to get multi things accomplished at the same time which enabled them to be extremely productive. For example, consumers of wireless service desire to use voice, video, and data channels simultaneously at a high speed. In response for consumers growing demand for highbandwidth speeds, wireless carriers continue to invest and develop telecommunication ____ 3

technology which enables multimedia applications by integrating mobile technology with high data-transmission capacity; therefore, cultural changes trigger the development of telecommunication technologies.

IV.

Technological Forces By the end of 2010, wireless carriers still continue to rely on 3G network for the

majority of their traffic, however, there is currently a strong shift towards forthgeneration (4G) technology which is designed for faster mobile Internet access, it also supports the growth of mobile data services which is defined as the delivery of non-voice, broadband information to a mobile device. There are two competing 4G technologies: Long Term Evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMAX). LTE provides optimal future speeds of 100 megabits per second (Mbps) on the downlink and 50 Mbps on the uplink. WiMAX offers optimal future speeds of 100 Mbps for high mobility and up to 1 Gbps for fixed or low mobility. (pg15, Standard & Poor Industry Survey, James Moorman) Such speeds will enable complete device and network convergence; i.e. any network will be able to deliver any service over any device. So customers can receive faster and better quality video and audio, as well as greater network capacity on a handheld device, mobile or laptop using a 4G data card. We believe the development of 4G wireless platforms will accelerate in 2011 and into 2012. The full deployment of 4G in the US will enable the transmission of advanced multimedia services, such as streaming video, to customer devices (pg15, Standard & Poor Industry Survey, James Moorman). Consequently, the mainstay of the Wireless Telecommunications shifts from voice transmission to media transmission. V. Political-Legal Forces In order to enter into the telecommunication wireless industry, companies must gain a spectrum license from the Federal Communications Commission (FCC). This license entitles operators to provide mobile services within specified geographic areas and frequencies. FCC is the primarily regulatory body that oversees US wireless ____ 4

telephony communications, along with wireline telecommunications service. (pg. 27, Standard & Poor Survey, James Moorman) In response to the growing market, this FCC has allocated a number of radio frequencies to mobile providers. For example, cellular telephony has been granted the frequency ranges of 824-849 MHz and 869-894 MHz, and PCS phones have been assigned 1850-1990 MHz for digital transmission. Additionally, the Telecommunication Act of 1996 further opened the market for licensing of bandwidth. Under the new act, as many as 9 competitors in a given area may share the airwaves, replacing the previous duopoly system that was in place. Operators may now share equipment with one another and purchase licenses through auctions. (Pg. 27, Standard & Poor Survey, James Moorman) Since spectrum is finite within all markets, once the entire spectrum is allocated the only way to enter a market is through merger and acquisition. For example, the deal that AT&T was planning to buy T-Mobile USA Inc. affects the competition, pricing, and available spectrum. After a M&A decision is reached on the deal, we feel that discussions regarding future spectrum auctions and the need for additional spectrum will begin to reappear. (pg. 2, Standard & Poor Survey, James Moorman) VI. Global Forces Todays markets and economics are globally interconnected. Political change, economic downturns, technological breakthroughs, supply shortages or price increase occurring in one region brings opportunities or threads to firms operating elsewhere fairly rapidly. (pg72, Strategic Management, Raghavan Parthasarthy and Alvin L. Booke) In Asia, significant firms are NTT DoCoMo Inc.(Japan), China Corp. Ltd (China), KT Corp.(South Korea). In Europe, we look at Vodafone Group PLC (UK), Orange SA (France) The successes and failures of these firms are indicative of the trends and issues affecting the entire industry. (pg. 28, Standard & Poor Survey, James Moorman) Telecommunication wireless industry has seen overall growth due to advances in wireless technology. Furthermore, service providers will continue to look for growth through further consolidation, product and service innovation.

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Five Forces Analysis I. Rivals

The rivals within telecommunication wireless industry are the service providers offering wireless service to the same consumers base, such as the top three wireless providers in United States: AT&T, Verizon Wireless, and Sprint Nextel. There are also a number of prepaid wireless providers, such as Metro PCS, United State Cellular who are also competing for a market share of the mobile phone industry. The intensity of rivalry between firms is determined by demand conditions, the size and number of competitors, and the level of industry maturity and exiting costs. At some points, the rivalry within the telecommunication is relative low compared to the fragmented industry. Because the number of competitors within the telecommunication wireless providers industry is low, due to the restricted governmental regulation and high level of capital investment. Therefore, each of the national carriers has almost equal strength, with one dominant firm (Verizon Wireless) setting the price and others following the lead to avoid competitive battles. 2) There is an increasing number of new addition subscribers which means the demand for wireless service is still growing. However, the intensity of competition is still high within the few national wireless providers. The reasons are following: 1) Exit barriers are high since it consists high investments in plant, contractual obligations, and dedicated technology. Under these conditions, excess capacity results in intensifying competition, leading to price wars. 2) The wireless industry is almost reached maturity. Therefore, in the last few years, wireless operators have adjusted their growth strategies. Rather than seek market penetration at any cost, they are now favoring higher quality, profitable growth with higher customer retention, lower customer churn, and more focus on market segmentation. (pg. 29, Standard & Poor Survey, James Moorman) II. Potential competitors The economists expect that the telecom carriers will continue to lose customer accounts due to competition from cable providers in 2011. The cable companies are competing with the telecom companies via their own VoIP-oriented cable telephony offerings. VoIP (Voice over Internet Protocol) turns the human voice into digitized units, ____ 6

which are then bundled into packets that can stream over a network at high speeds. At the receiving end, the packets are reassembled into an analog voice signal. The cost of the calls is largely equal to the cost of providing Internet bandwidth.(pg. 17, Standard and Poors industry survey, Todd Rosenbluth) With their large marketing budgets, established customer loyalty, and secure broadband networks, the cable companies have the ability to put additional pressure on the traditional voice segment of the telecoms with their service bundles. (pg. 17, Standard and Poors industry survey, Todd Rosenbluth) However, the following strategies may probably prevent the potential competitors to deprive of the industry market shares: 1) continually develop and invest in technological network innovation to enable customers to enjoy high quality of streaming video and high speed of Internet access. 2) Offering a variety of product offering and service plan options 3) increasing the service availability 4) providing high quality of after-sales service III. Buyers The buyers in telecommunication wireless industry are people who want to receive wireless service combined with the device products. 1) The number, size, and distribution of competitors in a market affect the negotiating power of the buyer. However, there are only a few national competitors in the telecom industry; therefore, the buyers do not have so many alternatives to choose. 2) The volume of purchase is very low and causes no threat to national providers. A high number of subscribers for this strategic group leave a low risk for noticeable change in a gain or loss of customers. 3) Switching from one provider to another is expensive. 4) There is a limited substitute for the service provided. 4) Buyers cannot backwards integrate with the service providers. Therefore, overall the industry has a low to medium threat associated with increased buyer power. IV. Suppliers

The primary suppliers to the wireless providers industry are the manufacturers of the mobile phones themselves. These manufacturers produce the actual phones sold by the service providers and are dominated by a number of large domestic and international manufacturers. 1) Supplier to the service provider industry is highly concentrated. There ____ 7

are only a few manufacturers that provide mobile phones to the service providers, with each provider only carrying products from specific suppliers. 2) Switching from one manufacturer to another requires new training for technical support and customer service employees, causing a high cognitive switching cost. 3) Due to the large overhead costs of establishing a new national service provider, suppliers extremely dependant upon national carriers for business. Without such large carriers, manufacturers of mobile phones would have to forward integrate to sell their own service at a costly, and ultimately risk, proposition. By examining each factor of the power of suppliers, it was shown that the supplier generally has a minimal amount of power for wireless carriers. This is largely due to the fact that the suppliers are highly dependant upon the service industry and are striving to capture business V. Substitutes Substitute products are items that satisfy the same customers in a different way. As more substitute items are in the market, they allow more alternative choices for customers to choose in between. This creates threads for incumbent firms since it is more difficult for the firms to raise price and generate higher revenue. Substitutes to the mobile phone service industry are products and services such as landline phones, cable companies, and Wi-Fi etc. However, the wireless service plans combined with smartphone may at a certain degree offset the influence of substitutes.

Reference:

1.

U.S. Bureau of economic analysis ____ 8

<http://www.bea.gov/newsreleases/industry/gdpindustry/gdpind_glance.htm>

2. 3. 4. 5. 6. 7. 8.

U.S Bureau of Labor Satistics <http://www.bls.gov/bls/industry.htm> U.S Bureau of Population Estimates <http://www.census.gov/popest/estimates.html> Telecommunications: Wireless, Standard & Poors Industry Survey by James Moorman, CFA, Wireless Services Analyst, July 21,2011 Telecommunications: Wireline, Standard & Poors Industry Survey by Todd Rosenbluth, Wireless Services Analyst, April 7, 2011 Strategic Management, Strategy Consulting Group by Raghavan Parthasarthy and Alvin L. Booke, 2010

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