U.S. Mobile Providers Face Spectrum Uncertainty

U.S. wireless operators and equity analysts have argued for well over a decade that there is "too much competition" in the U.S. mobile market. The notion is that a stable national market would have no more than three providers. 


Also, with the emergence of the smart phone business, all mobile service providers need lots more spectrum, though some would contest the notion in a near-term sense. 


But some also note that, at least for the moment, contestants are stymied, in large part because recent deals that would have changed spectrum allocations, and some deals still pending, signal to most contestants the likely regulatory resistance.


Recent regulatory action includes the successful regulator resistance to the AT&T purchase of T-Mobile USA, and scrutiny of the spectrum sales by Comcast, Time Warner Telecom, Cox Communications and Bright House Networks to Verizon. 


The denial of LightSquared to use satellite spectrum for a terrestrial Long Term Evolution network is a separate case, many would argue, as the issue there was not market structure (indeed, one might have argued LightSquared would increase the level of competition in the U.S. market), but signal interference with other licensed users. 


Is the share of market now characteristic of the U.S. market sustainable? Most would say "no." Among the common observations is that two of the top four national providers have market share two to three times greater than two of the others.

Many observers would say a market with four national providers is about one too many for a sustainable and stable market. Significantly, that view is held by the Federal Communications Commission and Department of Justice, both of which use a standard test of market concentration in deeming the U.S. mobile market already

 

non-competitive. 

One of the ways to measure market concentration is the Heffindahl-Hirshman Index or HHI, often used as a measure of market concentration. The HHI is the square of the percentage market share of each firm summed over the largest 50 firms in a market. 

The  HHI which already suggests that the market is uncompetitive. HHI is the problem where it comes to further mergers among the four largest national mobile providers, even a merger of Sprint and T-Mobile USA, which despite its complexity would create three national providers with roughly equivalent market share. 

Market share concerns also will permeate any spectrum acquisitions, as well, since spectrum is a key "raw material" from which any mobile service provider can build a business. 

Over the long term, there is perhaps general agreement that more spectrum will be required. At issue is the way such spectrum is allocated. In the past, many regulators, in many countries, have restricted availability of new spectrum by incumbents, hoping thereby to create more competition. 

Over the long term, one has to question whether this actually ever works, as all markets, over time, consolidate, even when the initial implications would appear to be positive, from an "enabling of competition" perspective. 

 

Cloud Winners and Losers Will Cross Ecosystems

Who wins, and who loses, as mobile apps and services, especially cloud-based apps and services, gain more traction? The “obvious” answer is that device and app providers are “winning,” while service providers “lose.” Though obviously true in the case of over-the-top voice, messaging, videoconferencing and entertainment video realms, the larger reality is more complicated.

In many cases substantial and real competition now is occurring between firms in different ecosystems, not only within single ecosystems. And, as has been the case for a couple of decades, contestants have to balance effort between protecting existing businesses and growing new lines of business. 


The difference now is that many of the new revenue streams and businesses actually cross ecosystems and redefine them.
For example, mobile payment systems offered by Square, Intuit and PayPal arguably represent incremental revenue within the credit card and debit card transaction business, rather than primarily a shift of transaction volume within the business. The reason is that such services are used primarily by businesses that would not have used merchant point of sale systems in the past.

Likewise, to some extent, services that turn smart phones and tablets into merchant point of sale systems will compete with supplier of traditional merchant terminals, as well.

Enterprise cloud services might compete with packaged software suppliers, data centers or server manufacturers, for example. That would mean some amount of competition between segments of one industry.

Small business cloud services might reduce the amount of revenue earned by value-added resellers or system integrators, for example. That also is a form of intra-ecosystem competition.

Consumer cloud services, especially those related to storage, will displace some of the need for local storage, and could reduce demand for external hard drive storage and some amount of PC sales. That might be more an example of competition between ecosystems

Cloud storage might reduce need for PCs and storage devices, for example, reducing some amount of device spending and shifting that spending into software and services. So some device manufacturers might lose, while others might gain (PCs, external storage lose; mobile devices win).

By the end of 2013, consumer cloud services for accessing content will be integrated into 90 percent of all connected consumer devices, according to Gartner.

The other dynamic is that, in the case of brand-new services, such as cloud storage, there could also be winners within and between ecosystems. App providers could win, as well as hosting facilities.

Traditional entertainment video suppliers such as cable companies hope to win, even as some amount of entertainment video shifts to cloud mechanisms, even as rivals think cloud delivery will eventually displace traditional distribution mechanisms.

Likewise, cloud services could help device manufacturers as much as app providers. Certain handsets and environments, such as iOS iTunes and Apple tablets and phones, or Google Drive and Android-based devices, provide early examples. That might be an example of value and revenue shifts within the mobile ecosystem.

In other cases, such as many parts of the mobile commerce business, competition might entail substantial amounts of competition between ecosystems. Services offered by the likes of Square, Intuit and PayPal that turn a smart phone into a merchant point of service terminal represent competition between those firms and other existing payment systems, merchant POS terminal providers and emerging application provider or mobile communications service provider payment systems.

“Inside the spending envelope, market dynamics will collapse some markets while creating others that expand the captured revenue,” says Gartner managing vice president Andrew Johnson.

Providers of consumer devices, services and content must anticipate the risk of sweeping changes to their business models,” said Johnson. “The personal cloud will force technology providers not only to rethink how they approach markets, but also, more importantly, how they define markets.”

Emerging and mature markets are no longer useful form of market segmentation, Johnson argues.

Online Video Still Needs Scale to Attract More Advertising

The online-video market represented about $1.8 billion worth of ad spending in 2011, with half of that going to just two players: Hulu (about $300 million) and YouTube (about $600 million), according to Brian Wieser, an analyst at Pivotal Research Group, and reported by Ad Age. 


Most of the advertising growth in online video could happen because it shifts spending from the $70 billion spent annually on TV ads in the U.S. market. 


High-quality video lots of people want to watch might be necessary. But it is not sufficient for success, simply because video advertisers want large audiences.


And the simple fact is that not many providers have both attractive programming and large audiences. Subscription revenue is dominated by Netflix. 

Apple Tablet Share 51% in 2017

Apple, after reaching a market share high of nearly 75 percent in 2013, will see its share decline steadily to 50.9 percent in 2017, according to forecasts by the NPD Group.


Shipments of tablet PCs are expected to grow from 81.6 million units in 2011 to 424.9 million units by 2017, according to NPD Group. 


That forecast suggests that in 2016 more tablet PCs will be shipped than notebook PCs. 

Most of Apple's declining market share will be grabbed by Android tablets, which will increase its market share to 40.5 percent from an estimated 22.5 percent in 2012, NPD says. It adds that Windows RT slates may be at 7.5 percent of the market in 2017.


The iOS operating system has been dominant in tablet PCs, but it is expected to lose share, from 72.1 percent in 2012 to 50.9 percent in 2017, as Android increases from 22.5 percent in  2012 to 40.5 percent over the same period. 


Meanwhile, share for Windows RT is also expected to grow, but from a very small base of 1.5 percent in 2012 to 7.5 percent in 2017.


 

Subscription Video Market Shrinks 1.5% in 2011

U.S. cable operators lost about 2.9 million video subscribers in 2011, shrinking the overall subscription TV market by 1.5 percent even as telcos added 1.1 million and satellite TV providers were roughly flat at 280,000 net adds, according to Nielsen data.


The big take away is that cable TV subs fell five percent. That steady drip, drip, drip of deserting customers now is the cable analogy to telco wired voice. 


Meanwhile, households with broadband and only free, over-the-air broadcast TV increased by 631,000 over the course of last year, climbing 14 percent to 5.1 million. 

Why Google Has to Go "Mobile First"

Three numbers explain why Google has taken the "mobile first" approach to application development, why it has chosen to lose some money on Android and create mobile devices.


A recent survey by Strata Marketing of  1,000 advertising agencies that together process $50 billion in media buys annually found 69 percent focused their digital spend on social media. 


That's more than those who focused on search (65.5 percent) and just short of online display (71.3 percent), Strata says. 


Keep in mind that Google built its business on search advertising. So leading ad agencies now are placing inventory on display and social more than search. 


Within social media, the majority of advertising agencies (85.1 percent) said they and their clients focused most on Facebook, 44.8 percent on YouTube, 39.1 percent on LinkedIn, 24.1 percent on Google , 9.2 percent on Foursquare and 1.1 percent  on  MySpace. 

The YouTube figures are helpful, but the fact remains that Google has to do better in display and social advertising, as well as mobile, to remain a force in advertising. And it is mobile where the opportunity is greatest, and the market as yet unconsolidated. 

Tablet Market Grew Less than Expected in First Quarter, 2012

The global tablet market did not grow as fast as analysts at International Data Corporation had expected in the first quarter of 2012. A steep drop in shipments of Android-based tablets offset a strong quarter from Apple, according to International Data Corporation Worldwide Quarterly Media Tablet and eReader Tracker.

Total worldwide media tablet shipments for the quarter reached 17.4 million units in the first quarter of 2012, about 1.2 million units below IDC's projection for the quarter.

While IDC predicted a sharp seasonal slowdown of -34 percent from the previous quarter’s record-breaking 28.2 million units, the actual decline was slightly steeper at -38.4 percent.

The total still represents a robust year-over-year growth rate of 120 percent, up from 7.9 million units in the first quarter of 2011.

Apple shipped 11.8 million iPads during the quarter, down from 15.4 million units in the fourth quarter of 2011, and grew its worldwide share from 54.7 percent in the fourth quarter of 2011 to 68 percent in the first quarter of 2012.

Amazon, which had 16.8 percent of the market on shipment of 4.8 million units, saw its share decline significantly in the first quarter to just over four percent, falling to third place as a result.

Samsung took the number-two position while Lenovo vaulted into the number four spot, followed by Barnes & Noble at number five.

Although total Android shipments were down sharply in the first quarter of 2012, companies such as Samsung and Lenovo are beginning to gain traction in the market with their latest generation of Android products. IDC expects the segment to rebound quickly as other vendors introduce new products in the second quarter and beyond.

"The worldwide tablet market is entering a new phase in the second half of 2012 that will undoubtedly reshape the competitive landscape," said Bob O'Donnell, program vice president, Clients and Displays. "While Apple will continue to sit comfortably on the top for now, the battle for the next several positions is going to be fierce. Throw in Ultrabooks, the launch of Windows 8, and a few surprise product launches, and you have all the makings of an incredible 2012 holiday shopping season."