T-Mobile US Attack Will Fail, Analysts Say

Will T-Mobile US or Sprint be able to make a dent in U.S. mobile market share? It might be a significant question U.S. regulators and antitrust authorities might have to ponder, if Sprint decides to make an acquisition move on T-Mobile US.

In the span of three recent quarters, for example, T-Mobile US gained two million new accounts, which suggests to some observers that T-Mobile US can attack U.S. market structure, and that Sprint might have a chance to do the same.

In that regard, at least one communications analyst firm believes that T-Mobile US will not change industry market share in 2014, no matter what it does. That does not address the issue of whether T-Mobile US can significantly change U.S. mobile market share over the longer term.

But neither does the prediction suggest T-Mobile US or Sprint can prevail, over the longer term, in a protracted price war against Verizon Wireless and AT&T Mobility.

"Despite the price war, we do not anticipate any major shifts in market positioning among the top four carriers in 2014, says Susan Welsh de Grimaldo, Strategy Analytics research director.

But Strategy Analytics is not more optimistic over the medium term, either. T-Mobile US will struggle to stay near 11 percent of the retail market, while Sprint will gain a percent to
reach 15.5 percent by 2018 and the two leaders remain on top with Verizon Wireless at 33 percent and AT&T Mobility just under 25 percent.

The implications for policymakers might be clear enough: if Strategy Analytics is right, neither Sprint nor T-Mobile US will be able, on their own, to change U.S. market structure.

That might not matter, in terms of competitive dynamics, if Sprint and T-Mobile US can exert pressure on the two market leaders with 58 percent share.

But some might argue that 58 percent will be more significant than might at first appear, since the two leading service providers are likely to have the lion’s share of the most lucrative accounts (multi-line, postpaid, smartphone-using shared accounts).

T-Mobile US will take nearly 16 percent of retail gross adds in 2014, about the same as Sprint will achieve. But T-Mobile US also will experience levels of customer churn that result in net gains of about nine percent, compared to Verizon Wireless net gains of 47 percent, on 22 percent gross adds.

The Strategy Analytics prediction suggests there is almost no chance the T-Mobile US attack will succeed, leaving the U.S. mobile market in a situation where a functional duopoly, which most believe will not be good for innovation and competition, will prevail.

Almost No "Poor" Countries Left by 2035: Positive for Internet Apps, Access

“By 2035 no nation will be as poor as any of the 35 that the World Bank now classifies as low-income, even adjusting for inflation,” predicts Bill Gates, Bill & Melinda Gates Foundation chairman. “Most countries will have higher per-person income by 2035 than China does now.”

That has strategic implications for providers of Internet access and providers of Internet applications, as it suggests there is no fundamental barrier to connecting virtually everyone on the planet, based on sustainable revenue models.

Nor is there any serious reason to doubt that access speed and user experience will remain as limited as often is the case at present.

Almost all countries will be what are now called lower-middle income or richer by 2035, Gates said.

Gates also argued against “three myths” that block progress for the poor: poor countries are doomed to stay poor; foreign aid is a big waste; and saving lives leads to overpopulation.

“The belief that the world is getting worse, that we can’t solve extreme poverty and disease, isn’t just mistaken. It is harmful,” Gates said. “By almost any measure, the world is better than it has ever been. In two decades it will be better still.”

Visa and Mastercard Mobile Payments Go Cloud, Android, Nix NFC

Credit card companies, mobile service providers, banks and retailers have been attempting to figure out how their own part of the retail payments ecosystem will emerge as the provider of the greatest value to end users.

Mobile service providers have pinned their hopes on near field communications for the device to terminal communications, using the subscriber information module as the data store, in order to create a new role for themselves in the retail payments ecosystem.

It has proven difficult, so far. U.K.-based O2 abandoned its mobile wallet service, for example.

Now Visa and Mastercard have thrown key support behind a cloud-based approach using Google's Host Card Emulation (HCE) platform.

HCE allows any NFC application on an Android device to emulate a smart card, letting users wave-to-pay with their smartphones, while permitting financial institutions to host payment accounts in a secure, virtual cloud.

By doing so, Visa and Mastercard mobile payment systems simply bypass the SIM card and NFC chip, and will instead verify mobile transactions in the cloud, using the HCE technology in Android.

By doing so, Visa and Mastercard also leverage the huge global Android installed base of devices, a huge factor in an ecosystem that relies crucially on critical mass for success.

Fully 78 percent of smartphones sold in Q4 2013 run on the Android operating system, and Android is enjoying strong gains in markets outside the U.S., including in China and Latin America. Android also recently became the fastest platform to reach one billion users worldwide.

By using HCE, the credit card firms are able to operate globally with a single platform.

In a clear sense, mobile operators are finding that success in mobile payments, machine to machine service, the Internet of Things, content services, messaging and other applications now  requires working as part of an ecosystem, not as closed providers of fully-owned apps.

That might require a shift to horizontal provision of functions, not vertical ownership of full services.

Will U.S. Voice Revenue Dip to 28% of Total by 2015?

It sometimes is hard to remember how fast revenue sources and demand are changing in the communications business.

As recently as 2005, voice revenues represented 73 percent of total revenues. +

By 2013, voice had dropped to just 43 percent of total revenues. 

And voice revenues undoubtedly are headed lower still.

Some service providers might already be earning a third of total revenue from voice.

And by some estimates, voice might represent 28 percent of total industry revenue by about 2015.

To be sure, Insight Research projects that U.S. telecommunications service revenues will continue to grow from 2013 to 2018.

But voice revenue will continue to decline at -4.81 percent compound annual growth rate from $163 billion in 2013 to $127 billion in 2018, Insight Research predicts.

Mobile voice—which peaked at $118 billion in 2008—will decline at -3.82 percent CAGR to $84 billion in 2018. Fixed network voice will drop even faster, at a negative 6.56 percent CAGR from $61 billion in 2013 to $44 billion in 2018.

Voice lines in service obviously will mirror those declines.

Changing communication preferences explain much of the change, but so does changing technology, namely VoIP.

Normally, when prices for a product in demand fall, usage grows. Given mandatory reductions in roaming costs in Europe and continued pressure on retail calling rates (international and domestic), one might expect call volume to grow. Typically, volume does grow as prices drop.

But changes in the demand curve can wreck havoc on the expected trend. As it turns out, people now prefer other modes of communication.

The average length of a local call has fallen more than 50 percent over the last decade to 1.8 minutes, according CTIA-The Wireless Association.

And consumer email traffic fell nearly 10 percent between 2010 and 2012, according to Radicati Group.

Over the top messaging, meanwhile, is growing at triple-digit rates. WhatsApp recorded an all-time high of 10 billion outgoing messages in a single day in June 2013, which equated to an average of more than 30 messages per user per day, according to Stephen Sale, Analysys Mason principal analyst.

“We estimate that the total volume of messages sent from mobile devices via IP services exceeded the volume of SMS messages for the first time in 2013, at more than 10.3 trillion compared with 6.5 trillion worldwide,” said Sale. “Messaging volumes associated with OTT services are expected to almost double in 2014 and will reach 37.8 trillion messages sent in 2018.”

That is having an impact on voice revenues and usage as well, at least in many markets.

Sometimes, even dropping the price of a product, which would be expected to produce usage growth, does not work quite that way. That is the case when overall demand for a product declines.

Google Fiber is the Biggest "Overbuilder" Challenge in More than a Decade

Google Fiber represents the single biggest potential “overbuilder” challenge ever seen by the U.S. cable industry, which already faces competition from satellite, telco and wireless ISP competitors.

Overbuilders are independent fixed network service providers, typically offering triple-play services to residential customers in markets where telcos and cable TV operators also operate.

As such, the key business issue is whether a sustainable business case can be created, under conditions where the overbuilder has to contend with two entrenched cable and telco opponents.

Since 2000, the underlying revenue elements have changed a bit. Though the triple play has been considered essential by earlier generations of overbuilders, Google Fiber has chosen to lead with gigabit Internet access and supplement with video entertainment.

Though some will point to the concessions Google Fiber might obtain by working with municipalities (permitting, engineering, access to ducts and rights of way), such advantages are likely to represent only a relatively small part of overall costs.

The key challenges remain the actual construction of the access networks, even using gigabit opto-electronics and home-built consumer premises equipment.

Whether the Google Fiber business case is helped by in-house development of CPE also is an issue. Some might argue that building its own CPE cannot lead to lower costs. But it might be possible use of its own gear has some in-home equipment cost advantages.

What is not so clear is whether Google Fiber also has used the same approach for access network opto-electronics.

Still, as much as 80 percent of cost is related to civil engineering, not cable and optoelectronics.

Some have estimated it would cost $400 billion to replicate Google Fiber on a national basis in the United States.

In that sense, overbuilders as a category of service providers are different from the thousands of independent wireless ISPs operating in the United States that tend to focus on Internet access rather than triple-play services.

Not since the 2000 time frame has overbuilding been a major new funding priority for many service providers, in part because it is so capital-intensive to create a new facilities-based network, using either the traditional hybrid fiber coax model preferred by cable operators or the fiber to home approach favored by telcos.

Overbuilders--both municipal and commercial--have tried to gain a foothold in several U.S. markets over the last couple of decades, with mixed success. RCN in the U.S. Northeast and Grande Communications in Texas are among the commercial providers that have achieved notable success.

Grande serves 140,000 customers, for example. RCN primarily focuses on high-density housing areas in Washington, D.C., Philadelphia, Lehigh Valley (PA), New York City, Boston, and Chicago.

A few municipal networks also have managed to create sustainable business models as well in smaller markets.

But Google Fiber might represent the biggest-ever challenge, in part because of Google’s ability to finance the networks, in part because Google’s business model might allow it to operate at lower costs than even cable operators, which after wireless ISPs and satellite providers, tend to have the lowest operating costs in the consumer services business.

Much depends on whether one believes Google Fiber actually is viewed as a long-term business opportunity for Google, or whether it primarily remains an effort aimed at prodding the rest of the ISP industry to upgrade bandwidth faster.

If Google Fiber represents the former, Google would seem to represent the most-serious overbuilder challenge the cable industry ever has faced.

Still, even without a full national deployment, Google Fiber has to be seen within the context of a broader policy effort aimed at gaining support from federal, state and municipal regulators to allow flexible deployments, while also prodding other ISPs to upgrade faster, and drop their prices.

EE Says It Doesn't Compete with Over the Top Messaging

While the decline of voice and text messaging prices is not welcome in the mobile business, and though the pace of decline matters greatly, not every executive, at least in public, is excessively worried about the maturation of traditional products.

The acquisition of WhatsApp by Facebook, for example, does not worry Olaf Swantee, EE CEO. That public calm is possible because EE does not rely on text messaging revenues to drive its growth, Swantee insists.

That is an optimistic prediction, when text messaging still drives about a third of revenue growth for a mobile service provider, and represents scores of billions of revenue.

“It is not something we need to compete with,” said Swantee about over the top messaging, pointing out that EE revenue growth is driven principally by the acquisition of additional postpaid mobile service contracts and mobile data plans.

“SMS revenues and usage will come down over time,” Swantee said.

WhatsApp recorded an all-time high of 10 billion outgoing messages in a single day in June 2013, which equated to an average of more than 30 messages per user per day, according to Stephen Sale, Analysys Mason principal analyst.

“We estimate that the total volume of messages sent from mobile devices via IP services exceeded the volume of SMS messages for the first time in 2013, at more than 10.3 trillion compared with 6.5 trillion worldwide,” said Sale. “Messaging volumes associated with OTT services are expected to almost double in 2014 and will reach 37.8 trillion messages sent in 2018.”

“It is only a matter of time before SMS services are dislodged from their current default position on smartphones,” said Sale.

                                Mobile Messaging Forecast

source: Analysys Mason

On the other hand, EE revenue growth clearly is weighted towards account gains and mobile broadband. Data and messaging revenues reached 56 percent of total EE average revenue per user in the fourth quarter of 2013, compared to 50 percent of total revenue in the fourth quarter of 2012, with data (non-text) revenue up to 44 percent of ARPU compared to 34 percent in the fourth quarter of  2012, EE says.

EE also says its 4G customer base grew 68 percent from the third quarter of 2013 to the fourth quarter of 2013.

After adding 194,000 postpaid net adds in the fourth quarter of 2013, 58 percent of the EE customer base now is postpaid, excluding machine-to-machine (M2M), delivering six times more ARPU than prepaid.

The prepaid base meanwhile dipped 543,000, EE says.

How Much Will Facebook-Owned WhatsApp Reduce Carrier Revenues?

Facebook’s acquisition of WhatsApp immediately makes Facebook a major provider of fast-growing social messaging (over the top messaging) services globally. Precisely how much the acquisition will affect market dynamics (though intended to benefit Facebook)  is less clear.

Over the top messaging might grow at triple-digit rates in 2014, and at least some of that activity shifts user behavior. Where people might have sent text messages, they now send OTT messages (social or instant messages).

Among the key metrics are revenue and usage, with the caveat that over the top messaging revenue models normally are indirect. Volume is easiest to depict.

“The social messaging market is growing rapidly, with messaging volumes to reach 69 trillion with subscribers growing to 1.8 billion by the end of 2014,” says Eden Zoller, Ovum principal analyst.

Perhaps as significant ar the growth rates. OTT messaging traffic was about 27.4 trillion in 2013, and will grow at 300-percent rate and will grow at a triple digit rate in 2014, Ovum estimates.

Operator-based mobile messaging traffic (short message and multimedia messaging) volumes will peak in 2014 with 7.7 trillion messages, declining in 2015 to 7.6 trillion messages, Ovum also estimates.

It might be easy enough to predict that the text messages WhatsApp actually cannibalizes are high-cost international messages.

That has been true of Skype, the classic example of an over the top voice calling app. Such new apps get used first when the cost of carrier-provided messaging or voice is high. In the same way, WhatsApp likely directly substitutes for international text messages.

Domestic use is more complicated, and likely represents activity that would not have occurred at all. So most OTT messaging probably is largely incremental activity, not a direct substitute for text or multimedia messaging at all.

But it would be reasonable enough to conclude that the revenue impact on mobile service providers will be to cap revenue growth, as users needing to send international text messages will shift to use of OTT apps such as WhatsApp.

That doesn’t necessarily mean international texting revenue will halt, only that it will grow less robustly, as has been the case for international voice. Also, to the extent that the base of users continues to grow, more text messaging users and revenue-generating units will be added to the universe of customers.

The impact on usage in some ways is clearer: OTT messaging volumes will grow.

As always is true, users have multiple ways to communicate, and use of OTT messaging will at least indirectly reduce the volume of messages sent other ways.

Text messaging will generate more than $100 billion in 2014 revenue for mobile service providers, about 50 times the total revenues from all over the top messaging services.

The volume of OTT messages is substantial, with Deloitte analysts estimating that 50 billion OTT messages will be sent every day, compared to 21 billion text messages. But, as with everything Internet, volume and usage is not revenue.

Some observers have estimated that OTT messaging in 2013 cannibalized $32 billion in SMS revenues. But such extrapolations tend to quantify such developments by assuming that nearly all the incremental OTT messages would have been sent using SMS.

In most cases, especially international messaging, the alternative would have been “no message sent,” or use of some other communications mode.

A Facebook-owned WhatsApp likely will help cap potential revenue growth for carrier-provided messaging services, in part by reducing usage, in part by forcing carriers to merchandise texting services (reducing both aggregate revenue and profit margin).