T-Mobile US Creeping Past Sprint in Terms of Market Share

T-Mobile US is creeping closer to a rather rare event in the recent history of the U.S. mobile business, namely a shift in leader market share that has any of the leading providers changing its rank.

Some might argue the switch will happen sometime in 2015, if T-Mobile US maintains its present sales momentum and Sprint cannot ignite faster subscriber growth.

In fact, T-Mobile (including former MetroPCS assets) is now the third largest service provider, in terms of smartphone accounts, if share includes prepaid and postpaid accounts.

And nobody can be sure how market structure could change over the next few years, as Sprint ponders a bid for T-Mobile US, Dish evaluates whether to make its own eventual bid for T-Mobile US, or whether another entity makes an effort to buy T-Mobile.

And then there is the issue of what Comcast or cable might do. Some think Comcast could weigh its own bid for T-Mobile US, though that would be a big break from traditional cable company strategy.

Traditionally, cable operators are loathe to provider services on a non-facilities-based basis, and also prefer to offer services on their existing fixed network.Wi-Fi-first is the present direction, but many speculate a wholesale-supported mobile capability might be added.

That wouldn’t have been unusual for most of the history of the U.S. mobile business, which has been highly fragmented in the past.

But over the decade, the U.S. mobile service provider market has been relatively stable. That wasn’t the case in the three prior decades, when the U.S. mobile market was relatively fragmented.

One result of the recent stability is a market structure similar to most other mobile markets in Europe, where there are four leading providers.

Starting about 2000, the current structure began taking shape, with four leading national providers, including Verizon Wireless, AT&T Mobility, Sprint and T-Mobile US.

The present structure did not take shape until after both Sprint and the precursor of T-Mobile US began operations using new 3G spectrum in the mid-1990s, and after a series of big mergers happened starting around 2000.

SBC, the precursor to today’s AT&T, entered the mobile business in 1987 when it acquired Cellular One, then owned by Metromedia.

In 1988, Pacific Northwest Cellular is founded. It later changes its name to VoiceStream, and then was evenually acquired by Deutsche Telekom.

In 1994, AT&T acquired all of McCaw Cellular and started operating using the AT&T Wireless brand name.

Verizon Wireless was formed in 2000 by Bell Atlantic (now renamed Verizon) and Vodafone, owner of “Airtouch.’

Cingular was formed in 2001 by SBC and BellSouth (BellSouth was later purchased by SBC).

Sprint did not enter the national market in a significant way until after 1995, based on new 2 GHz spectrum allowing it to launch its own mobile service. The same was true for VoiceStream, which was acquired by Deutsche Telekom in 2001.

In 2003, the market share rankings had Verizon at number one, AT&T number two, Sprint the third biggest and T-Mobile US number four, measured by revenues. Rankings of the top two providers can flip if subscribers are the measure of share.

The point is that a U.S. mobile market with an increasingly-stable market share pattern is about to undergo the biggest potential period of change in perhaps a decade.

In fact, some might argue that the U.S. market is unstable not only because of proposed mergers and new entrants, but because the market share structure is itself a bit out of line with what one would expect in almost any competitive market.

A typical expected structure would have the biggest company to have market share about twice that of the number-two provider, while the second-biggest firm has market share about twice that of the number-three supplier.

Generally, that is what one has seen in the Organization for Economic Cooperation and Development countries. In fact, in 1998 the pattern was almost classically perfect. By 2003 the pattern had weakened, with the number-one firm generally losing share, compared to the other two top providers.

Recently, in the U.S. market, the top two providers have had nearly equal share, vastly more than the final two contenders. And even if that raises worries about an eventual stable duopoly, no global mobile market actually has settled into such a pattern. At least, not yet.

source: Nakil Sung

source: OECD

U.S. mobile market share before the big consolidation began after 2003 shows the market fragmentation.

Venturebeat

Cable Adds 83% of Net New High Speed Access Customers in 1Q 2014

Why high speed access market share matters: The top cable companies accounted for 83 percent of the net broadband additions in the first quarter of 2014, according to Leichtman Research Group.

Given enough time, that will lead to cable TV domination of high speed access in the U.S. market.

Looking only at the 17 largest cable and telephone providers in the US, which serve about 93 percent of all high speed access customers in the U.S. market, about 1.2 million net additional high-speed Internet subscribers were added in the first quarter of 2014.

The top cable companies added about 970,000 subscribers, while the top telephone companies added about 200,000 net new subscribers.

The 17 firms collectively serve about 86.5 million accounts. Cable TV firms have about 59 percent of the installed base, serving 50.3 million accounts, while telcos serve 35.2 million customers, representing about 41 percent of the installed base.

The numbers are somewhat complicated by the transition telcos are making from all-copper digital subscriber line connections to fiber-reinforced or fiber-to-home access networks.

AT&T and Verizon added 732,000 subscribers on the U-verse and FiOS networks in the first quarter of  2014, while losing a net 638,000 DSL subscribers.

U-verse and FiOS broadband subscribers now account for 49 percent of telco broadband subscribers. Some might argue that means half the existing telco high speed access share is susceptible to churn, unless AT&T and Verizon can get their networks upgraded.

In that regard, AT&T is going to do much more than Verizon. In 2013, about 25 million AT&T access lines were upgraded with fiber to neighborhood facilities, out of about 76 million total locations, by some estimates.

In other words, about 33 percent of AT&T lines had fiber reinforcement. Project VIP originally was slated to cover 57 million households, about 75 percent of locations. AT&T further says it will add 15 million more locations if the DirecTV acquisition is approved, reaching nearly 95 percent of households.

Verizon might have passed about 52 percent of all its households with fiber-to-home networks by the end of 2013. Verizon has halted FioS deployment except where it already had gotten franchise agreements requiring it.

Granted, policy eventually could change. And AT&T is making significant new efforts to upgrade its networks. The need to compete with the likes of Google Fiber could spur both telcos to rethink high speed access investment.

Broadband Internet	Subscribers at End of 1Q 2014	Net Adds in 1Q 2014
Cable Companies
Comcast*	21,068,000	383,000
Time Warner	11,889,000	283,000
Charter	4,778,000	148,000
Cablevision	2,788,000	8,000
Suddenlink*	1,103,100	35,100
Mediacom	984,000	19,000
WOW (WideOpenWest)	756,700	16,700
Cable ONE	484,168	11,537
Other Major Private Cable Companies**	6,450,000	65,000
Total Top Cable	50,310,968	969,337
Telephone Companies
AT&T	16,503,000	78,000
Verizon	9,031,000	16,000
CenturyLink	6,057,000	66,000
Frontier^	1,873,000	37,000
Windstream	1,170,400	(500)
FairPoint	331,538	1,772
Cincinnati Bell	270,000	1,600
Total Top Telephone Companies	35,235,938	199,872
Total Broadband	85,546,906	1,169,209

Sources: source: Leichtman Research

Verizon Mobile-First Strategy Validated by Fixed Network Results

Though it is the supplier of the great bulk of fiber to the home connections in the U.S. market, Verizon nevertheless has had a “mobile-first” business strategy for most of the last decade.

And though it originally expected the business case for FiOS deployments to be bolstered both by new revenues and operating cost reductions--and though that has happened--Verizon now sees the fulcrum of growth from its mobile segment.

Skeptical about the future return from deploying capital in the fixed network compared to the mobile network, Verizon clearly has concluded the investment returns are much better from mobile investment.

Verizon has capped its FiOS deployments to about 19 million homes passed, enough network to reach about 70 percent of locations served by Verizon’s fixed network. Obviously, that means 30 percent of the network never will be upgraded for FiOS.

Verizon is betting that capital invested elsewhere, in mobile assets and services, and possibly at some point in acquisitions, will produce a higher financial return than building FiOS to reach another 20 percent or so of its installed base of fixed network customers.

Stranded assets, in fact, could represent as much as half of the new FiOS access network investment, in “greenfield” builds.

The reason is simply that FiOS is unlikely to attain long-term penetration rates in excess of much more than 40 percent, either for Internet access or video services, where it operates.

FiOS Internet penetration was 39.5 percent at the end of fourth-quarter 2013, meaning that Verizon was able to sell a high speed connection to about four homes out of 10 it passes.

That might imply FiOS overall penetration of about 50 percent (assuming 90 percent of FiOS customers buy a dual-play or triple-play service) while about 10 percent of households only buy a single service.

Over a 10-year period, tthe issue is whether that actually covers Verizon’s cost of capital, given current revenue opportunities, the level of market competition and stranded capital.

In fact, Lowell McAdam, CEO of Verizon, says video growth is lagging high speed Internet access, reducing that amount of incremental revenue Verizon can earn from FiOS.

"We used to sell a TV service and an equal number of broadband services and we're seeing the gap now increase significantly," McAdam said at the J.P. Morgan Global Technology, Media and Telecom Conference. "In the first quarter where we had 20, 30 and 40 percent more broadband sales than linear TV sales."

And growth rates are slowing. In the first quarter of 2014 Verizon added a net 98,000 FiOS Internet customers, down from the 126,000 new subscribers added in the fourth quarter of 2013 and the 188,000 users it added in the first quarter of 2013.

In the first quarter of 2014 Verizon added a net 57,000 FiOS video customers, down from 92,000 customers added in the fourth quarter of 2013  and 160,000 subscribers in the first quarter of 2013.

The point is that Verizon is taking a “mobile first” approach for a good reason: that is where the revenue growth lies.

Will Low ISP, Video Provider Satisfaction Drive Churn?

Internet access service is the lowest ranked industry--last out of 43 industries--in the most-recent American Customer Satisfaction Index. Just above it--at position 42--is consumer satisfaction with video subscription services.

What that means for contestants in both markets is not immediately clear. 

The old joke about outrunning a bear--you don't have to be faster than the bear, only faster than the other guy being chased--likely applies here.

To be sure, to the extent that customer satisfaction is directly associated with customer loyalty, the rankings show relatively high unhappiness with most of the providers, and with the industry products compared to 41 others.

But relatively high dissatisfaction levels do not always result in product abandonment, especially when there are no reasonable product substitutes, or consumers judge all providers to have similar problems.

Cable TV services, for example, always have had “satisfaction” issues, and none of that stopped cable operators from growing to about 70 percent penetration before new competitors halted growth and began taking market share.

ISP service is purchased by about 75 percent of U.S. households, while video subscriptions are bought by more than 85 percent of U.S. households.

But competition arguably is growing in the ISP business, as it has grown in the video business.

Still, it is the video product that seems most exposed to potential new product substitutes, namely streaming over the top video.

At the same time, the ISP market arguably is in the process of evolving in a way that should increase satisfaction, ultimately, as the value-price relationship is reset, giving consumer much more bandwidth at equivalent prices (1 Gbps for $70 or $80 a month).

Video service scores a 65 on the ACSI scale. Internet service, which is provided by many of the same companies that provide video service, scores a 63 on the ACSI scale.

By way of comparison, mobile service got an ACSI score of 72. Fixed voice service scored 73/

Industries ranked between 85 at top and 63 on the bottom.

According to the American Customer Satisfaction Index, industry satisfaction scores fell 4.4 percent to an ACSI score of 65 after peaking at 68 in 2013.

But ISPs fared even worse, ranked last among all 43 industries tracked. Higher subscription prices, unreliable service, and slow speeds continue to pull ISP customer satisfaction down, ACSI says.

Verizon FiOS earned the highest satisfaction score among ISPs, scoring 71. Time Warner Cable scored lowest at 54. Comcast scored 57, while AT&T earned a 65.

To the extent that satisfaction ratings are correlated with “customer acquisition, retention and churn,” extremely-low ISP satisfaction ratings would seem to open up an opportunity for ISPs able to outperform the rest of the industry.

The same might be true in the video subscription business. DirecTV and AT&T U-Verse scored 69, Comcast scored 60 and Time Warner Cable ranked lowest at 56.

And though AT&T is facing some skepticism about the wisdom of its bid to buy DirecTV,

customer satisfaction with fiber or satellite services is eight points higher than cable (68 compared with 60).

Note that DirecTV and AT&T scored highest in terms of satisfaction with video providers.

Will Fixed Network Voice Be Big Loser in Transition to New Triple Play and Quadruple Play Packages?

source: broadbandgenie

The triple play (fixed network voice, video entertainment and high speed access) and quadruple play (mobile service, fixed network voice, video entertainment and high speed access) bundles have been a mainstay of service provider strategy in recent years.

But both triple play and quad play are changing in ways that might be quite negative for fixed network voice, and highly favorable for fixed network high speed access.

Consider only the impact mobile has had in the voice business. For many users, mobile now is the way they consume voice services, making the fixed voice service superfluous. 

So fixed network voice might not be an anchor of tomorrow's triple play bundle. Instead, mobile services will replace fixed network voice, creating a new triple play offer based on mobile, broadband access and linear video.

In a related way, mobile Internet access might emerge as a new key anchor for bundles. And that's where the difference between a triple play and a quadruple play becomes a matter of semantics, to a large extent. 


A consumer of a triple play bundle (mobile, video entertainment and fixed Internet service) might be said to be buying four key products: mobile Internet, fixed Internet, voice and linear video entertainment. 

One might otherwise call that a functional quadruple play (voice, video, high speed access and mobile), even if the formal offer is mobile, video and broadband access. 

The corollary implication is that the enduring value of a high speed access connection is lots of bandwidth at an order of magnitude lower cost than use of a mobile connection.

source: Nielsen

That will occur if and when linear video significantly is displaced by over the top delivery. Video is an application with bandwidth requirements an order of magnitude or more greater than all other applications.

So if significant viewing time is shifted from linear video delivery to over the top Internet delivery, the amount of Internet bandwidth required by many consumers will shift dramatically.

That will put a premium on Internet access services able to deliver lots of bandwidth at the lowest possible cost.

And that means the fixed network becomes more important, as it can deliver much more bandwidth, at lower costs, than the mobile network, as end user demand grows by an order of magnitude or perhaps two orders of magnitude.

One might argue that the cost of providing a gigabyte of consumption is an order of magnitude cheaper, using a fixed network, compared to a mobile network.

To be sure, what use of one megabyte or one gigabyte of Internet access actually costs an end user is a statistical issue.

The monthly price for use of any mobile or fixed high speed access connection is fixed. And that is one way of highlighting the cost of using a gigabyte of Internet data.

But the actual “price per use of a megabyte” depends on actual consumption, not the retail price to have access to a fixed bucket of usage. Likewise, the cost to supply a gigabyte or megabyte of usage is determined by actual usage.

In other words, a mobile service might feature a price of about $6 per gigabyte to $10 per gigabyte of mobile usage, for a 5-Gbyte bucket of usage. But it a user actually routinely uses only about 2 Gbytes a month, the effective cost is about $15 per gigabyte.

source: Nielsen

A fixed network service might retail for a price of about $50 a month, with usage buckets of 300 Gbytes, or virtually unlimited access, in some cases. The nominal price might be 17 cents a gigabyte.

But if a user consumes about 30 Gbytes, the effective price might be $1.67 per gigabyte, or less than two tenths of a cent per megabyte.

The point is that fixed network voice might cease to be an anchor component of a triple play bundle, its function replaced by mobile service. 

At the same time, if and when over the top video entertainment becomes a major development, the value of fixed access will soar, almost linearly with the amount of streamed video being consumed by the typical consumer.

For the first time, we might see an evolution of the component parts of a consumer "triple play" service, as well as a blurring of the value of a triple play that makes a "quadruple play" different.