Mobile Device Replacement Cycles Slow

Mobile installment payment plans, replacing the device subsidy model long favored in the U.S. mobile market, have had some expected, and some unexpected impacts on smartphone adoption and replacement behavior.

Even if the new plans are largely constructed to be revenue neutral to the customer, there does appear to be a slowdown in replacement rates, according to Recon Analytics.

That was a concern when the new retail plans were created, and the concern appears to be justified, to an extent.

In 2014, roughly 143 million mobile phones were sold in the United States, and 90 percent of them were  smartphones. But that represents a drop of 25 million phones from 2013 when approximately 168 million phones were sold (only half of them were smartphones).

The decline in phone sales is caused by the rise of equipment financing plans, but also by slower new subscriber additions.

At the same time, consumers' phone purchase habits have changed significantly.

A growing number of American consumers appear to delay their phone upgrades to take advantage of the lower monthly service prices carriers offer to consumers who wait to upgrade phones at the end of their two-year contracts.

On the other hand consumers who are purchasing replacement phones are focusing on newer, higher priced devices, says Roger Entner, Recon Analytics principal.

While device sales declined by 15 percent year-over-year, device revenues increased by about five percent.

So, as expected, the shift to installment plans appears to be slowing the device replacement rate, a trend that arguably will slow innovation.

Entner expects device sales to fall by five perent to 136 million in 2015 and to fall again by four percent to 131 million in 2016.

In fact, says Entner,”handset replacement has abruptly slowed to the lowest rate since we began calculating the metric.”

Device replacement cycles are lengthening, reaching 26.5 months in 2014, an increase of 4.1 months compared to 2013.

In the past, U.S. consumers typically upgraded their phone at three points in time. Many upgraded at about one year,  when a new generation device was launched.

The next window was an upgrade every two years when the contract expired.

That now is changing.

The percentage of devices replaced at the traditional two year time point fell from 40 percent in 2013 to 16 percent in 2014, while replacement at three years grew from 15 percent in 2013 to 35 percent in 2014.

So nearly half of consumers upgrade every year, but more than a third keep their devices for three years.

Slower device upgrades might also have an effect on service provider efforts to provide more spectrum, as older devices often cannot get access to new spectrum that newer devices can support.

A six year old iPhone 3G will achieve download speeds of 2 Mbps on a 3G network, but a new iPhone 6 will be able to operate 25 times faster due to its new 4G LTE access.

To some extent, the delay in device upgrades also means it will take longer to migrate users off of congested legacy spectrum and onto new bands.

5G will be "4G on Steroids"

Despite the hype about future fifth generation network mobile networks, it is quite likely that 5G will simply be an evolution of concepts pioneered on fourth generation Long Term Evolution networks.

Among the more-important capabilities are access to multiple networks, built on today’s use of Wi-Fi and carrier networks; small cells; more complex antenna arrays; and a wider range of devices and applications.

As typically happens, new frequencies will be added, since carriers have to maintain existing networks while they add the next generation.

The degree to which millimeter wave spectrum (30 GHz to 300 GHz) will be a feature of 5G is not yet so clear, but is conceivable. The issue is not so much whether millimeter wave frequencies will be important for backhaul (they already are), but how effective they will be for distribution (direct access by mobile and other devices), using sophisticated new antenna arrays (multiple input, multiple output).

Fifth generation mobile networks, most supporters are quick to say, will not be about “faster speeds” or novel air interfaces.

Instead, at least for the moment, the emphasis is on making all access platforms available to mobile and untethered devices, seamlessly. And that will mean 5G is a development of 4G, not a sharp break from 4G.

In other words, all the fundamental concepts already exist, and all the fundamental underlying technologies already are being developed to support future 5G networks.

Those of you with long memories will see the pattern. All new next generation networks are preceded by a period where all marketing emphasizes “compatibility” with the new emerging standard. That is likely to be the 5G pattern as well.

On the other hand, 5G will bring new spectrum to bear, in particular in the millimeter wave area, where much work is being done to commercialize the use of frequencies that historically have been unworkable for communications applications.

Moore’s Law, though, allows cheap processing that enables networks to take advantage of formerly-forbidding millimeter wave frequencies (30 GHz up to perhaps 300 GHz).

In the United States, the 38.6 GHz to 40 GHz band already is used for licensed high-speed microwave data links and the 60 GHz band can be used for unlicensed short range (1.7 km) data links.

The 71 GHz to 76 GHz, 81 GHz to 86 GHz and 92 GHz to 95 GHz bands are also used for point-to-point high-bandwidth communication links.

The issue is whether sophisticated signal processing also will allow use of millimeter waves for local distribution (access) , in addition to trunking (point to point backhaul).

Observers will readily admit there are issues, ranging from propagation distances to atmospheric issues (rain fade) and even oxygen absorption. But at millimeter wave frequencies, extremely high bandwidths are possible, if distance is limited.

Still, 5G is highly likely to  be an extrapolation of trends we already see. Supporters will likely not appreciate the characterization of 5G as “4G on steroids,” but that is likely to be quite correct.

New Definition of "Broadband" Could Have Big Consequences

The Federal Communications Commission decision to redefine "broadband" might have consequences. Where the FCC had used a 4 Mbps definition, it now defines “broadband” as a minimum of 25 Mbps downstream.

With the new definition, about, 12 million U.S. households that previously qualified as having a broadband connection no longer have it.

All satellite broadband and most fixed wireless Internet service providers now sell “Internet access,” not “high speed” or “broadband” access. Many fixed network telcos likewise now do not sell “broadband.”

Paradoxically, 10 Mbps Ethernet no longer is “broadband,” either. The new definitions will mean a revising--downward--of U.S. “broadband” access connections.

Some think the new definition could derail the proposed Comcast bid to buy Time Warner Cable, as well.

Up to this point, Comcast has been careful to point out it would sell off three million video accounts, to keep total video accounts below the 30 percent market share level that the Federal Communications Commission historically has used as a limit for market share in linear video, mobility or fixed network communications.

The problem is is that some do not believe “video” is the key market where share is crucial.

With the new definition in place, Comcast’s share of broadband will  be 56.8 percent, up from 30.6 percent using the older definition.

That will be a problem.

Does U.S. Telecom Industry Skate on Thin Ice?

Do service providers actually make much profit? That might seem, at first glance, a silly question, looking only at quarterly or annual financial statements. To be sure, some contestants--typically the smaller providers in any industry segment--face clear challenges.

But some might argue the problems are greater than often perceived. And that means the opportunity or danger--depending on one's point of view--are quite high. The easiest example is the mobile handset business.

In some ways, handsets are fashion items. For that reason, device market share can change dramatically. That has applied to whole handset brands as well. In fact, some might argue leadership changes about every seven years, in the handset business.

Whether that applies to Apple is an open question at the moment, as so far Apple seems to be defying past rules of thumb. Apple's sales velocity and prices seem to defy rules of thumb that suggest prices "should drop," margins "should" weaken and growth rates "should" slow.

Whether Apple is the exception that proves the rule is one question. But other big questions "should" be asked. Among those big questions are the shape of future telecom service provider markets.

Product share is one issue. Share of revenue is another question. Who the leading contestants will be is yet another question. The three biggest U.S. communications service providers, by revenue, now are AT&T, Verizon and Comcast.

The point is that, for the first time ever, a "cable TV company" is in the top ranks of telecom service providers. One might suggest even that could change, in a decade or two.

On the service provider side of the business, one might argue, disruptive market share change occurs "rarely," even if the relative shares of existing providers does shift, largely because of acquisitions.

But huge market share shifts now happen rather routinely at the product level.

In fact, at least historically, one might argue that discontinuities--distinct or sharp breaks--in the telecom business are relatively rare. One might also argue that discontinuities now are more frequent in the telecommunications business.

In fact, it now is possible to argue that truly significant changes now can happen in the service provider business  over periods as short as one decade.

Consider the matter of fixed network voice services in the U.S. market. Compared to 2000, U.S. incumbent telcos in 2013 served about 42 percent of accounts sold in 2000. In other words, over about a decade, U.S. fixed network telcos lost half of their voice lines.

In some cases, providers arguably have lost as much as 70 percent of fixed network voice lines.

In the U.S. market, 27.6 million total lines were “lost” marketwide, a shrinkage of about 17 percent of total lines in the market. In other words, aggregate demand dropped by that amount.

There also was contestant market share change. Over the 2008 to 2013 period, cable TV voice accounts grew from about 20 million to 30 million, for example.

The point is that a triggering disruptive event–the Telecommunications Act of 1996, did not immediately produce huge changes in market structure or revenue shares.

In the years between 1996 and 1999, new competitors gained about four percent share.

From 1999 to 2003, a period of three additional years, competitor market share rose from four percent to 13 percent.

From 2003 to 2005, competitors gained four more share points.

After 2008, competitor share--aided perhaps b y a new way of counting--climbed to 27 percent, according to FCC data.

The point is that significant changes now can happen over a decade, and big changes over periods of perhaps two decades.

But market share might not tell the whole story. Some might argue that firms such as Verizon might have lost money with their investments in fiber to the home platforms, for example.

Some argue that is why Verizon is willing to shed even FiOS lines to concentrate on mobility.

The more shocking argument is that Verizon and others might lose money even on their mobile business.

That raises a disturbing question: what happens when even dominating scale is not enough to ensure robust earnings by the largest service providers?

What changes in business model might be needed? And by the time fifth generation mobile networks actually arrive, will even the biggest mobile service providers have a defensible “moat” against new competition?

And, and if tht is a real possibility, why do regulators spend so much time burdening contestants that, one might argue, are going to face sustainability challenges even greater than they face at present?

Sprint, T-Mobile US Improving; Verizon and AT&T Way in Front for Network Performance

Choose your storyline: "Sprint and T-Mobile US improving fast," or "Verizon and AT&T way in front." Both would be accurate ways of summarizing the latest Rootmetrics study of network performance.

Sprint and T-Mobile US gained significant ground on AT&T and Verizon in Rootmetrics studies of metro market performance in the areas of network reliability and network speed, across mobile data, voice and text messaging products in the second half of 2014.

While Sprint and T-Mobile US still trail Verizon and AT&T, both Sprint and T-Mobile either gained awards or held steady in every category in the second half of 2014.

Sprint and T-Mobile increased their award tally by 140 compared to what the two networks earned at the metro level in the first half of 2014, according to Rootmetrics.

One might note that the results are shaped by the lead AT&T and Verizon have, and therefore the room for improvement possible for Sprint and T-Mobile US.

That said, all the networks improved in the second half, compared to the  first half.

Verizon either won or tied for first in our “overall” scores in 113 of the 125 markets tested. AT&T had 51 such scores. Verizon won or tied for first in 117 of the 125 markets. AT&T had 78 first-place wins or ties.

But T-Mobile US “in particular continues to show very fast speeds in many of the metro areas we test and, as we note below, even recorded the fastest median upload speed we saw from any network in the second half of 2014,” says Rootmetrics.

Also, T-Mobile’s 27 “overall” RootScore Awards in the second half of 2014 also represents “the most we have ever recorded for the network,” Rootmetrics says.

Sprint has also “made tremendous strides in our measurements,” says Rootmetrics. “With much better reliability than what we saw in the first half of 2014, Sprint won significantly more RootScore Awards in our call, text, and reliability measures this time around.”

“Sprint even pulled ahead of T-Mobile in both our call and  reliability categories at the metro level,” Rootmetrics said.

On the other hand, “while Sprint was the biggest net gainer in RootScore Awards (improving by 108 awards compared to the first half of 2014), its tally of 135 trailed those of the other three networks.”

Mobile Data Consumption to Grow 59% in 2015

Mobile data traffic will grow 59 percent in 2015 and 53 percent in 2016, Gartner predicts, driven primarily by consumption of video.

“Mobile video is generating 50 percent of all mobile data,” says Jessica Ekholm, Gartner research director. “We expect video streaming to account for over 60 percent of mobile data traffic in 2018.”

Video-calling services will contribute to overall demand, as well. In terms of traffic, five minutes of 3G FaceTime video calling uses up to 15 megabytes of data, a small amount. But the number of users arguably is large and growing.

Though mobile video is the primary usage driver, mobile music streaming can easily generate hundreds of megabytes of data as well.

Usage is increasing for several reasons. Faster mobile networks lead to higher data consumption.

More affordable smartphones also mean more people are using smartphones, which also increases data consumption.

Despite the activation of new 4G networks, 3G networks will continue to fuel worldwide data growth during the next five years, Gartner predicts. “We expect 3G connections to grow by 45.7 percent globally in 2015,” Gartner says.

“We predict that, in 2018, half of North American mobile connections will use 4G networks, but in the Middle East and Africa 4G users will amount to only 3.5 percent of the region's total,” says Ekholm.

By 2018, 4G users will generate 46 percent of all mobile data traffic, with each 4G smartphone consuming 5.5GB of data per month, three times more than a 3G smartphone, Gartner says.

Will 600-MHz Auctions Flop?

Is it possible the upcoming 600-MHz auctions of U.S. TV broadcast spectrum will flop? And is that possibility more or less likely than huge demand for spectrum that leads bidders to overpay?

Right now, it is hard to say which outcome is more likely.

Some might argue the prospect is for overpayment, as bidders compete for high-quality spectrum. The precedent is surprising high prices paid in the 700-MHz AWS-3 spectrum.

In fact, some might say, the results of that precedent already are being seen in reverse auction prices for 600-MHz spectrum auctions.

In some cases, initial prices have been reset at an order of magnitude higher ranges. In New York City, the median bid for a full power station rose to $660 million from $410 million.

In Los Angeles, initial prices  jumped to $560 million from $340 million.

In Portland, Ore., the initial price  rose to a median of $170 million from just $18 million. In Nashville, Tenn., prices climbed to $220 million from $20 million.

On the other hand, some might argue the pressure will run in the other direction: namely less demand for the 600-MHz spectrum.

For starters, there are multiple ways mobile service providers can create more effective capacity. Spectrum resources matter. But so do network architectures, air interfaces and other signal processing techniques.

Bidders will have to decide how much emphasis to place on acquiring new spectrum, compared to other techniques.

Also, other spectrum options exist, and are developing. That means “scarcity” might be a relative concept. Longer term, there is lots of attention being paid to huge new blocks of spectrum in the millimeter range that previously have been unusable for communications purposes.

Nearer term is the possibility of spectrum sharing between current non-profit and government licensees and new commercial users.

An immediate possibility is use of spectrum not yet commercially deployed, especially the LTE spectrum amassed by Dish Network.

Dish Network has amassed a significant collection of spectrum assets to enable it to launch a new Long Term Evolution mobile network.

Whether Dish Network ultimately will do so is not clear, though. Some think Dish Network might ultimately simply sell the spectrum to another firm, or might create a national wholesale business, or sell all of Dish Network--video business and spectrum--entirely.

Any of those moves would affect demand for 600-MHz spectrum by reducing demand. Less demand would first mean less spectrum is made available, and then lead to lower prices for available assets.

In other words, one might argue there is as much likelihood of a relatively unsuccessful auction as of an auction that draws huge bids.

One might argue that “overbidding” is a danger to be avoided.

Mobile service providers have in the past misjudged the value of spectrum and nearly bankrupted themselves.

When auctions for third generation network spectrum were held in Europe, carriers overbid, creating financial pressures that nearly bankrupted a number of tier one service providers. (“Shocking,” some sarcastically will note).

And every cost anywhere in the delivery ecosystem ultimately is paid for by end users. So higher spectrum prices will mean higher retail prices, one way or the other.

Concern about excessive prices already has arisen in some 4G auctions. On the other hand, there has been some speculation that 700-MHz AWS-3 prices were bid up so much because carriers think the 600-MHz auctions might not provide as much value.

Indeed, the very structure of the 600-MHz reverse auction process encourages “high prices.”

In a two-step process, the auction has to encourage TV broadcasters to part with spectrum by offering large payments. Only then will spectrum be made available for mobile service providers to buy.

So high initial prices are not necessarily the ultimate prices buyers might pay. Also, the voluntary clearing process also means it might be hard to assemble uniform national footprints of new spectrum. That might lead to lower prices in secondary and tertiary markets.

So despite speculation that demand for AWS-3 spectrum was unexpectedly robust, demand for 600-MHz spectrum is less clear. Other spectrum alternatives are coming, longer term.

But some think the precedent of the AWS-3 auctions suggests higher prices for 600-MHz assets.

The impact of broader service provider debt loads is not to be discounted, either. Leading service providers face revenue pressure at the same time they face demands to invest in the next generation of services, plus pay for additional spectrum.

How much operators should--or can--pay is a growing issue.