Installment Plans Have Not Disrupted Mobile Carrier Revenues, but Manufacturer Leasing Might Do So

A shift from bundled “device plus service contract” to “installment plan phone purchase” apparently has not disrupted mobile service provider revenues.

That might not be the case if phone leasing becomes a major trend, and especially if consumers shift purchases of devices from carriers to the manufacturers.

“Ever since U.S. carriers began experimenting with installment plans and no-contract options designed to transition customers away from traditional two-year contracts with subsidized phones, there has been concern that high-end smartphone sales would suffer,” says Carolina Milanesi, chief of research at Kantar Worldpanel ComTech. That has not happened.

“Our most recent dataset dispels the fear that the new plans would negatively impact high-end device sales,” she says.

Looking at all installment or no-contract plans associated with iPhones, 55 percent were for an iPhone 6, and 22 percent were for an iPhone 6 Plus.

Those two devices account for 68 percent and nine percent of traditional contracts, respectively.

Samsung’s devices purchased on installment or without a contract include the Galaxy S6 with 36 percent of sales, and the Galaxy S6 Edge, accounting for 12 percent of sales.

Sales of those devices in conjunction with traditional contracts included the Galaxy S6 at 28 percent and Galaxy S6 Edge at five percent.

For the three months ending August 2015, 47 percent of the smartphones sold in the United States were linked to installment plans, said Kantar Worldpanel ComTech.

During this same period, smartphone purchases connected to traditional contracts, once the bulk of such transactions, represented only 20 percent of sales. Prepaid sales represented 33 percent.

In the three months ending August 2015, 51 percent of iOS sales were associated with installment or no-contract plans, 37 percent were on a traditional contract, and 12 percent were on prepaid plans.

For Android, 46 percent of sales were on installment plans or no-contract, 15 percent were on traditional contract, and 39 percent were prepaid.

Apple recently launched an upgrade plan in the U.S. market that allows buyers of the latest iPhone models the option to get a new phone every 12 months.

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We will have to see whether that “buy direct” program significantly dents carrier revenues by removing significant device sales.

Phone Leasing--From Manufacturers--Could Disrupt Mobile Provider Revenue

A potential shift to smartphone leasing in the U.S. mobile business points out just how hard it is for access providers (mobile, fixed, cable TV, satellite, fixed wireless, independent ISP) to create value, and therefore sustainable advantage, for their services.

Traditionally, the bundling of subsidized mobile phones with service contracts reduced churn and created consumer “lock in.” That hasn’t changed very much with the recent shift to installment plans. Basically, that move simply shifted how mobile service providers record revenue: less for recurring service and more for device sales.

A potential move to device leasing might be another matter. That opens up “new opportunities for device suppliers,” said Jan Dawson, Jackdaw Research principal.

Conversely, carrier average revenue per account could drop substantially. Comparing the older model where the phone was bundled with service with a contract, and the newer pattern where the device is sold separately from service, but on an installment plan, aggregate mobile service provider revenue is basically revenue neutral, either way.

But all could change if consumers are able to lease phones directly from the device manufacturers themselves. In that case, there will be a direct hit to carrier revenues. 

It’s the difference between the grey line and the blue line. The magnitude of revenue shift depends on what percentage of customers shift from financing their phones from the device supplier or the access provider (mobile operator).

These are the sorts dangers for ecosystem participants when value shifts inside any value chain. Carrier executives always worried about the amount of value they represent in the ecosystem will not be terribly reassured by what could happen because of device leasing, directly from the device suppliers.

New Competitors, Mobile and Fixed, Will Take Share from U.S. Telco ISPs

As fundamental as Internet access is within the broader Internet ecosystem (without access, apps and devices do not work), there is no fixed relationship between the supply of a necessary function, and the segment revenue based on those functions.

In other words, access is necessary, but “who” supplies the access, and what the business models are, can change. That question matters greatly for traditional fixed telecom network services providers, mobile service providers, cable TV companies, independent Internet service providers, satellite and fixed wireless ISPs and government-related or non-profit ISPs alike.

One fact seems clear enough: U.S. mobile revenue will drive growth in the U.S. communications business in 2016, offsetting declines in the fixed network segment.

The important fact of note there is revenue contraction in the fixed network segment. The possibly more important fact is the emergence of new competitors, ranging from Google Fiber to independent ISPs offering gigabit services, plus municipal ISPs.

Another key trend: perhaps municipalities are learning to focus on providing incentives for ISP investment, rather than focusing on revenue to be directly gained in the form of fees on such efforts.  

In that sense, what happens in terms of local government policy could have as much impact on ISP investment and gigabit network deployment as anything done by the Federal Communications Commission at the national level. In fact, some would argue the FCC has actually made investment decisions more difficult for most mobile and fixed operators.

On the other hand, such limits make more feasible new competition by firms with different cost structures and revenue models. Some might make the argument that the long-term effect will include the imposition of usage caps by many of the largest ISPs, as more-difficult business models will place a premium on controlling costs.

“Unlimited usage” arguably is among the potential cost elements that have to be adjusted.

During periods of U.S. economic growth or recession, the mobile industry has faced a generally-declining rate of revenue growth, from 1987 to the present.

Taking into account the different accounting treatment of device sales and recurring revenue, U.S. mobile service provider revenue has been nearly completely unaffected by the substitution of device installment plans, compared to the previous bundled approach, where discounted phones were amortized over the life of a service contract.

That could change.

If a shift to device leasing affects business models more than a shift to installment plans, one can expect a focus on operating costs will come rather rapidly.

The point is that the Internet access business could change significantly, in terms of supplier base. Incumbent telcos likely will have a smaller share of the fixed market, and eventually less share in mobile as well, as new providers take more share.

source: Chetan Sharma

Western Europe Mobile Market Stabilizing, Still Not Growing

The French telecom market might not be as difficult as the Indian mobile market, but it remains difficult.

Though Bouygues now has raised its guidance for 2015 earnings (EBITDA), compared to its May 2015 guidance, the change is driven by performance of the construction unit, not the telecom unit.

In 2014, firm earnings were €694 million. The May 3015 forecast called for full-year earnings of about that same amount. The revised forecast calls for full-year earnings of around €750 million. If Bouygues is proven correct, that would boost earnings by eight percent, year over year.

Bouygues Telecom is forecast to do better than believed when the last forecast was made in May 2015, and better than it did in 2014. But Bouygues Telecom might still lose money for the year. In the first half of 2015, the firm lost about €54 million.

The company reported a current operating loss of €54 million in the first half of 2015, €17 million better than in the first half of 2014.

Including an extraordinary (one time) item--costs related to network sharing with Numericable-SFR--the operating loss was €109 million.

Bouygues Telecom revenue remained stable in the second quarter 2015 at €1.1 billion, down one percent from the first quarter. The firm booked €2.2 billion revenue in the first half of 2015.

First-half 2015 EBITDA rose €21 million to €323 million, while EBITDA margin grew 1.5 points to 17.1 percent.

Though many are hopeful of a trend reversal in the Western Europe mobile market, with some clear signs of revenue stabilization, few would yet be prepared to predict a long-term “rising retail revenue trend.”

Mobile operators in India fear that unregulated over-the-top messaging and voice applications could destroy about 30 percent to 50 percent of total industry revenue.

The fear is rooted in trends elsewhere, including Western Europe, where voice and messaging revenue declines have not been offset by the growth of data revenues.

Between 2010 and 2020, it appears highly likely that voice and messaging revenue will have dropped by half.

Ovum forecasts that mobile revenues in Europe will decline by 1.7 percent year-on-year in 2015. In Western Europe, revenues will decline by 2.7 percent year over year compared to a rise of one percent for Eastern Europe.

The perhaps-encouraging news is that 2015 will fare better than 2013 and 2014, as the deficits are shrinking.

source: Analysys Mason  

Mobile OS Market Now a Duopoly

To a great extent, operating systems create market platforms. The advantage is direct for more closed systems such as Apple’s iOS, direct but of arguably less magnitude for Android.

At the moment, the global mobile operating system market--despite the interest by service providers and potential platform suppliers--has settled mostly into a two-provider structure, with Apple and Android the dominant suppliers.

At least for the moment, the efforts some have mounted to create credible new operating system options largely has failed.

source: the Register

Industry Volatility is High, Getting Higher

There are periods when communications policy is fairly static, and other times when major change erupts. The same holds for spectrum policy. And it might be fair to say a new period of heightened change is coming.

That holds the potential for huge changes in market structure, contestants and changes in retail offers and rates, across fixed and mobile segments.

Consider what is happening, or could happen, in the mobile services arena, regarding spectrum access. Some have noted that auctions for licensed mobile spectrum are sort of at an end, after the incentive auction for 600-MHz spectrum.

So scarcity could become a bigger issue. That might be why mobile service providers are working so strenuously on integrating LTE with Wi-Fi for access, for example.

If providers think licensed spectrum really will be hard to come by in the future, then ways to maximize what they mostly already have could take on new importance.

So what does that mean? Clearly, the value of using unlicensed spectrum becomes even more valuable to a firm fundamentally based on use of licensed spectrum. As many would note, Wi-Fi already represents more bandwidth than all mobile spectrum put together.

Ironically, it is not clear what greater availability of license-exempt spectrum will mean for the strategies of various contestants.

On one hand, much more license-exempt spectrum reduces the scarcity value of licensed spectrum. That should have positive implications for app, device and service providers who can expect they can get to market at lower costs, where access is concerned.

That likewise suggests licensed spectrum could, in some ways, become less valuable, or at least less a barrier to market entry by new providers.

On the other hand, as the need to support more mobile video becomes a fundamental requirement, access to much more unlicensed spectrum will be essential. So the release of more license-exempt spectrum will help mobile service providers. Indeed, it likely is essential.

Also, ironically, more license-exempt spectrum, available only “best effort,” could reinforce the quality advantage traditionally claimed for licensed spectrum.

Strategically, ownership of fixed network assets, or access to them, also becomes more valuable to any mobile Internet access provider, if the capital and operating costs are be “right sized.”

It is getting harder and harder to wring profits out of triple-play fixed network assets, as valuable as fixed network capacity is as the essential precursor to Wi-Fi abundance.

According to the International Telecommunications Union, the business case for fiber to the home or fiber to the curb is feasible in less than half of all locations globally.

The point is that all the activity you now are hearing about in the spectrum area, plus conflicts over Internet app and access policy, plus potential emergence of new access providers, is a reflection of the tumult that now is breaking out globally.

It is not simply regulatory activity that is at a high level, but also business models and technology that are changing very rapidly.

There are times when volatility in the broader telecom industry is low. This is not one of those times.

In U.S. Market, Use of OTT Video Streaming is Nearly Ubiquitous

In 2015,  181 million people in the United States will watch video using an app or website that provides streaming content over the Internet and bypasses traditional distribution, according to eMarketer.

That means 90 percent of digital video viewers are watching OTT streaming video. Virtually of those viewers watch YouTube.

The YouTube audience will reach 170.7 million monthly video viewers n 2015, eMarketer estimates, or 94.3 percent of all OTT video service users.

As you would guess, there is not much room for YouTube to grow its user base.

That is not the case for other streaming providers. Netflix, for example, will grow its U.S. audience by more than 20 percent in 2015 to 114.3 million, or 63 percent of OTT viewers.

Netflix will be viewed by nearly 72 percent of all OTT viewers by about 2019.

Hulu will reach 82.2 million people by 2019, eMarketer estimates.

Amazon’s video streaming service will reach 88.6 million OTT video viewers by 2020.