What Drives Postpaid Net Adds: Tablets or Former Prepaid Accounts?

Over the past year, tablet connections have largely accounted for net subscriber growth at AT&T Mobility, Verizon Wireless and Sprint. What now remains to be seen is whether growth over the next couple of years might shift back to phone account additions.

The reason is an apparent shift of policy by Sprint and T-Mobile US to convert more prepaid accounts into postpaid accounts, principally by relaxing traditional credit standards.

Some will immediately grasp the other implications. Churn rates might increase and the size of the prepaid market might level off or possibly shrink, at least for a time.

On the other hand, between tablet net adds and a faster conversion of prepaid accounts to postpaid, the number of U.S. mobile accounts might grow substantially over the next few years.

Tablets with mobile Internet subscriptions using 3G and 4G LTE will grow more than five times in the next five years to reach nearly 250 million in 2018 at a global level, according to the Strategy Analytics.

Strategy Analytics predicts there will be 247 million tablet subscriptions by 2018, up from 45 million in 2013.

In the U.S. mobile market, that will translate into 50 million tablet subscriptions between 2014 and 2018. Verizon Wireless, Sprint and AT&T combined added nearly 1.5 million tablet subscriptions in the first quarter of 2014, for example.

That implies a growth rate of about 25 percent a year.

But connected tablet forecasts might also have to contend with a seemingly higher rate of postpaid smartphone net additions as well, as at least some of the largest U.S. mobile service providers attempt to convert more prepaid accounts into postpaid accounts.

By at least one analysis, it is conceivable the U.S. mobile industry could add four times more net new phone accounts in 2014 as it did in 2013, and possibly three times more phone accounts in 2015, compared to 2013 levels.

For reasons related to tightened restrictions on fraud, a “lifeline service” program propping up prepaid account volume saw a big fall in 2013.

Where in 2012 the mobile industry added 4.5 million net new accounts because of the lifeline program, in 2013 only 1.2 million were added.

A continued decline in net prepaid additions in 2014, even after the one-time adjustment for program rule changes, is what requires explanation.

The industry should add only 959,000 prepaid subscribers in 2014, UBS says. Since the slowdown cannot be attributed to the impact of lifeline program rule changes, something else is going on.

And that something is likely bigger numbers of consumers shifting from prepaid to postpaid accounts as credit standards are relaxed. Some might argue that process will result in higher churn rates, higher bad debt and higher customer service costs for the firms that relax the standards.

As of the end of the second quarter, there were about 74 million prepaid subscribers in the U.S. versus 228 million postpaid subscribers.

The big question now is how many of those prepaid accounts actually can become long-term postpaid accounts.

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No New Revenue for 5G?

From time to time, you will hear a consultant or market researcher make a startling claim about the next generation network (fixed, mobile or wireless), namely, that there are “no new revenues" to be generated by the new network.

It is a hard claim to refute in its entirety, for some logical reasons. Telcos replacing copper access with “fiber to home” or “fiber deep into the network” already know the issue.

If a service provider has customers served by a digital subscriber line connection, and then replaces it with a fiber-to-home connection, there is a net zero change in subscription volume: one replaces the other.

One might also make the argument that there is “no net new revenue” involved, but that likely is wrong for several reasons. That might sometimes be the case.

Quite frequently, a higher-bandwidth connection is purchased, at higher cost. Also, the fiber connection supports more-reliable video entertainment services (linear and streaming).

Or consider the matter of mobile next generation networks. Did 2G represent “no net new revenue, compared to first generation analog?” In one sense, over a period of time, voice service revenue possibly decreased, as prices for mobile service dropped.

Also, over a period of time, 1G voice revenues became 2G voice revenues. Sure, it is tough to calculate net revenue changes due to the network upgrade, as opposed to market price changes, which likely were more substantial.

But 2G made text messaging possible, so eventually, incremental new revenue was generated. Also, as voice prices dropped, consumers began substituting mobile voice for fixed line voice, increasing the number of subscriptions. So, yes, a next-generation network most often does lead to higher revenue, over time.

Some might argue 5G will not lead to higher revenues, compared to 4G, or that Internet of Things will not boost revenue.

It always is difficult to fully anticipate the business value provided by each successive generation of mobile networks. There always is a stated business case, of course. From the first generation to the second, the advantage was the transition from analog to digital, with the advantages that normally represents.

The shift from 2G to 3G was supposed to be “new applications.” That eventually happened, but not right away. First mobile email and then mobile Internet access were new apps of note, though the use of mobile hotspots also was an important development.

The shift from 3G to 4G generally was said to be “more bandwidth” supporting new applications.

Video apps generally have been the most notable new apps, compared to 3G, although user experience when using the Internet also is far better with 4G. And though it often goes unnoticed, 4G speeds have allowed any number of users to substitute mobile for Internet access.

More U.S. households now seem to be abandoning even fixed Internet access in favor of mobile access, as it now is common for households to rely on mobile voice (more than 46 percent of U.S. households now are “mobile only” for voice) , instead of fixed network voice, or over the top video entertainment in place of traditional subscription services.

In fact, because of mobile use, fixed network Internet access rates actually are dropping in the United States, having reached an apparent peak in 2011.

Eventually, skeptics will be proven wrong. In the early going, one might well argue that the incremental cost of running both 4G and 5G, plus the new capital investment, plus substitution effects (customers move from 4G to 5G) might not--initially--show net new revenues or earnings.

Over time, that will change, as 5G becomes the default network and customers migrate over. That, of course, means the 4G network is less-heavily loaded, and therefore drives less revenue, unless a new temporary purpose can be found for 4G that is distinct from 5G.

Eventually, the 4G network reaches end of life and is decommissioned. But there is a long period when multiple networks coexist, with evolving business models and profitability, over time.

That is not to say the discovery of new revenue models happens right away. Frequently that does not happen immediately. Some of us would argue it took some time before new apps--such as mobile email--actually became interesting new 3G apps and revenue drivers (direct or indirect).

It is too early to say, with precision, how new millimeter wave spectrum allocations around the world, to support 5G mobile networks and other applications, will increase the total supply of wireless communications bandwidth, spectrum and business models.  

Some might guess that the new millimeter wave capacity will equal or exceed all prior wireless allocations yet made. There are tradeoffs: distance for capacity, generally speaking.

Mobile Operator Questions About 5G Payback Model Reflect 4G Experiences

Many in the mobile ecosystem ask the question “how will we make money from 5G? Fixed network operators have been asking themselves similar questions--"how do we get a payback from fiber-to-the-home?"--for several decades.

For mobile or fixed network operators, competition and changing demand make payback models uncertain and challenging. Where facilities-based competiton exists, the infrastructure cost per customer account always rises.

Stranded assets are the reason, though more an issue for fixed networks. In a monopoly market, the single provider might hope to get close to 98 percent take rates. In a competitive market with two equally-capable providers, each provider might hope to get 50 percent share of the installed base.

That effectively doubles the network cost per customer, as revenue is earned from about half of locations passed. In markets with three or more facilities-based competitors, cost-per-account increases more.

Demand changes also effect payback models. Fiber to the home once was underpinned by the assumption that there would be high demand for up to three services (voice, video and internet access).

As demand for fixed network voice and linear video subscriptions declines, the business model increasingly is built on home broadband. Voice and linear video help, but both are expected to keep declining.

But that has key revenue implications. Where a home location might have been expected to generate revenue of $80 to $200, the growing reality is that a location is expected to generate perhaps $50 in home broadband revenue, and then some amount of voice or other revenue from some locations.

Basically, revenue expectations--average revenue per customer or location--are effectively cut in half. That forces changes to the payback model on the cost side. Basically, costs must drop.

Those savings can come from intrastructure cost declines; operating cost drops; higher subsidies; lower maintenance costs; lower headcount and overhead or any combination.

The key point is that revenue assumptions for fixed networks increasingly are founded on lower gross revenue assumptions; revenue from additional sources; shared costs between mobile and fixed networks and more importance attached to defending market share or taking market share.

The parallel question asked by mobile operators--"how do we make money from 5G?--embeds some of the same issues faced by fixed network operators.

What the question likely means is less an uncertainty about revenue drivers and more a concern about the distribution of value within the ecosystem: will mobile operators reap a fair share of 5G benefits (higher revenue, higher profits, higher market share, lower operating costs)?

Looking only at consumer retail costs--exclusive of experience advantages such as higher speed; lower latency; new services or capabilities--it is not yet completely clear that average revenue per 5G account is higher than 4G ARPA.

5G has proven to generate higher ARPA in some markets, however.

It is a virtual certainty that 4G and older connections will be replaced by 5G. So the baseline for 5G revenue is 4G revenue. Beyond that, there is expected upside from private networks, network slicing (virtual private networks), edge computing and new enterprise connections to support internet of things use cases. 

To be sure, many wonder whether “we can charge more for 4G?” The long-term answer is not yet knowable, but the practical answer might well be “yes.” 

And that can be true even when direct tariffs for 5G are not that different, if different at all, from 4G tariffs. Some mobile operators do not charge a premium for 5G, but expect to gain market share, which drives higher 5G revenue.

Other service providers provide incentives for customers to use 5G but with a price increase coming in the form of unlimited usage. The actual driver of higher revenue per account is the shift to a higher-priced “unlimited usage” tier, not 5G as such, though such plans include 5G access at no extra charge. 

And though we have not seen it much, if at all, some mobile operators might decide to institute speed tiers for mobile service that mimic the ways access is sold on fixed networks. Customers might be offered lowest prices for lowest speeds; mid-tier pricing for mid-tier speeds and premium prices for the higher speed tiers. 

But there is another sense in which the question of “how will we make money from 5G?” can be understood.

Customers got value in terms of higher speeds when 4G was introduced. Mobile operators expected to sell more data, which would generate more revenues, and also create new services that would further increase revenues. 

But tough competition in many markets meant that mobile operators were not able to charge a price premium for 4G access. So the benefits went largely to consumers, according to ING analysts. “They got more data, better speeds and often paid less,” ING says. 

Governments also raised billions in revenue from spectrum auctions.

So one way of understanding the question about 5G revenues is the distribution of value and revenue for mobile operators within the 5G ecosystem. The downside for mobile operators is lower recurring revenues from 5G, compared to 4G. 

“Operators do not want to repeat these mistakes” seen in the transition from 3G to 4G, ING notes. But some might argue that the long-term trend will be difficult to break. 

source: Statista 

source: Strategy Analytics

source: Researchgate  

Taking market share, shifting customers to pricier accounts and increased usage charges are the immediate ways mobile operators have boosted 5G revenues over 4G levels. 

Longer-term pricing trends, though, might be difficult to change, as prices have been declining since 1996. 

On the other hand, the whole reason we see a next-generation mobile network about every 10 years, since 3G, is that capacity demand by customers keeps climbing. And while mobile operators can increase effective capacity using small cells and better radios, at some point an increase in spectrum is required. 

Also, as modulation and coding gets better with each successive generation, the cost to deliver a bit drops, allowing mobile operators to supply data consumption demand at lower costs. 

So another way to look at the payback model is to ask “what happens to your business if you do not upgrade to 5G?” Defending existing market share is a legitimate business outcome. 

Creating a more-efficient data network that supplies demand affordably also is an important business outcome. And to the extent 5G network capabilities are required to support dense internet of things networks, edge computing networks and network slicing, not investing in 5G forsakes any revenue opportunities in those areas. 

In many ways, that is akin to the value of fiber-to-home networks. In many cases, higher revenue per account is not expected. The business value instead comes from consumer market share gains, market share defense and the ability to compete in those markets. 

There is incremental value in terms of backhaul support for mobile small cell networks or business-grade services for smaller businesses. There is value in reduced operating expenses and possibly headcount. 

In other words, there are lots of ways 5G contributes to overall business value for mobile operators that go beyond direct tariff increases.

How Much Can Consumer Communications Spending Grow?

How much can consumer spending on communications, including mobility services, broadband and other services continue to grow, as a percentage of total household spending? The answer to that question could well determine the health of the global telecom business.

And there are clear indications that household spending on a range of communications services and appliances has been growing over the past couple of decades. In fact, a spending rate below three percent was the norm until the recent Internet and mobile era.

In part, you might argue, that is logical. People now are buying multiple services (broadband access, video entertainment, mobile telephone service, fixed telephone service) where in the past they were only buying a single service, namely fixed network telephone service.

There also are some indications that overall spending on devices and services is reaching unprecedented levels.

U.K. household spending on communications, broadly defined, are as high as 12 percent of total household spending, the U.K. government says.  That figure seems unprecedented and out of line with historic percentages in most markets. If such levels can be reached, then there is room for overall spending on devices and services to more than double.

In the U.S. market,  household communications and information technology spending has recently been in the five percent of spending range. That includes both “communications” subscriptions and devices such as computers and other “office” technology.

And there are clear indications that consumers are spending a greater percentage of their disposable income on mobile services, in particular. Even there, though, there are nuances. People surveyed on behalf of the Cisco nternet Business Solutions Group seem to find mobile broadband a discretionary item. 

Cisco Internet Business Solutions Group found that despite consumers’ fondness for smart phones, they do not prioritize their mobile data spending accordingly. 

Most consumers in all countries surveyed would cut mobile data services first or second if they needed to reduce their household communication and entertainment expenditures.

Why haven’t consumers adapted their spending priorities to favor mobile data? Possibly because when consumers do use their smart phones for data access, the research shows that about 80 percent of mobile Internet activity is not truly mobile, but nomadic. 

That has potential implications. In future recessions, might consumers try to save money by cutting back on mobile data, in addition to subscription video and fixed network voice service? The data suggests there is a possibility of such behavior, as fixed network broadband and mobile voice are the most-important services. That suggests the last services to be cut would be fixed broadband access and mobile voice.

U.S. consumer spending on phone services rose more than four percent in 2011, the fastest rate since 2005, according to Department of Labor statistics.

And mobility now drives much of that spending. In fact, families with more than one smart phone sometimes pay more for mobile service than they pay for cable TV and home Internet access.

The longer term issue is how much more spending can grow, as a percentage of total household spending. The question assumed more importance recently during the Great Recession of 2008, but is an on-going question in light of robust consumer adoption of smart phones and tablets, for example. In principle, widespread use of those devices could change spending on communications.

Though surveys taken in 2009 and 2010 seem to indicate that consumers were cutting back on communications and multi-channel video entertainment spending, other data from the Bureau of Economic Analysis suggests that did not happen; in fact, such spending increased between the start of 2008 and the middle of 2010, for example.

Since the recession started in the fourth quarter of 2007, U.S. consumers have apparently been cutting back on their spending. But Bureau of Economic Analysis data suggests that consumers have been cutting more in some areas than others, and actually have increased spending on many communications services.

BEA show aggregate personal consumption expenditures were up 2.9 percent, or $285 billion, between the fourth quarter of 2007 and the end of the second quarter of 2010, for example.

Mobile device spending was up almost 17 percent since the fourth quarter of 2007. And spending on communications and multi-channel video services was up by five percent.

What Drives 5G Revenue Gains, Really

As important as internet of things, edge computing or private networks might be for mobile operators, revenue gains from basic phone subscriptions are far more important. In developing markets "more users" will drive results. In developed markets most of the net gains will come from taking market share.

It is difficult to quantify how much revenue 5G actually creates on a “net” basis, as up to 80 percent of 5G subscription revenues come from an existing account upgrading from 4G. It is possible there is some incremental revenue change, but since the upgrade to 5G also cannibalizes an existing 4G connection, only the revenue delta can be attributed to 5G. 

Most observers might agree that perhaps 80 percent of all “new” 5G accounts represent upgrades by current customers. 

Possibly 20 percent of 5G accounts are new signups by customers a mobile service provider did not have before. In some cases such signups represent “new” accounts from customers who did not previously have mobile service. But perhaps most of the “new” 5G accounts are customers ported over from other service providers. 

So particular service providers might gain, but the overall market might see much less net change. 

But 5G fixed wireless, some IoT device connections, some amount of mobile-operator-supplied 5G private networks and some amount of edge computing revenue are better examples of incrementally-new revenue sources that might not have existed before 5G. 

The other qualification is that 4G is used to support private networks, IoT connections and some edge computing use cases. So the 5G contribution is less than the revenue earned using all mobile platforms and sales channels. 

Also, global estimates vary by as much as an order of magnitude, especially in early years. But one observation most might agree upon is that fixed wireless has been the surprise 5G revenue generator. At the moment, fixed wireless revenue likely surpassed IoT connection revenue, mobile operator-supplied private networks and edge computing. 

Revenue Stream	2022	2023	2024	2025
Fixed wireless	$10 billion	$15 billion	$20 billion	$25 billion
IoT connectivity	$5 billion	$10 billion	$15 billion	$20 billion
Private networks	$2 billion	$4 billion	$6 billion	$8 billion
Edge computing	$1 billion	$2 billion	$3 billion	$4 billion

Still, all of those sources are dwarfed by “new” 5G connections, assuming 20 percent of 5G accounts signed by any mobile operator are incremental new accounts. Assume 2024 net 5G account additions of 300 million accounts. Assume 20 percent are “net new” account additions. 

Assume each of those accounts generates $120 in annual revenue. That implies $72 billion in revenue. The new revenue sources are welcome, but also dwarfed by revenue changes from subscription volume and average revenue per account.

The point is that mobile operators earn most of their revenue from basic phone subscriptions and device sales.

Operator	Connectivity	Device Sales	Other Revenue	Total
NTT Docomo	70%	15%	15%	100%
SKT	65%	20%	15%	100%
Telefonica	60%	20%	20%	100%
China Mobile	55%	25%	20%	100%
Vodafone	75%	15%	10%	100%
AT&T	65%	20%	15%	100%
Verizon	50%	30%	20%	100%
T-Mobile	72%	18%	10%	100%
DT	52%	28%	20%	100%