When I joined New Vector in 1986 the cellular industry was in its infancy, my father predicted that within 3 years, “Everyone who needs a cellular phone will have one.” He was of the post-Depression era, when a TV in every house seemed far-fetched . Little did he realize the transformative power of technology and the monumental market efficiencies that occur when economies of scale kick in to gear. As innovation types, TVs and cellular phones had something in common: they propelled massive new industries, and did so by fundamentally improving the quality of life. Particularly at a time when life was a bit of a struggle.
History is prologue for predictions on the future. During the Great Depression, radio was to that generation what television became for the post-WWII generation – the principal means by which people understood American prosperity. In their time, these technologies satisfied our culture’s urges toward “instant gratification.” Analogous to the adoption of radios and television, instant communication whenever and wherever is here to stay.
Unlike radio and TV, however, cellular is subscription-based. As such, one could argue that four of the largest creditors in the US are AT&T, Verizon, Sprint and T-Mobile. Their “post paid” customer base accounts for over $11 billion in unsecured credit each month. During these troubling economic times, were cellular customers to make cuts of $5-20 from the average monthly bill (of $58), the results would be catastrophic. And who would argue that such a move would not be prudent on the part of the customers? This begs the question as to whether the cellular industry is susceptible to market volatility and reduced spending by customers small and large.
During the past five years, household spending on cellular has steadily flowed to the wireless industry, largely as a substitute to so-called wireline services. Additional and incremental revenues from mobile Internet (wireless data) have jumped at an average 40 percent per year. What was once a declining ARPU (Average Revenue per User) for cellular companies, has been gaining $1-2 every year across their customer bases for the past four years. And the utility of the wireless device has never been more widely appreciated, despite a broad erosion in customer satisfaction among service providers.
During the first half of 2008, both AT&T and Verizon increased their ad spend to nearly $1 billion each, according to TNS. This, while US advertisers lowered spending by 3.7 percent in Q2 (over the previous year). Why the colossal spending? The cellular titans (AT&T, Verizon) are focused on getting the maximum amount of a household’s overall “Telecom Wallet” (the total amount spent on all communication services).
At the same time, Comcast, Cox and TimeWarner are focused on the coveted “Triple Play” (voice, broadband and television), in advance of aggressive efforts by the telecom titans. Cox announced that they will build a cellular network, and the others are reselling cellular. The Telecom Wallet has grown to include landline or VOIP, broadband, television, satellite radio, GPS services, On-Star and cellular, at an average of $185 per month for every US household.
What can we expect as an effect on these services during the current economic downturn?
- Landline – Substitution to wireless is already at 15 percent and will keep eroding wired telecom, especially with the expansion of “all you can eat” cellular plans.
- Broadband – A slight slowdown of growth during this period as alternative access points expand (mobile, school, workplace) and are readily available. “All you can eat” cellular data plans are catching on with consumers who don’t download movies at home and won’t do it on their cell phones either.
- Television (Cable/Sat.) – The easiest cuts to a budget are premium channels and packages (NFL Ticket). Telco’s are coming on strong with their entertainment offerings right now. This expenditure can be cut altogether for some segments that use broadband connections to download or stream the content they want.
- Satellite Radio – Not a lot of money ($12/mo.), but there are many substitutes to turn to, and those are free.
- GPS Services – The gift of Christmas 2007 may be the lump of coal by Christmas 2009 as the cellular companies deploy GPS phones en masse, and Google has a pretty good downloadable application that’s free.
- On-Star – As goes GM’s fortunes, so goes this progressively non-essential subscription.
In 2005, the research company In-Stat forecast an 8 percent compound growth rate for the US cellular industry between 2006 and 2011. The growth in revenue for 2007 was actually12 percent; and it looks to continue that pace for 2008. T-Mobile announced the Google phone 40 days ago and saw 1.5 million subscribers pre-register for the offering. Since T-Mobile does not cater to business customers, this shows a healthy consumer appetite for a high end wireless data device.
Of great concern to the cellular carriers (for the past few years) was how to monetize the content and applications that might fuel wireless data adoption in $1-4 increments. For now, in order to obtain these high demand devices a corresponding data plan of $25 or $35 per month is required. This is similar to what AT&T and iPhone stipulated, leading to their largest net gain (2Q08) in customers (1.7 million) in their history. This bundling of carrier (network), device (smartphone) and data plan (Internet access) overshadows the former need to sell low cost apps to raise ARPU. Determining which new app will be a hit is no longer of prime concern.
Diabolical! This leaves cellular as the rock solid segment in Telecom.
The net result of these wireless data driven moves is to expand the Telecom Wallet via the cellular revenue share a little more towards $193 per household while grabbing more of the landline and broadband slices of the pie.
I wouldn’t say that cellular companies are the big winners as a result of this downturn. But compared to almost any other telecom industry segment, companies tied to the cellular industry and who deliver monetizable value to the wireless eco-system will be good bets for growth during the next few years.
Gary Cohen is a recognized pioneer in the US Cellular/Wireless industry who has built and led high performance sales teams, opened new markets, innovated channels of distribution and launched evolutionary products. Gary has a prolific history of strategic management success for early to mid stage companies needing leadership. At Verizon Wireless, he created satellite sales facilities and built major national account teams that closed the first governmental and multi-state corporate accounts. As VP/GM for AT&T Mobility, he managed the Central Pennsylvania region in growing direct and indirect distribution. Gary also created the mid-tier syndicated research practice for Telephia (now Nielsen Mobile), and spearheaded Oslo-based Birdstep Technology’s entrée into North America.
Gary holds a BS Finance, University of Colorado-Boulder, and an MS Marketing at the University of Colorado-Denver.
