Wireless at a Crossroads

• Cognizant 20-20 Insights

Wireless at a Crossroads (First installment in a multipart series) As record profits and low churn rates show signs of abating, wireless providers will need to adjust their strategies to accelerate innovation, cement customer relationships and improve operational efficiency to maintain revenue and profit growth.

Executive Summary In this environment, wireless providers must move quickly to revitalize their customer experience As they say, all good things must come to an strategies, optimize their infrastructure and end. After years of record profits and soaring develop partnerships to revolutionize their subscriber numbers, the U.S. wireless market is product lines. One potential strategy is to take a now becoming saturated, with over 90% of adults lesson from leaders such as Amazon, Facebook in the U.S. owning a cell phone, according to and Google and leverage the data generated by Pew Research Center.1 The heady growth cannot subscribers and all digital consumers in every continue without another swell of innovation aspect of their lives — what we call “Code Halos.”™ spurring new sales, which does not appear imme- (For more on Code Halos, read our white paper, diately forthcoming. Pundits posit that machine- “Code Rules: A Playbook for Managing at the to-machine wireless (M2M) will be “the next big Crossroads.”) In other words, they must perform thing,” shifting the question to how to profit from more like tech companies than telecos. As such, the “Internet of things.” With a slowdown in the carriers no longer have the luxury of time — the wave of game-changing technology, consumers time to adjust is now. are now value-conscious and much more inclined to use pre-paid service than they used to be. A Changing Landscape The party is ending quickly. For much of its The seemingly unshakable U.S. wireless commu- history, the U.S. wireless market has seen wave nications market now finds itself at a crossroads. after wave of innovative “must-have” products The market is quickly maturing, and the growing (the feature phone, the smartphone and tablets). subscriber numbers, record profits and low churn Revenue and subscriptions grew at a healthy clip. rates will not continue forever. Now, the picture is emerging of a commoditizing market in which purchasing is driven increas- Competitive forces are also growing from ingly by the need for replacements and upgrades. outside the traditional wireless sector. Internet The new reality: Obtaining new subscribers now technology companies are beginning to leverage means taking them from competing providers. their growing mobile experience, along with their

cognizant 20-20 insights | november 2013 Market Maturation Wireless providers have seen a fall-off in quarterly subscriber net additions.

Q1 ‘10 Q1 ‘11 Q2 ‘11 Q3 ‘11 Q4 ‘11 Q1 ‘12 Q1 ‘13 Q1 ‘09 Q2 ‘09 Q3 ‘09 Q4 ‘09 Q2 ‘10 Q3 ‘10 Q4 ‘10 Q2 ‘12 Q3 ‘12 Q4 ‘12 Q2 ‘13

Source: FCC (Q1 2009-Q4 2011 data) and Chetan Sharma Consulting (Q1 2012-Q2 2013). Figure 1

considerable ambition and resources, to enter Now, communications and tech giants such as the wireless marketplace. Two cases in point are Amazon, Google and Facebook are generating Google and Facebook, which are targeting multiple dramatically higher market capitalization than the elements of the wireless market, primarily to wireless carriers that provide their essential infra- drive ad revenues. This is happening at the same structure (see Figure 2, next page). This is due in time that wireless subscriber growth is declining part to their ability to track, understand and profit (see Figure 1) and customers are becoming more from their customers’ preferences and require- price-sensitive. ments as expressed via their digital footprints, or Code Halos. If wireless carriers could similarly The U.S. mobile market has entered a time of create new product offerings based on Code Halo change that will affect the nature of competi- insights, they would be even better positioned to tion in this space, as well as how companies profit due to their powerful ecosystems, which win and the basis for growth going forward. As consist of networks, billing and customer care a result, providers are faced with the need to infrastructures; marketing and sales forces; and simultaneously initiate innovations in customer retail channels. experience and product/service offerings while also improving efficiencies in their network and The Good News Now business operations. The U.S. wireless communications market has shown impressive strength compared with other A quick examination of recent history confirms developed markets, especially since the release of the urgency. The industry has experienced the Apple iPhone in 2007, which helped usher in previous periods where once dominant carriers the smartphone era. That performance was inter- were unable to adjust and quickly fell behind, rupted by a dip during the 2008-2009 recession, disappeared or were absorbed by others. In the but record growth returned in 2010. Consider the 2000s, several carriers, including Global Crossing, following indicators of robust market health: WorldCom, Nextel and the original AT&T Corp., suffered such fates. In the ‘90s, fallen carriers • Sales growth. Strong sales are attributable to included MCI, PacBell and NYNEX. The reasons the explosion in mobile data usage driven by were different, but the results were the same. the adoption of smartphones, tablets and other And similar to the present, the fallout at those devices, as well as the accompanying new price crossroads followed periods of strong business plans. According to GSMA Wireless Intelligence, performance and market expansion. while European wireless revenues are contract-

cognizant 20-20 insights 2 Wireless Providers Not Reaping the Rewards Tech and communication giants lead wireless providers in market capitalization.

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Note: Valuations as of Sept. 24, 2013. Source: Company filings, NYSE, Capital IQ. Figure 2

ing, U.S. revenues continue to expand, such • Robust M&A activity. The acquisitions of Leap that monthly average revenue per unit (ARPU) Wireless, Metro PCS and Clearwire have been for U.S. carriers is now 80% higher than it is announced or been completed. Even industry in Europe.2 giants like Sprint and Verizon Wireless (the • Healthy profits. While handset subsidies portion owned by Vodafone) have found buyers continue to be a drag on profit for U.S. carriers, willing to spend billions on their acquisitions. individual profit records are also being set. For • Capital investments in 4G and long-term example, in the first quarter of 2013, Verizon evolution (LTE) network upgrades. U.S. reported the highest segment EBITDA margin carriers are projected to spend $37.7 billion (50.4%) on service revenues in the company’s on the LTE rollout between 2012 and 2017, history.3 according to market strategy consultancy iGR.5 • Low churn. U.S. customer defection rates are This aggressive build-out should translate to trending in historically low ranges of less than roughly one in five wireless connections in the U.S. being LTE by the end of 2013, according 1% to about 2% per month.4 The major U.S. wireless players showed declining or steady to GSMA Wireless Intelligence. That compares churn rates in the last few years. And adjusting with roughly one in 50 in Europe for the same 6 for the shutdown of Nextel, industry churn has period. been low overall. The Inflection Point • Pricing power. Carriers have been able to Despite the recent good news, change is afoot increase prices in several ways, such as retiring in the U.S. market, even in areas that until just unlimited data plans, which allowed them to recently exhibited positive signs. Consider the charge for data usage, driving a windfall that following: helped justify and fund their investments in the 4G network. Case in point is T-Mobile’s • Flattening subscriber growth (particularly for disruptive move earlier this year to eliminate post-paid subscriptions). While wireless revenue contract plans and subsidies for phones. Under continues to grow, the pace of subscriber these new plans, consumers pay full price for expansion has dramatically slowed, as the U.S. the smartphone through an upfront fee and market nears saturation. In the second quarter monthly payment. The net result: These new of 2013, U.S. carriers added only 139,000 net plans took hold without carriers losing sub- new mobile connections, according to Chetan 7 scribers. Sharma Consulting. The impact of the Nextel

cognizant 20-20 insights 3 shutdown was clearly a factor, yet even in the second quarter of 2013, it led all U.S. carriers in first quarter, all subscribers increased less than growth of post-paid subscribers.12 0.5%. According to the CTIA Wireless Associa- • Outside pressures. As mentioned above, tion, the 327.4 million U.S. wireless subscrip- Google, Facebook and Apple are working to tions at the end of December become both the “front door” to the mobile Google, Facebook and 2012 corresponded to market experience and the conduit for sales to 8 Apple are working penetration of 102.2%. And and information about mobile device and while growth of tablets and to become both the network users. Cable operators are position- other new devices may be a ing their Wi-Fi networks as alternatives to “front door” to the positive force for subscrip- mobile broadband, as are mobile broadband mobile experience and tion growth, factors such companies like Clearwire. as consolidation of devices, the conduit for sales bring-your-own-device The Crossroads (BYOD) programs and family to and information The changes detailed above point to a market share plans are likely to about mobile device moving in the direction of a more mature, lower constrain subscriber growth growth state, characterized by elements found in and network users to even further. commodity marketplaces. This shift means the drive ad sales. • Increased focus on U.S. market will become increasingly like more price/value. Value-based competitive markets in terms of growth and other pre-paid wireless is now the fastest growing attributes, including: U.S. market segment, potentially reducing both ARPU and the consistency of revenue. • More aggressive and direct price competition. (Watch for a future piece in this series for a • A need to grow the subscriber base by taking more in-depth discussion of this trend and share and customers from other providers vs. its implications for wireless providers.) Even attracting new users. Verizon isn’t immune to the more challenging Aggressive cost-reduction options, such as environment. Its post-paid wireless-subscriber • infrastructure sharing and outsourcing. additions were down 40% year over year in the third quarter of 2013.9 • Increased focus on the regulatory environment.

Additional examples of how this trend is playing We believe carriers can effectively respond to out include: these market changes by focusing on three areas >>In the first quarter of 2013, there were more that can impact performance, even amid slow net-new pre-paid mobile subscribers than growth and more intense competition: retaining traditional post-paid subscribers for the first and growing customers, developing innovative time ever, according to Capital IQ.10 services and lowering costs in order to offer lower prices. >>TracFone was the fastest growing mobile provider, based on the number of subscrib- Customer Experience ers in the first quarter of 2013.11 The company Providing a strong customer experience is the key had more net-new subscribers than all the to retaining existing customers and proactively post-paid carriers combined, according to winning customers from other carriers. Consumers Capital IQ. today measure their experience with their wireless >>AT&T has invested in both the creation of its provider (and other brands) not against that of own Aio pre-paid wireless subsidiary and the other carriers, but against standards established purchase of pre-paid carrier Leap Wireless. by customer experience leaders such as Amazon >>T-Mobile acquired pre-paid provider Metro and Apple. Several carriers are already investing PCS. in customer experience, with a renewed focus on customer metrics like NPS (net promoter score); • Emerging wireless price competition, even in however, as a group, carriers lag in providing a the post-paid segment. After already creating high-quality, personalized experience consistently a market stir with its $100-per-month unlimited across channels. Most also have not yet succeeded voice and data plan, Sprint has further reduced in translating directives to improve NPS or other the price of that plan to $80 per month. metrics into actions on which teams can execute T-Mobile has also introduced an unlimited plan across the organization. (along with other pricing changes), and in the

cognizant 20-20 insights 4 The work of defining an engaging customer Centers) that are exploring ways to accelerate experience can be long and all-encompassing, but the pace of new technology development and there are a few key activities at the core. First on usability concepts. But the ability to deliver on the agenda: segmenting customers using insights the level of innovation, speed and infrastructure about actual customer behavior and custom- that is often found in Silicon Valley does not izing service to the needs and values of those commonly exist at scale across segments rather than providing the same service the wireless carriers, even as By tapping the for all. At the brand level, carriers also need to they approach fresh growth differentiate on meaningful attributes that dis- markets based on M2M com- subscriber’s digital tinguish them and counter the inability of many munications (i.e., telemedical footprint, or Code wireless customers to identify significant differ- applications). In fact, for some Halo, wireless ences among carriers. providers, the M2M market could be the immediate place providers could Aligning the company around a particular value to deploy a new approach to realize a vast array set is a fundamental way of standing out in a product and service innovation of new opportunities. share-driven market, where customers need a and development. compelling reason to switch providers. The values or attributes that the provider chooses for dif- To get there, wireless carriers need to move from ferentiation need to be reflected in every aspect network- and equipment-defined innovation to of the brand, including strategy, operations market-driven innovation, creating an ecosystem and customer experience, and they need to be in which different types of partners come together supported by the provider’s business processes, to serve customers. Traditionally, many break- systems and networks. through features were defined by the equipment manufacturer or through siloed, time-consuming New Product/Service Development and often sequential development processes. Product and service innovations can help create Today, in response to customer desires, many “stickier” customer relationships and expand the vendors — and even individuals — are creating revenue potential of a stagnant customer base. advanced services that are independent of the The goal is to create compelling new offerings for equipment and run on top of the network, as entertainment, productivity and commerce that part of a new ecosystem. To better drive these entice customers to add incremental services to ecosystems, carriers need to rationalize and their mobile services contract. Subscribers are integrate their control and network infrastruc- buying such offerings today in high volumes, just tures to be more flexible and responsive to the not from the carriers. Apple, LinkedIn, Paypal and requirements of market-defined product develop- over-the-top content providers like Netflix and ment, rethinking their development integration Amazon are delivering these services and dra- points, organizational structures and business matically capturing revenues, profits, customer processes. loyalty and — not surprisingly — market capitalization. Even advertisers are looking more to Critical to this effort will be establishing the Facebook, Twitter and Google to target wireless specific way each carrier creates the value it subscribers on their phones than they are to will provide to make its ecosystem attractive. carriers — notwithstanding carrier efforts in this (The production, search, delivery model that area. we developed with MIT to help carriers address this issue will be the topic of a future paper). By tapping the subscriber’s digital footprint, or Ultimately, carriers will need to develop more Code Halo, wireless providers could realize a effective teaming capabilities, giving trusted vast array of new opportunities. This is particu- partners access to their network ecosystems, larly true if they borrow from the novel execution for example, by making application program- strategies of companies like Amazon and ming interfaces and software development kits Facebook while leveraging their own vast data available. stores to unlock previously unimaginable services and revenue streams. Operational Efficiency Finding operational efficiencies will enable Here again, wireless carriers are investing in go-to- wireless carriers to reduce costs in a market market partnerships and innovation centers (such with decreasing growth and increasing margin as AT&T’s Foundries and Verizon’s Innovation pressures. In a maturing market, cost reductions

cognizant 20-20 insights 5 may be the key to improved margins. Clearly, U.S. — urgent priorities. Carriers also must understand carriers have established the lead in deploying their own source of value to the market. LTE networks, which should create a path to lower network operating costs over time. Yet fully For example, a company eyeing the wireless realizing those benefits will require retirement of market should consider the cautionary tale of legacy networks and integration of the control Facebook. Facebook debuted as a public company and support infrastructure in May 2012, with a spectacular subscriber base Carriers can save to achieve more flexibility of almost one billion and revenues of almost $4 and lower costs. billion. But analysts promptly called it to task for money by consolidating its lack of a mobile strategy and mobile revenues. or sharing functions, As operators have been By the second quarter of 2013, Facebook had or even outsourcing focused on M&A activity taken fast and focused action and had grown its and aggressive network mobile revenues from a single-digit percentage to capabilities like field builds, many process and over 40% of its total ad revenues. And the share operations to a shared infrastructure technology price and market cap of the company responded service or a third-party areas also remain ripe for dramatically, with shares trading at $26.51 on July optimization. For example, 24, 2013 and hitting a high of $54.22 on October provider. many carriers still run 18, according to company information. We can’t multiple separate systems know now if that will hold, but the episode illus- for operational support and business support trates the type of speed, clarity of objective across services and networks. Consolidating and and ability to create measurable impact that rationalizing that infrastructure should yield sig- successful companies in this technology-driven nificant savings, as well as greater flexibility. space will need to demonstrate.

Field operations and network infrastructure For U.S. wireless carriers, the inflection point has are other areas ripe for optimization. Carriers arrived. Changes are afoot, and the market is can save money by consolidating or sharing moving more quickly than the good news would functions, or even outsourcing capabilities like imply. The question is, how will the wireless field operations to a shared service or a third- carriers in the U.S. respond to arriving at the party provider. crossroads?

Looking Forward Future installments of the “Wireless at a Virtually all wireless carriers have made some Crossroads” series will examine strategies effort to target one or all these areas. But for improving customer interaction, product arriving at the crossroads makes speed, focus innovation and operating cost, as well as the rise and measurable impact — not business as usual of the post-paid wireless market.

Acknowledgments The author would like to thank industry expert Clarence Mitchell for his contributions to this white paper.

Footnotes 1 Lee Rainie, “Cell Phone Ownership Hits 91% of Adults,” Pew Research Center, June 6, 2013, http://www.pewresearch.org/fact-tank/2013/06/06/cell-phone-ownership-hits-91-of-adults/. 2 “Mobile Wireless Performance in the EU and U.S.,” GSMA, May 2013, http://www.gsmamobilewirelessperformance.com/GSMA_Mobile_Wireless_Performance_May2013.pdf. 3 Steve Schaefer, “Record Wireless Margins Boost Verizon Profits,”Forbes , April 18, 2013, http://www.forbes.com/sites/steveschaefer/2013/04/18/record-wireless-margins-boost-verizon-profits/. 4 “Verizon Reports Lowest Churn Rate in the Industry for Q2,” PhoneArena.com, Aug. 9, 2012, http://www.phonearena.com/news/Verizon-reports-lowest-churn-rate-in-the-industry-for-Q2_id33174.

cognizant 20-20 insights 6 5 “New iGR Study Forecasts U.S. LTE Infrastructure CapEx and OpEx Spending to Reach $95 Billion Over the Next Five Years,” FierceWireless, May 15, 2013, http://www.fiercewireless.com/press-releases/new-igr- study-forecasts-us-lte-infrastructure-capex-and-opex-spending-reach. 6 “Mobile Wireless Performance in the EU and U.S.,” GSMA, May 2013, http://www.gsmamobilewirelessperformance.com/GSMA_Mobile_Wireless_Performance_May2013.pdf. 7 Kevin Fitchard, “Mobile Subscriber Growth in the U.S. Slows to a Standstill,” GigaOm, Aug. 13, 2013, http://gigaom.com/2013/08/13/mobile-subscriber-growth-in-the-u-s-slows-to-a-standstill/. 8 “Wireless Quick Facts,” CTIA, http://www.ctia.org/advocacy/research/index.cfm/aid/10323. 9 Miriam Gottfried, “Competitive Clouds on the Verizon,” The Wall Street Journal, Oct. 17, 2013, http://online.wsj.com/news/articles/SB10001424052702304384104579141762143896676. 10 Roger Entner, “New Wireless Customers Chose No-Contract Over Contract 10 to 1 in Q1,” FierceWireless, May 15, 2013, http://www.fiercewireless.com/story/entner-new-wireless-customers-chose-no-contract- over-contract-10-1-q1/2013-05-15. 11 “One-Third of all Smartphones Sold in the U.S. Are Prepaid,” NPD Group, May 15, 2013, https://www.npd.com/wps/portal/npd/us/news/press-releases/the-npd-group-nearly-one-third-of-all- smartphones-sold-in-the-u-s-are-prepaid/. 12 “U.S. Mobile Market Update, Q2 2013,” Chetan Sharma, http://www.chetansharma.com/usmarketupdateq22013.htm.

About the Author Lee Taylor is a Consulting Director in Cognizant’s Business Consulting (CBC) Practice for the commu nications industry and leads the wireless line of business within CBC Communications. Prior to joining Cognizant, Lee worked at BusinessEdge Consulting and Ameritech/SBC Communications and has over 13 years of communications and consulting experience. Lee studied geography at the University of Kentucky. He can be reached at [email protected].

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