PATHFINDER REPORT

Disruption and Change: US Wireless Market 2013-2015 Three Years That Altered the US Mobile Operator Market – And What It All Means for Mobile Users RICH KARPINSKI PRINCIPAL ANALYST MOBILE OPERATOR STRATEGIES MARCH 2016

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TABLE OF CONTENTS Introduction: The Power of Disruption ƒƒ Hello Smartphones; Goodbye Subsidies and Two-Year Contracts ƒƒ The New Mobile Equation: More Data Bang for the Mobile Buck ƒƒ What Dumb Pipe? Service Innovation Comes to America US Market Change and Global Mobile Competitiveness Conclusion: The Impact of Change

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In the past three years, the US mobile services market has undergone a period of remarkable change. From T-Mobile’s market-instigating ‘Un-carrier’ push to the expansion of LTE services and a range of M&A activity – including deals closed, rumored, abandoned and some likely still to come – today’s mar- ket looks nothing like it once did.

While 100% of US postpaid users were on two-year contracts with early termination fees (ETFs) in 2012, about 50% of those users have shifted over to no-contract/no-ETF plans today. While device subsi- dies were the norm then, in the past six months just 29% of consumers said they opted to purchase a subsidized phone. Customer device upgrade programs, which enable both device financing and more frequent phone upgrades, have surpassed 40% participation at several operators, while accounting for the bulk of new quarterly device activations.

Mobile data availability, coverage and pricing has evolved significantly as well. In 2012, LTE accounted for just 41.7 million customer lines, or 12.8% of the market. By the end of this year, LTE’s share will grow to 258.1 million lines, or 65.4% of all lines. During that same time, mobile data consumption in the US grew 5X, from just 0.74GB per month to 3.87GB per month today – double the global average.

Meanwhile, customers get more value for their mobile dollar than ever before. Comparing postpaid data plans from 2012 and today, a 1GB data plan cost $90 then and about $50 today, a 45% service fee de- crease. Add in a financed smartphone today (at about $25 per month) and the cost is about $75, still an 18% drop. Family and multiuser shared-data-plan differences are even more pronounced. In 2012, four smartphones and a 10GB shared plan cost $260; today four smartphones with 10GB per line costs just $120 – four times the data for half the monthly service fee. Again, add in four financed smartphones and while the total cost of ownership gets closer ($260 then vs. $220 now), the 4X increase in data remains.

Additional pricing creativity – including data rollover, zero-rated services and the elimination of global roaming fees – allows US mobile users to stretch their data dollar even further. Today, users cite ‘cost’ – at 51% of survey respondents – as the main reason they consider switching to a new operator, compared with seeking a ‘better network’ at just 14% of those surveyed – percentages that have largely flipped over the past three years. Meanwhile, US mobile operators have proved to be keen service innovators, leading the way in areas including creative data pricing, big-data and IOT services, and telco over-the- top (OTT) video experimentation.

The result has been solid performance and growth for the US mobile market overall. Operator transition away from voice to data as the key revenue source has gone well: today, mobile data accounts for 70% of service revenue, compared to just 47% at the end of 2012. While many global mobile service markets have shrunk in the past three years, the US market as a whole has grown 0.5% annually, spurred by a mobile data CAGR of 20% over that same period.

For mobile operators, this period of disruption and change has seen market shares shift, and significant new revenue opportunities emerge. For mobile customers, the benefits have been just as clear: more flexibility in how they buy and upgrade devices; greater freedom to change operators; access to high- er-speed data services and more innovative digital service offerings; and increased mobile consumption coupled with more bang for their mobile buck.

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Introduction: The Power of Disruption The mobile services market has now gone through nearly a decade of profound change – from the introduction of smart- phones led by the Apple iPhone, to the creation of an entirely new and vibrant mobile apps and content ecosystem, to the launch and continued evolution of high-speed 4G (and soon 5G) mobile data services (see Figure 1). In the US, amid all of that technology, product and service change, the mobile market has undergone – and in just the past three years – an equally important leap forward: a fundamental rethinking of how operators do business, and how subscribers purchase and consume mobile devices, services and applications. The impact of this disruption and change on the US mobile services market cannot be underestimated. Just a few scant years ago, the mobile landscape was very, very different. Unlike other worldwide markets where subscribers could simply swap a SIM card to change operators, US mobile users were locked into devices and operator relationships via costly-to- break two-year contracts. Voice-centric service plans charged by the minute, the text and the MB, with customers in fear of overages and roaming fees that could run up their bills into the hundreds of dollars in a flash. Service ‘innovation’ was limited to operator content and service portals that offered users little of real interest, while mobile data networks crawled along at 3G speeds while true 4G services were still in their infancy – and not yet priced in a way to truly encourage con- sumption. In sum, mobile operators tended to place their own concerns – rather than those of mobile users– at the center of their thinking, with business practices that in many ways were downright hostile to their own customers. More than any technology issue, what was holding back change was the unwillingness, inability – or fear – of US mobile operators to move beyond those traditional ways of doing business. Indeed, for all the carrier concern about being sub- jugated to ‘dumb pipe’ status, years if not decades of inertia needed to be broken before true change could occur: reve- nue streams put to risk, hidebound cultures overcome, regulatory landmines navigated, and business practices evolved or made new. And most importantly: A keen focus on delivering the best customer experience placed at the center of it.

Figure 1: Zooming Out: The 4G/Smartphone Era

US Shared Services Market 5G Trials Data Plans Disruption & Change Begin US LTE Launch Apple Android Debut App Store Launch iPhone Launch Launch

2007 2009 2011 2013 2015

Source: 451 Research All of this makes the period of 2013 to the present – a span we’d characterize as one of significant market disruption and change – all the more notable. A few landmark moves clearly stand out (see Figure 2). T-Mobile’s ‘Un-carrier’ debut in March 2013 – and its follow-up moves, now numbering 10 and counting – clearly and fundamentally changed the market’s course. Competitors’ reactions – both zigs responding directly to T-Mobile challenges, and zags aimed at changing the playing field altogether – only accelerated that change. Significant M&A activity – both completed and some not-yet-realized – shook things up further. Meanwhile, ongoing regulatory wrangling – over net neutrality, to be sure, but more recently involving new telco privacy rules – added an element of uncertainty to the proceedings.

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Figure 2: Zooming In: 2013-2015 – A Period of Market Disruption and Change

Video Traffic Softbank AT&T FCC Issues Open T-Mobile Passes 50% on Sprint Cricket Internet/Net Binge On Carrier network acquisition acquistion Neutrality Rules Launch T-Mobile US Mobile AT&T Verizon FCC Data MetroPCS data revenues DirecTV AOL Privacy Rules acquisition surpass voice acquistion acquisition Proposed

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016

AT&T T-Mobile Jump! T-Mobile Music Verizon AT&T Digital AT&T Next Freedom Launch Go90 Launch DirecTV Home Debut OTT Launch T-Mobile Sprint Sprint Cut Verizon Un-carrier Framily Your Price in FreeBee Launch Launch Half Launch Launch (No-Contract/ No-Overage)

Source: 451 Research The end result is clear: a US mobile market that works in a fundamentally different way than just a few years ago – and to sig- nificant consumer benefit as operators increased their focus on providing a better customer experience. Two-year service contracts and costly early termination fees have given way to more flexible no-contract plans. Device subsidies have largely disappeared, replaced by improved price transparency and an array of new ways for mobile subscribers to pay for their devices. Truly high-speed mobile data services are ubiquitously available and less costly to consume, with a variety of new constructs – including data rollover programs, zero-rated/sponsored data services and cheaper roaming arrangements – that allow mobile users to stretch their mobile data spending even further. New, innovative mobile operator services and business tactics now seem to appear daily, such as T-Mobile’s Music Freedom and Binge On streaming juggernauts; AT&T’s DirecTV-enabled OTT video launch; Verizon’s growing mobile advertising and big-data service engine; and Sprint’s aggres- sive promo push, led by its half-off competitor pricing. In this 451 Pathfinder paper, we provide qualitative insight and quantitative data-driven analysis of this crucial period of market disruption and change. We examine key financial, operational, network and customer-satisfaction metrics, evaluat- ing progress within the market and making comparisons to other global mobile markets where illustrative. The goal is to understand the key drivers behind this sweeping industry change, while detailing the market-altering moves that define this period of significant disruption in the US mobile industry and assessing their impact today – and into the future. Hello Smartphones; Goodbye Subsidies and Two-Year Contracts For years the US market could best be described as the ‘home of the two-year contract’: essentially, 100% of postpaid mo- bile subscribers were bound to their carrier for two years in exchange for subsidized phone prices, with early termination fees, or ETFs, charged for leaving early. Carriers built the cost of the device into their monthly service charges, while also typ- ically charging an up-front, out-the-door device charge as well. The result was little to no visibility into how much phones really cost, or even how much customers were actually paying for them. This was much different from other global mobile markets, where customers typically paid for phones at cost and usually unbundled, or separate from, the mobile service to which they subscribed. That not only made true costs more clear, it also made moving from one operator to another as simple as switching out a SIM card. Operators couldn’t simply force customers to stay on board with high exit fees. Rather, they had to continually compete to win their loyalty via service quality, customer-service attention and competitive pricing. While prepaid, no-contract service options have always existed in the US, they were most often associated with higher-risk customers – younger users, for instance, or customers with credit issues. Prepaid services often came with service limits as well, such as being restricted to lower data speeds or having limited or no access to the very best devices. The trade-off for US customers wanting postpaid mobile service was clear: sign on the dotted line and tie yourself for the next two years to device and operator, without a clear understanding of whether you were getting a fair deal, and limited ability to break those chains and go a different route.

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Breaking the postpaid contract/ETF model in the US required a major break from past business practices. Instigating this change was T-Mobile, whose Simple Choice plans did away with contracts and subsidies and simplified mobile data pricing as part of its Un-carrier 1.0 launch more than three years ago. T-Mobile’s initial Un-carrier move – and its nine (and count- ing) follow-on announcements – had a common thread: disrupting traditional carrier business practices by focusing on improving the customer mobile experience. With T-Mobile going fully no-contract, rival domestic carriers followed suit, albeit slowly – first, as an option if customers paid full price up front; next, as a payment option in device upgrade plans; and finally by largely doing away with two-year contracts altogether (see Figure 3). By the start of 2016, all four major US operators had announced they had completely abandoned contracts, although Sprint quickly reversed course, choosing to keep contracts/subsidies available to customers as an option.

Figure 3: The End of the Two-Year Contract in the US

Mar Aug Jan 2013 2013 2016

Source: 451 Research; operator news releases The move away from two-year postpaid contracts represented a fundamental change in the US mobile market, benefiting consumers in a variety of ways: ƒƒ More transparent device pricing. With subsidy device pricing, consumers had no idea what their phone truly cost – and whether they were getting a good deal or drastically overpaying for it. Today, customers can see the full device cost and choose to invest their dollars in the way they see fit. In short, customers now pay what their device is worth – and only that – as opposed to a subsidy model that never disclosed true device pricing and forced users to pay higher monthly service fees that subsidized their device costs – even after the real-world cost of their device had actually been covered. ƒƒ More options in how to pay for mobile devices. In this new environment, US mobile users can choose to pay full price for their phones up front (from their operator, at brick-and-mortar third-party retailers or online); finance their device with monthly payments and retain the phone’s residual value; or lease phones from their operators for a monthly fee. In the past, ETFs not only kept customers locked into their carriers but also kept them tied to outdated, last-generation devices. Today, all four US carriers also offer device ‘upgrade’ plans – such as T-Mobile’s JUMP! or AT&T Next – which, in addition to providing device financing, allow customers to regularly update to the latest devices (typically once per year, or in the case of T-Mobile’s JUMP! On Demand, up to three times per year). The emergence of a strong secondary market for used phones – enabling the buying and selling of individual devices, and also enabling operators to ‘securitize’ and financially manage their device inventory – makes this new no-subsidy world a win for operators who implement up- grade programs as well. ƒƒ No-subsidy device pricing clarifies (and lowers) mobile service pricing.Under the device subsidy paradigm, opera- tors shifted part of the cost of mobile devices into their mobile service fees. How much? It wasn’t always clear – a price transparency problem we discussed earlier. In today’s no-subsidy world, because they no longer have to ‘make up for’ the low cost of subsidized devices, operators have across-the-board lowered their data pricing. Customers that are willing and able to pay for their device up front or who bring their own device – and thus do not have to pay monthly device finance fees – are in particular able to take advantage of those lower monthly service fees (more on mobile data services and pricing below). ƒƒ No-contract users can more easily change carriers, while carrier ETF payoffs help those tied to a contract break free. Free from contracts and ETFs, customers are able to move to another operator for a better price or service offer without penalty. But what about those customers still bound by an ETF, or with equipment installment plan (EIP) month- ly fees still to pay? To help break those customers free, T-Mobile, as part of its Un-carrier 4.0 announcement in January 2014, introduced the idea of the ‘buyout’ – helping customers still bound to carrier contracts pay off ETFs or remaining EIP balances when they moved to T-Mobile. This move forced other carriers to offer buyouts as well, and today all four US operators run some form of this promotion, typically offering customers up to $650 per line to change carriers. The

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impact of ETF payoffs was twofold: they not only helped customers break their ETF handcuffs, and thus have greater free- dom to change carriers; they also significantly hastened the industry’s eventual move away from contracts altogether by making them largely irrelevant. With payoffs, customers could move whenever they liked – contract or no contract.

Cumulatively, all these carrier moves instigated significant change across the entire US mobile market: ƒƒ The total number of US no-contract users has grown substantially. About 25% of total US mobile lines today are no-contract prepaid – just under 95 million lines. Postpaid no-contract customers are growing significantly as well, with individual operators just beginning to report those numbers. Far out ahead is no-contract pioneer T-Mobile, which re- ports that 94% of its postpaid base of 31.7 million users are currently on a no-contract plan – about 30 million customers. AT&T reports that about two-thirds of its postpaid base of nearly 50 million users are on no-contract deals. Verizon and Sprint have been less vocal about their no-contract transitions. In sum, about 50% of all US postpaid mobile users are likely on no-contract arrangements today. ƒƒ No-contract momentum is strongly accelerating. In the past six months, the majority of new contract sign-ups have been no-contract. According to the latest 451 Research ChangeWave survey (January 2016), just 29% of respondents had purchased a subsidized device in the past six months, compared with 54% in the previous six months (see Figure 4). That equates to 71% of device sales in the last six months being made on some form of no-contract basis. That percentage will only increase now that operators have across-the-board abandoned contracts in recent months. Figure 4: Customers Are Moving Rapidly Away from Subsidized Devices Q. Which of the following best describes how you paid (pay) for your smart phone (Dec 2015)

Pay full retail using a monthly 29% device payment plan 14%

Paid discounted price upfront in exchange for 29% signing a two-year wireless service contract 54%

Paid full retail price upfront 22% at the time of purchase 19% Within Past 6 Months More Than Lease phone from wireless 9% 6 Months Ago service provider 5%

0% 10% 20% 30% 40% 50% 60% Source: 451 Research ChangeWave Survey, January 2016 ƒƒ Device upgrade plans are seeing strong take-up as well. As of Q4 2015, 46% of all AT&T postpaid customers were on AT&T Next financing plans, while 41% of T-Mobile postpaid users were on its JUMP! or JUMP! On Demand plans. Those percentages will only grow, not only at AT&T and T-Mobile, but across all carriers as they do away with subsidies and contracts entirely. Device upgrade plans in particular not only help customers afford high-end phones without device subsidies and upgrade to new devices more quickly, they also help reduce churn and increase loyalty for mobile opera- tors. Despite the many ways and incentives customers have to switch operators today, market-wide US postpaid mobile churn was just 1.3% in Q4 2015 – the lowest rate during this three-year period of significant change.

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Bottom Line: Device Subsidies/No-Contract

CUSTOMER IMPACT INDUSTRY IMPACT In the past six months, more than two-thirds T-Mobile forced the industry’s hand on the of new mobile service sign-ups have been on no-contract model with its Un-carrier 1.0 a no-subsidy/no-contract basis. Customers get announcement three years ago. Competitors improved price transparency, more frequent initially made no-contract arrangements optional device upgrades and greater freedom to switch before more recently abandoning contracts operators for better networks, services or altogether (with Sprint ultimately making pricing – rather than being locked into their subsidies optional). Despite aggressive price operator by an ETF. and promo competition – which greatly benefits mobile users but also opens the door for them to switch carriers – postpaid churn has remained surprisingly low.

The New Mobile Equation: More Data Bang for the Mobile Buck We’ve seen how changes in the way that operators deliver and price devices has impacted the US mobile market. A similar and equally important evolution has occurred in how operators deliver and price mobile services, in particular mobile data services. Most significant has been the aggressive deployment of LTE networks and service (see Figures 5a and 5b). At the end of 2012, high-speed LTE service accounted for just 12.8% of all US mobile lines (representing 41.7 million customer lines). By the end of 2015, LTE’s share of mobile lines grew to 57.5% (218.8 million lines), and is expected to grow to 75% (or 320 million lines) by 2019. Figure 5a: US LTE Customer Lines Figure 5b: LTE Share of all Mobile Lines

80% 70% 300 70% LTE 60% 250 HSPA 60% 50% DCHSPA 200 50% CDMA2000 40% 40% LTE EXPLOSION 150 TD-LTE 30% 30% WCDMA 100 20% 20% 2G WiMax 10% 50 10% 1G 0% 0 0% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2017 2018 2019

LTE Share LTE lines (in millions)

Source: 451 Research Global Wireless Subscriber Forecast, Dec. 2015 The US market’s rapid and successful deployment of LTE networks and services was significant for a number of reasons: ƒƒ While Verizon was an early LTE leader, today LTE networks are available from all US mobile operators, signifi- cantly leveling the mobile data playing field.To be fair, not all LTE networks are equal, even today. But it has become increasingly difficult – and often market-dependent – to tell them apart. Every operator touts drive testing wins across different metrics: average speed, top speed, availability, coverage and latency. The bottom line is that while having an LTE network was once a significant competitive advantage (Verizon launched its LTE network in 38 cities in 2010; T-Mo- bile had zero LTE POPs until 2013), that is no longer the case. Today, all four major operators tout near-ubiquitous LTE network coverage, nearing or above 300 million LTE POPs, and LTE network coverage has become table stakes.

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ƒƒ A more level LTE playing field tipped the competitive dynamic even further toward price and service innovation. The leveling out of differences between carrier LTE networks has significantly shifted how customers think about their mobile operator (see Figure 6). Today, price – cited by 51% of survey respondents – is the overwhelming reason that cus- tomers consider changing operators (this figure is up from just 33% in 2012). Meanwhile, only 14% of customers today cite network concerns as their main reason to consider leaving their current operator. Customers are now far less willing to pay premium prices for a service available on relatively equal terms from all network operators. Figure 6: Price is the Main Reason Customers Consider Changing Mobile Operators Today What’s the most important reason why you’re likely to change wireless service providers?

60% 51% 50%

40% 33% 30% 26% December 2012 20% 14% 12% 11% December 2015 8% 10% 7%

0% Cost Poor Reception / To Get a Better Moving to a Better Coverage Data Plan 4G/LTE Network

Source: 451 Research ChangeWave Survey, January 2012 and January 2015 ƒƒ Higher-speed mobile data services enabled an entirely new set of mobile apps – driving even more mobile data usage. The impact of LTE network deployment and adoption cannot be overstated – true 4G speeds (typically ranging from 5-12Mbps in real-world usage) – have enabled the full range of mobile activities we take for granted today: mobile app usage, social networking, photo sharing, music and video streaming, and more. In turn, the greater availability of US 4G networks (and improved offers/pricing; more on that below) encouraged significantly more on-the-go data con- sumption. At the end of 2012, the typical US smartphone user consumed less than 1GB of mobile data per month. By the end of 2015, that grew to 2.56GB – and is slated to grow to almost 10GB per month by 2020 (see Figure 7). Notably, the level of US mobile data consumption is double the global average, attesting to both the wide availability of US LTE networks and the growing appetite for mobile data among users. Figure 7: US Mobile Data Consumption, per Device, per Month 4.5 3.87GB 4.0 3.5 2.56GB 3.0 2.5 1.57GB 2.0 1.21GB 1.5 US Mobile Data 0.75GB Traffic Smartphones 1.0 per device, per month 0.5 0.0 2012 2013 2014 2015 2016 Source: 451 Research Mobile Data Traffic Forecast, January 2016

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As important as LTE network availability has been for driving mobile data consumption in the US, changes in data plans and data pricing have been just as significant. During the past three years, the structure of US mobile data plans changed drastically. Those changes have been driven by two major factors. First, with voice and text revenue shrinking, and the im- portance of mobile data services increasing, operators were forced to rethink their network ‘monetization engines,’ or the ways in which they make money off their network. As we’ll see in greater detail in the global competitiveness section later in this paper, US operators have navigated that transition much better than operators in other geographies. The second main factor driving changes in mobile data plans is that competitive pressure has led operators to try to differentiate themselves on pricing and plan options while also keeping a keen eye on what customers want – or risk losing them to rivals with better approaches. While that dynamic has resulted in a lot of variety when it comes to data plans in the US – as well as aggressive promo and price competition – a few trends that impact the overall structure, health and competitiveness of the market do stand out: ƒƒ Unlimited plans have largely been replaced by tiered data pricing. According to 451 Research’s ChangeWave sur- veys, at the end of 2012, 53% of mobile users reported that they were on unlimited plans, compared with 41% on tiered plans (individual or shared tiers). By the end of 2015, those numbers had largely flipped, with just 30% on unlimited plans and 64% on tiered plans (43% shared and 21% individual – see Figure 8). Figure 8: Types of Wireless Data Plans Used 60% 53% 49% 48% 50% 44% 45% 42% 42% 44% 43% Shared 39% 39% 40% 40% 37% 33% 32% 31% 29% 30% 30% 25% 25% 25% 35% 34% Unlimited 23% 23% 33%

20% 25% 25% Tiered 22% 20% 21% 20% 21% 21% 18% 18% 19% 10% 16% 17%

0% DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 2012 2013 2014 2015

Source: 451 Research ChangeWave Survey, January 2016 ƒƒ Even with that shift, the market includes a wide array of mobile data pricing alternatives. Today, Verizon, AT&T and Sprint lead with shared data offers, while T-Mobile’s consumer offerings provide data on a per-line basis (although pooled data options are available to business customers). Since moving to its Simple Choice pricing in 2013, T-Mobile has also emphasized no-overage pricing – reducing network speeds at congested cell sites based on prioritization, but keeping connectivity intact even after users reach their data limits – an approach in line with its value pricing and Un-car- rier strategy of addressing customer pain points like overages. By comparison, AT&T and Verizon charge users overages – typically $10 per GB – when they pass their data tier limits. For customers that want to avoid data limits altogether, unlimited data plans are available today from T-Mobile and Sprint, and (when bundled with DirecTV video service) from AT&T as well. For its part, Verizon has stayed away from offering an unlimited data plan. While every operator plan has a basic dollar-per-GB-bucket pricing component, there is less consistency in other areas, such as how they implement per-line access changes, add in device financing and leasing fees, and implement volume price discounts or promotional price and data offers. Those anomalies between carriers – coupled with the market-wide move away from device subsidy pricing models to financing/leasing – makes it difficult to do an apples-to-apples comparison of mobile data pricing changes over the past three years. That said, there’s no doubt that most US mobile users today have the opportunity to get more mobile data at a cheaper out-of-pocket cost (see Figure 9 for a detailed before-and-after plan comparison). For example, when AT&T and Verizon introduced shared data plans in 2012, a single smartphone line with 1GB of data cost about $90 per month; today, a single

COMMISSIONED BY T-MOBILE 10 PATHFINDER REPORT: DISRUPTION AND CHANGE: US WIRELESS MARKET 2013-2015 line with 1GB of data is an average of $50 – a 45% decrease in monthly service fees. Even adding in the cost of a subsidized phone (say, $25 per month) results in a total monthly charge today of just $75, still a 17% decrease in combined fees. Cus- tomers that pay for a phone outright, or bring their own device with them to a carrier, can benefit from that full 45% service fee decrease. Multiple-device or family plans are even more difficult to directly compare. But it’s worth noting just how aggressive some mobile data offers are today. In 2012, for instance, customers paid on average $260 for 10GB of shared data. In 2016, T-Mo- bile, in one example, offers 10GB of data per line for four devices at just $120 – providing four times the data, but for less than half the cost. While adding another $100 ($25 per phone) to account for monthly device financing fees brings the total-cost-of-ownership closer in line ($220 vs. $260 in 2012), today’s subscribers still get four times the data every month. Even better, T-Mobile and Sprint currently offer four-line unlimited high-speed data packages for just $150 per month. Again, even adding in $100 for device financing, that family of four is swimming in data vs. sharing a mere 10GB – and for basically the same service + device cost. Figure 9: Mobile Pricing: 2012 vs. 2016 2012 2016 Typical Shared T-Mobile Sprint Plan Verizon AT&T T-Mobile Promo Offer Sprint Promo Offer 1 Phone 1 GB $90 $50 $55 $50 (2GB) $40 6GB $130 $80 $75 (5GB) $65 $65 10GB $150 $100 (14GB) $115 (15GB) $80 $80 (12GB) Unlimited $95 $75

4 Phones 6GB $240 $140 $150 $160 $125 (5GB) (6GB/line) 10GB $260 $180 $160 $220 $120 $140 (14GB) (15GB) (10GB/line) (10GB/line) (12GB) Unlimited $150 $150 2012 pricing based on two-year contract + device subsidy; 2016 monthly pricing does not include device financing/leasing costs In 2016, some operators offer additional incentive data pricing, such as rollover data (AT&T, T-Mobile) and zero-rated music/video (T-Mobile) Source: 451 Research data plan comparison of published rates As a final pricing note, it’s instructive to point out that during this period of intense market competition, average revenue per user (ARPU) for mobile services has, not surprisingly, fallen from $47 to $42 (about 9%) on a blended, monthly basis – further evidence that US operators today are delivering more value (and more GB per user) at an overall lower cost to subscribers (see Figure 10).

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Figure 10: US Mobile Service ARPU $60

$50 Monthly Total ARPU $40 Monthly Data ARPU $30

$20 Monthly Voice ARPU $10

$0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2013 2014 2015 Source: 451 Research North American Mobile Carrier Monitor, March 2016

Bottom Line: 4G/LTE Networks and Data Pricing

CUSTOMER IMPACT INDUSTRY IMPACT US mobile consumers are benefiting from You can’t cut service pricing without impacting a virtuous circle when it comes to 4G/LTE service revenue, and from 2013-2015, operator service availability, speed and pricing. Near LTE postpaid service revenue per user fell from $47 ubiquity across all operators pivoted carrier to $42, or about 9%. At least some of those competition to pricing and service innovation. dollars have shifted over to the mobile equipment Which led to cheaper mobile data. Which led revenue stream – which grew by 22% for the ‘big to more data consumption. Which encouraged four’ US operators in 2015 alone. That transition additional operator service innovation (more on not only helps clear up the muddied revenue that in the next section). Which increased data picture that came with the device subsidy model – consumption even further. In short, US mobile it also puts the user more in charge of how, when users get more data bang for their buck than and with whom they spend their mobile dollars. ever before.

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What Dumb Pipe? Service Innovation Comes to America As we’ve seen, US mobile operators have completely reversed course in several critical areas from no-contract/no-subsidy pricing to LTE coverage and service delivery. As those changes have taken hold in the market, US operators have become sur- prisingly creative service innovators as well – especially given their traditionally plodding, ‘non-innovative’ service reputation. Two broad areas of service innovation stand out in particular: service pricing creativity and the development of new digital services.

SERVICE PRICING CREATIVITY Intense market competition has pushed US operators to experiment with a variety of approaches for data plans. But be- yond that, US operators have delivered an array of unique options to help subscribers stretch their data plans even further – or, in the parlance of one mobile operator, turn a ‘gig’ of data into a ‘super gig.’ Examples include. ƒƒ Data rollover, or the ability to use – rather than lose – unused data in subsequent months. T-Mobile’s Data Stash lets data-plan customers keep their unused monthly LTE data, up to 20GB, for up to 12 months. AT&T Rollover Data lets subscribers roll over one month’s unused data to the next month. For mobile users watching their data bottom lines, such plans offer three benefits: ensuring excess data doesn’t go unused; helping users avoid paying for larger data tiers they might not typically use; and avoiding potential overage charges from going over their monthly data allotments. ƒƒ Zero-rated or sponsored data services, which allow users to consume certain services without eating up their data. T-Mobile has been the most aggressive with such services. As of March, the operator has zero-rated 40 streaming music services with its Music Freedom program, and 52 streaming providers with its opt-in/opt-out Binge On service. Beyond the technical innovation that enables those services, the customer impact of Music Freedom and Binge On have been significant. According to T-Mobile, 20 million daily subscribers stream about 210 million songs at no charge each day under Music Freedom. A typical mobile user streaming 10 Spotify songs per day (four minutes per song) at high quality (160kb/s, or 1.2MB per minute), would gain almost 1.5GB of ‘free’ data consumption per month, a significant savings. The early numbers from T-Mobile’s Binge On offering are even more impactful, with zero-rated video streaming accounting for about 18% of all T-Mobile video streaming today – or about 45 petabytes of free data consumption in the service’s first three months. That equates to about 3.3GB of free video streaming per month for the average Binge On user. While T-Mobile has been the most aggressive operator with zero-rating – and doing so without requiring its music and video partners to pay to be included – it isn’t alone. AT&T and Verizon both offer programs that allow for third-party content providers to subsidize zero-rated content with sponsor or ad dollars, and Verizon recently started zero-rating some video-streaming content via sponsored data through its Go90 OTT video app for its own customers as well. Several operators also offer zero-rated loyalty programs, including AT&T’s Data Perks and Sprint’s Boost Dealz, which give cus- tomers additional data per month for viewing ads or taking other actions. ƒƒ New approaches to international service plans, which help resolve one of the biggest sources of customer bill shock: exorbitant global roaming rates. Previously, customers roaming outside the U.S. often paid more than a dollar per minute for voice calls, with data service even more expensive – one pay-as-you-go example was $2.00 per minute, or more than $2,000 for a single gigabyte of data. T-Mobile addressed this major customer pain point first with its Simple Global pricing (covering 100 countries as part of its Un-carrier 3.0 announcement in October 2013, which it expanded to 145 countries by 2015). The change was stark. With T-Mobile’s Simple Global service, out-of-the-country voice calls top out at 20 cents per minute, and customers receive unlimited text and data service (albeit at 2G or 3G speeds) at essen- tially no additional cost under the terms of their domestic service plans. The carrier followed that up with an add-on plan for low-cost calling from the US to 75 countries and by expanding its domestic calling borders to include Mexico and Canada at no extra cost. Sprint followed suit in 2015 when it launched International Value Roaming, which similarly of- fered no-charge texting and 2G data roaming and voice calls for 20 cents per minute, as well as discounted higher-speed data roaming. AT&T, meanwhile, has cut prices on its Passport international calling plans and also offers free roaming in Mexico as part of its acquisitions of Nextel Mexico and Iusacell.

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NEW DIGITAL SERVICES One of the greatest challenges for mobile operators is the transition from being a mere telecom service provider to being a provider of full digital services, encompassing not only communications services but also a broad range of digital services, applications and content. With core telecom service revenue falling, the addition of new digital services is crucial for mobile operators. US carriers have been particularly aggressive in pursuing these new opportunities. While digital service innova- tion is a huge topic on its own, a few areas are worth noting. ƒƒ Over-the-top video. Video represents both a challenge and an opportunity for mobile operators. It accounts for more than 50% of all data traffic today – and is growing exponentially. While third-party OTT video services dominate video content today – for instance, Netflix and YouTube alone account for 50% of video-streaming traffic – US mobile operators are playing a growing role in video services. T-Mobile’s Binge On service has enabled a massive amount of zero-rated video streaming from many providers large and small in just a few months. The technical approach driving Binge On is particularly creative, recasting the role a mobile data provider plays in the OTT video ecosystem. At least two other US operators are also aiming to grab a piece of the content pie for themselves. Verizon (with FiOS) and AT&T (previously via U-verse, now through DirecTV) offer their fixed TV users mobile access to video via multi-play apps. Both operators are also venturing into the OTT video market, Verizon via its Go90 video app and AT&T through an upcoming launch of a DirecTV-branded OTT video service. ƒƒ Big data and telecom data as a service (TDaaS). Mobile operators have a tremendous opportunity to build new busi- ness by leveraging data they already have about their subscribers, such as their network usage – especially location – and mobile behavior to deliver unique and valuable customer insights. 451 Research calls this market ‘telecom data as a ser- vice’ and estimates the global addressable market for operator TDaaS offerings was $24.1bn in 2015, growing to $68bn in 2020. Some US operators have been particularly aggressive in pursuing TDaaS opportunities. Verizon has been most active in this area, acquiring AOL and Millennial Media to drive its data-driven mobile advertising engine. Elsewhere, Sprint’s Pinsight Media has built a mobile advertising exchange and launched location insights analytics services based on TDaaS principles. ƒƒ IoT and connected everything. US operators have been strong early players in the connected-device and consumer Internet of Things (IoT) markets. Major opportunities include wearables, connected cars, digital home services and other bundled vertical IoT offerings. AT&T, for instance, expects to deliver more than 10 million connected cars by the end of 2016 while also aggressively rolling out its Digital Life connected-home service to close to 100 US markets. The other US operators are finding their own IoT and machine-to-machine niche as well – from security and healthcare to metering and digital signage – as the market begins to understand and adapt to these new technology implementations. The expected large-scale commercial launch of operator 5G networks – around 2020 – promises to significantly enhance network coverage and decrease latency, important enablers for the next wave of IoT applications.

Bottom Line: Service Innovation

CUSTOMER IMPACT INDUSTRY IMPACT Mobile users have strongly benefited from US With core telecom revenue falling, mobile operator service innovation. Creative pricing operators had to add new digital services to the options – such as keeping unused data or zero- mix. US operators are innovating in a number rating content – lets customers keep or add of areas, including multi-screen video, big-data gigabytes per month to their already growing monetization and connected-life services. While mobile data plans. A focus on enabling – and those next-generation services are just a sliver at times directly offering – new digital services compared to core mobile service revenue, they provides customers with more options in are growing rapidly and represent important new emerging areas such as OTT video and IoT opportunities for mobile operators. devices and services.

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US Market Change and Global Mobile Competitiveness The market disruptions and changes we’ve discussed, not surprisingly, have had a major impact on the overall makeup and competitiveness of the US mobile market. Overall, the US mobile market expanded, growing from just under 327 million lines served at the end of 2012 to almost 380 million lines at the end of 2015 – a compound annual growth rate of 5.2%. That growth places the US toward the higher end of the mobile pack globally in terms of line growth (for instance, India grew mobile lines 6.5% during that period and the UK just 0.7%). This is a bit surprising because the US was a relatively mature and well-penetrated mobile market even before 2012. Mobile line penetration in the US is set to reach 122% in 2016, or more than one line per person (compared to a global mobile penetration average of 107%). Market share within the US mobile operator industry, meanwhile, remains steady at the top of the market while there is some significant shifting below. AT&T (34% share) and Verizon (32%) continue to hold the top two slots, while T-Mobile (17%) made the biggest leap, leveraging its disruptive Un-carrier strategy and its focus on customer pain points and service innovation to move ahead of Sprint (15%) in the past few quarters (see Figure 11).

Figure 11: U.S. Mobile Services Market 2013-2015 - Before and After - Basic Market Structure Mobile Network Operator Market Share - Total Mobile Lines*

Before After End of 2012 Market Share End of 2015 CAGR 3-Year Growth Market Share AT&T 106,957,000 33% 128,640,000 6.4% 20.3% 34% Verizon 105,989,000 33% 120,965,000 4.5% 14.1% 32% Sprint 55,626,000 17% 58,359,000 1.6% 4.9% 15% T-Mobile 33,389,000 10% 63,282,000 23.8% 89.5% 17% Others 24,514,000 8% 8,579,000 (29.5%) (65.0%) 2% Total Lines 326,475,000 100% 379,825,000 5.2% 16.0% 100% * Mobile Network Operators own network facilities; MVNO lines (wholesale) count toward MNO totals * MNO acquisitions during this period included AT&T buying Leap/Cricket and T-Mobile acquiring MetroPCS Source: 451 Research North American Mobile Carrier Monitor, March 2016 Meanwhile, compared to other geographies, the US market as a whole has fared well across two critical – and related – fi- nancial metrics during this period: the successful replacement of voice with data revenue and overall revenue growth. Un- like many regions where OTT messaging apps have eroded voice and texting usage (and thus revenue) quicker than it could be replaced by mobile data consumption, US operators have navigated that perilous transition much more successfully. Mobile data surpassed voice revenue for US operators in mid-2013, and the market hasn’t looked back. In 2015, mobile data accounted for 67% of mobile service revenue and is expected to grow to 75% by 2019 (see Figure 12a and 12b).

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Figure 12a: Mobile Service Revenue (in Billions)

2012 2015

Voice Revenue $102.3 55% $62.6 33% Data Revenue $82.8 45% $126.8 67% Total $185.1 $189.4

Figure 12b: US Mobile Market Voice/Data Crossover 80% 70% Data as Share of Total Service Revenue 60% 50% 40% 30% Voice as Share of Total Service Revenue 20% 10% 0% 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2012 2013 2014 2015 Source: 451 Research North American Mobile Carrier Monitor, March 2016 In large part due to that successful cross-over (as well as a relatively brighter macroeconomic climate compared to some geographies, in particular Western Europe), the US has been able to keep its mobile market growing. Indeed, while many mobile markets saw revenue decline in the past three years – some, such as Spain, by as much as 10% – the US has stayed in the positive, buoyed in particular by strong mobile data revenue, which has grown at a CAGR of almost 20% during the period (see Figure 13).

Figure 13: Mobile Service Revenue Growth 2013-2105

Total Mobile Mobile Data Service CAGR CAGR Australia -5.30% 5.10% Brazil -5.70% 14.00% Canada -2.40% 9.00% China 2.50% 23.30% France -4.80% 5.40% Germany -2.30% 4.50% India 8.60% 20.10% Japan -4.00% 1.20% Poland -1.70% 11.10% Russia -3.90% 10.30% Spain -12.20% 3.70% United States 0.50% 19.60% Source: 451 Research Global Wireless Subscriber Forecast, 2016

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Conclusion: The Impact of Change As we move deeper into 2016, the impact of the changes in the US mobile services market over the past three years becomes ever more apparent – and the cumulative impact significant and far-reaching. Com- petition among rivals has pushed all operators to put their customers squarely at the center of the mobile service equation. Today, US mobile consumers have more flexibility in how they purchase devices, and greater freedom to move from carrier to carrier to hunt down a better deal or seek better service. Mobile service pricing has improved, and the ability for savvy mobile shoppers to get significantly more mobile data for much less cost is clear – encouraging and enabling US mobile users to become among the biggest consumers of mobile data in the world. LTE networks are ubiquitously available and improving by the day, with more bandwidth and a variety of new network services further enhancing the customer mobile experience. Indeed, if anything, competitive pressures and a willingness to change long-standing practices hasn’t harmed – but, rather, helped – US mobile operators (and the market in general) flourish. Today, US oper- ators stand among the global leaders in LTE deployment and consumption and new-service innovation – a label they would have been hard-pressed to claim in the past – the US mobile market as a whole has grown while other geographies have seen their mobile markets shrink. For both US mobile users and the operators that serve them, this recent period of disruption and change has clearly been a path well-taken.

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