• 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. 7M 6M 5M 4M 3M 2M 1M 0 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. $500B $400B $300B $200B $100B $0 t &T on on as edIn Apple AT Google eriz Sprint Amaz V omc -Mobile Facebook C Link T 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.