It’s clear to most that the wireless industry has had an enormous impact on nearly all walks of life across the globe. In developed countries, most people now carry smartphones which give them access to mobile information and computing power beyond what was available on home computers just a few years ago. In developing countries, wireless is delivering communications and information to people who have never had access to technology of any kind before. Given the criticality of this sector of telecom, it is important to look at where we’ve been, where we are and what that tells us about where we may be going.
It’s all about the Network
Over the course of the decade leading up to the launch of the iPhone in 2007, the industry went through significant consolidation, as regional carriers merged into national and the two giants of the industry, AT&T and Verizon, were formed. Customers, who were once happy with a “brick” phone that worked only on major roads in metro areas, came to expect coverage in every basement of every building and at every remote lake house in the country. Verizon delivered against these expectations, with AT&T not too far behind. It is not a coincidence that these two carriers are the current manifestations of the original cellular carriers created in 1983. This means they’ve been around the longest and have the best, low-frequency spectrum that travels the farthest and penetrates buildings the best. The other major carriers, T-Mobile and Sprint, are rollups of newer carriers that mainly use more recently issued, higher frequency spectrum that does not provide the same coverage benefits.
The Cozy Duopoly is Formed
Once the iPhone launched, the game began to change from mainly coverage and price to one dominated by devices and data speeds. Carrier success was then driven by the speed of network upgrades and access to the latest and greatest devices. AT&T and Verizon cemented their lead over the smaller carriers as a result.
"The next step is pushing coverage and capacity ever further into homes and businesses so that every couch and office has access to speeds that will support HD video and serve multiple users"
From 2010 to 2013, the industry continued to change, but market dynamics settled out into a duopoly structure, with AT&T and Verizon maintaining steady prices and taking share from the smaller competitors with exclusive devices, faster data speeds, better coverage, and continued saturation of mass media advertising. T-Mobile went through a long period of struggle as the proposed merger with AT&T struggled to gain regulatory approval and ultimately failed. That failure, however, left T-Mobile with $3 billion extra in cash and significant spectrum licenses due to the break-up agreement. These goodies bolstered its ability to prepare for a re-launch.
Sprint, in the meantime, had a brief renaissance by being the first to launch 4G. The other carriers soon caught up and Sprint returned to losing customers. Today, Sprint, the only carrier still losing its most profitable subscribers, is i nve s t i ng heavily in its LTE rollout. With its new majority owner Softbank providing the capital and strategic direction, Sprint is lying low but preparing to launch a major growth campaign assuming the rumored merger with T-Mobile proves infeasible.
T-Mobile the Party Spoiler
In early 2013, T-Mobile launched its coming out party as the “Un-carrier”. By that time, it had restructured its management team, dramatically accelerated its LTE rollout, launched the iPhone and tapped financial markets via an IPO for extra cash. Thus newly armed, T-Mobile went to war. It launched new, highly aggressive rate plans, paired with handsets available via a financing structure. The financing structure was an important innovation as it departed dramatically from the subsidized model that dominated the industry at the time. This had the effect of reducing the cost of subscriber acquisition, the financial benefit of which was offset by the declining Average Revenue Per User (ARPU) from the more aggressive rate plans.
As a result of these and other aggressive actions,TMobile engineered a startling turnaround in subscriber trends and began growing revenue for the first time in years. More importantly, T-Mobile forced the other carriers to respond. All of them launched their own versions of T-Mobile’s “equipment installment plan” structure. This is fast becoming the standard offer in the industry, as all the other carriers are reporting that equipment financing is growing rapidly as a percentage of device sales. And, of course, this comes with significant dilution to ARPU as the financed handsets are tied to lower priced rate plans. As result, Verizon and AT&T have found themselves in recent months competing on service pricing for the first time in three tofour years. Furthermore, the path is now clearly marked for carriers to do what they’ve always wanted to do—to take the cost of the device off their books completely and put it firmly in the hands of the customer.
More Changes to Come
Thanks to the higher capital investment of recent years, the nationwide buildout of LTE is nearly complete for all four national carriers. The next step is pushing coverage and capacity ever further into homes and businesses so that every couch and office has access to speeds that will support HD video and the capacity to serve multiple users. This will be done through installation of “small cells” in buildings and in neighborhoods. This will bring with it a period in which the major wireless carriers will launch trials to see if their wireless networks can support true multichannel video offerings that compete directly with cable. AT&T’s recent announcement regarding DirecTV shows that this is the intent. Finally, with LTE as the underlying common standard, more and more devices will include wireless connectivity, creating the much discussed “internet of things” that brings yet another wave of new capabilities to consumers and businesses wherever they are.