Friday, May 5, 2017

Big shifts in the U.S. mobile market – Part 1

It has been a very eventful start to the year for U.S. mobile operators. As the first quarter financials reports have rolled in over the past two weeks, it is clear the two top tier players, AT&T and Verizon, are increasingly under pressure from the No.3 and No.4 contenders, Sprint and T-Mobile US. All four operators offer virtually the same set of services, delivered to same handsets with roughly equivalent levels of performance in most places. So it is no wonder the battle is now primarily about price.

After years of rather stagnant market positions and services, suddenly a lot is happening in the U.S. mobile market. While there have not yet been any moves this year to consolidate four players to three, nor a full commitment from a cloud company (such as AWS, Google or Microsoft) to enter and lead in wireless, the 2017 battlefield differs from 2016 in the following respects:

·         The move to 'unlimited' data plans.

·         A new regulatory climate and the pending super merger of AT&T and Time Warner.

·         A quickly shifting spectrum map.

·         The FirstNet emergency responder network project finally ready to move ahead.

·         5G trials, setting the stage for the first commercial rollouts starts to take shape.

·         Carriers actively deploying virtualised network architectures, setting the stage for new services.

One could also add the rollout LTE-M to support the first significant wave of connected things to the list, but that is a topic on its own.

The move to unlimited data plans

With reports of mounting subscriber losses to T-Mobile and Sprint, on February 12th Verizon unveiled an Unlimited mobile data plan for smartphones and tablets on its LTE network (the plan also covers HD video streaming, Mobile Hotspot, calling and texting to Mexico and Canada and up to 500 Mbytes/day of 4G LTE roaming in Mexico and Canada, but subscribers may encounter throttling after 22 Gbytes of data usage on a line during any billing cycle). A day after Verizon announced its re-entry into unlimited mobile data plans, T-Mobile responded the addition of HD video and 10 Gbytes high-speed Mobile Hotspot data to its T-Mobile ONE unlimited plan. T-Mobile also introduced a new offer of two lines on T-Mobile ONE for $100.

In turn, this was quickly followed by AT&T, which begin offering a post-paid, unlimited mobile plan to consumers and business customers without requiring a DirecTV subscription. Under pressure from Steve Jobs, AT&T famously offered an unlimited data plan for the original iPhone, but in later years moved to tiered service. On the same day, Sprint fired back with a price cut that it says makes its service 50% cheaper than AT&T or Verizon. Sprint has been advertising heavily that its network quality/performance is 'within 1%' of the industry leader. The Sprint unlimited plan offers four lines for $22.50 each, with HD-quality video, 10 Gbytes mobile hotspot per line and an iPhone 7 lease included.

While the 'unlimited' data plans do not make sense for all customers, they do point to a future market that is quite familiar. Over time, telecom carriers have been forced to drop per-minute charges for voice calling, then for long-distance voice calling, and then for SMS. Some of this can be attributed to over-the-top services like Skype and Messenger, but there is also the case that the overall carrying capacity of the network has increased so much that this is really no incremental burden for carrying an additional text message. There is plenty of bandwidth available for these applications and the cost of billing for each transaction may not be worth while - retaining customers is a higher priority than high granularity billing. So it seems we are moving toward a market where mobile bandwidth consumption for the majority of subscribers will be 'unlimited', even if throttling occurs on some applications during peak hours or busy locations.

New regulatory climate puts media partnerships in play

The arrival of the Trump administration was certain to bring changes to the FCC. This came quickly with the nomination and subsequent confirmation of Ajit Pai as chairman of the FCC. Within 2 weeks, the FCC's Wireless Telecommunications Bureau ended its investigation into wireless carriers' free data offerings. The special video bundles, which Pai noted to be popular with consumers, enable smartphone customers to view select content without consuming data allowances on their mobile plans. Net neutrality was concerned that such offerings meant that the preferential treatment of some content would place other content providers at a competitive disadvantage. Mobile operators need not worry about FCC oversight here anymore.

With the move to 'unlimited' data plans, mobile operators will be incentivised to cache preferred content as close to the subscriber as possible. AT&T’s DirecTV content partnerships could prove valuable here, while its pending acquisition of Time Warner, announced in October 2016 at a whopping transaction value of $108 billion, could be a game changer. Time Warner, formed in 1990 through the merger of Time Inc. and Warner Communications, encompasses several premium media properties including HBO, New Line Cinema, Turner Broadcasting System, The CW Television Network, Warner Bros., CNN, Cartoon Network, Boomerang, Adult Swim, DC Comics, Warner Bros. Animation, Castle Rock Entertainment, Cartoon Network Studios, Esporte Interativo, Hanna-Barbera Productions and Interactive Entertainment. It also owns 10% of Hulu.

Two other big regulatory events in Q1 made this the most Significant quarter at the FCC in years: the FCC’s Broadcast Incentive Auction (see below) and Ajit Pai’s decision to reverse the Title II Net Neutrality rules adopted in 2015. Pai described the Title II rules as a 'regulatory mistake' that slowed down telecom infrastructure spending in the U.S. by 5.6% percent, or $3.6 billion, between 2014 and 2016 for just the top 12 Internet service providers.

One of the key Net Neutrality principles was 'no paid prioritisation' for favoured content. With this out of the way, the regulatory environment would also tend to favour operators with media partnerships. No wonder Verizon's CEO Lowell McAdams was quoted in April as saying the company was open to the possibility of transformative transactions. Perhaps there will be other Time Warner-scale deals coming to the fore. However, one should not take it for granted that these mega mergers will clear all regulatory environments even under the Trump administration. The issue could easily get ensnared in Trump's personal war against the media and 'fake news' companies.

There is a counter argument to the idea that paid prioritisation will rule the market. The impact of the cloud company has not yet been fully felt. Clearly, content and applications are consolidating to the big clouds, each of which is highly motivated to ensure the best possible performance. AWS, for instance, runs its CloudFront content delivery network (CDN), which accelerates websites and video content. CloudFront currently has 85 locations, including 74 PoPs, and a long list of top-tier customers and brands. Even if a carrier such as AT&T develops a special set of HBO videos for its customers under a zero-rating plan, it would still have the business motivation to ensure excellent connections with the AWS PoPs.

Part 2 of this article will look at additional forces reshaping the U.S. mobile industry, including the $10 billion broadcast spectrum auction, the big FirstNet project, early moves in 5G, the shift to network virtualisation, and other trends.

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