Tillman Elser, Isabelle Nunberg, Nikkita Mehta, Julie Greenberg

WIRELESS TELECOMMUNICATIO

N CARRIERS

The Industry• General Background• Consumers• Main Players• Competition

Pricing Strategies• Bundling and Versioning• Three Part Tariff• Network Externalities• Tacit Collusion• Penalty Pricing

• Discounts• Cell phone pricing

Recommendations• Investments

AGENDA

THE INDUSTRY

• - General Background• - Consumers• - Main Players• - Competition

Wireless voice communication

Text Messaging services (SMS)

Advanced PCS (personal communication services)

Other data servicesOther wireless

services

PRIMARY PRODUCTS

Lower pricing -> competitive advantage over wired services

Consumers embracing newer/more expensive technology

Retail presence decreasing in importance

INDUSTRY SNAPSHOT

IBISWorld

Corporate clients (15%) Stable market characterized by long term contracts and predictable

patterns of usage Most concerned with reliability (voice) and speed (data) Big target for 4G technology

Small/Medium Businesses (30%) Laptop data plans and fixed mobile services attractive to this market

General consumer/residential clients (55%) Most price sensitive Demand growing fastest in this group

PRIMARY CONSUMERS

Heterogeneous preferences for cell phone usageHigh useLow useFocus on DataFocus on VoiceFocus on Text

vs

DIFFERENTIATION AMONG CONSUMERS

WHY PRICING BEYOND MINUTES IS IMPORTANT.

24.8% - Cost of service

14.5% - Depreciation12.5% - Equipment

Purchases8.4% - Wages5.9% - Advertising6.7% - Rent/Utilities

fees6.5% - Profit~20% other expenses

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

EXPENSES BREAKDOWN

1G Analog, usage stopped in 2008

2G Basic voice and data functionality Popularity declining as newer standards develop 14.4Kb/s

2.5G Stepping Stone from 2G to 3G 50-150Kb/s speed Wireless Application Protocol (WAP) mobile Internet as well as

MMS Most advanced iteration of 2.5G is the EDGE network (AT&T/T-

Mobile) 200-1000Kb/s

NETWORK TECHNOLOGY

3G Current standard among smartphones Beginning to assume market dominance from

2G and 2.5G Speeds of 300-600Kb/s

3.5G Middle ground between 3G and 4G Speeds up to 14.4Mb/s AT&T/T-Mobile

4G Epitomizes shift from voice to data among

telecommunications carriers Conflict between WiMax (Sprint) and LTE

(Verizon) standards Speeds up to 100Mb/s for mobile devices

(1Gb/s for stationary devices)

NETWORK TECHNOLOGY (CONT.)

MARKET CONCENTRATION

Trends of M&AMethod to gain subscribers and

coverage Saturated market: harder to build

new customer baseEconomies of scale

Higher margins and available capital enable firms to invest in their networks and services

MARKET CONCENTRATION

Top 4 Firms Market Shares: Verizon Wireless: 33.4% AT&T Inc.: 31.2% Sprint Nextel Corporation: 16.2% Deutsche Telekom AG (T-Mobile): 11.0%

CR4 = 91.8 HHI = 2472.44

33.4% of market (market leader)Part of Verizon Communications– VW

contributes almost 2/3 of revenueOriginally merger of three companiesAcquired Alltel in 2009 to give VW largest

market share in industryNow transitioning to 4G LTERevenue growth of 11.7% annually over past 5

yearsIn 2011, expected to generate $66.1 billion in

revenue and net income of over $4.4 billion

VERIZON WIRELESS

31.2% of marketLargest market share until Verizon-Alltel mergerStarted as joint venture called Cingular WirelessIn 2006, AT&T acquired both companies and

became AT&T Inc. AT&T wireless contributes to ½ of company

revenuePlans to acquire T-Mobile within next 12 monthsProblem of congestion on data networksRevenue growth of 10.3% annually over past 5

yearsIn 2011, expected to generate $61 billion in

revenue and net income of $16.5 billion

AT&T INC.

16.2% of marketSprint and Nextel merged in 2005Only major company losing subscribersBacks WiMax instead of LTE for 4G

networkAnnual revenue decline of 4.1% and has

failed to turn a profit since 2006

SPRINT NEXTEL CORPORATION

11% of marketBrand of Deutsche Telekom AG in USFirst wireless carrier to offer Android phonesLarge carrier of WiFi with T-Mobile Hot SpotsPlans for AT&T to acquire T-MobileIn 2011, will generate $28.2 billion in

revenue and net income of $1.8 billion

T-MOBILE

COMPETITION

HIGHEST in whole telecommunications sector WHY? Churn rate of 1.5% to 3.5%

per month

Types: Price Service offerings & quality

of service Product innovation Network dependability and

call quality Marketing strategies Geographic coverage

Firms all off er similar products, coverage, and services price competition is vital Try to undercut competition

Discounts, network externalities, etc.

Partly enabled by recent M&A activity by improving fi rms’ economies of scale

COMPETITION:PRICING

Service becomes important weapon in the industry as customers increasingly value reliability and attention High investment in upgraded technologies and networks Customer service becomes vital in gaining customer

loyalty and reducing churn rates Expansion of service offerings: “one-stop” bundles

Telecommunications Act of 1996

COMPETITION:SERVICE OFFERINGS & QUALITY OF SERVICES

New technologies incredibly useful in increasing usage, margins, and customer base Short life cycles for products and applications New technology includes:

E-mail GPS mapping TV feeds E-commerce . . .

3G 4G

COMPETITION:PRODUCT INNOVATION

Promotional tactics Rebates, discounts, etc

Advertising Supply side: Combative advertising

Mature market; goal is to shift consumer demand toward advertising firm but not expanding consumer demand

Demand side Persuasive: alters consumers tastes based on service providers’

attributes, strengthens barriers to entry especially in industry with economies of scale

Complementary: appeals to “social prestige” with new phones, appeals to attributes complementary to use (coverage, overage, etc.)

COMPETITION:MARKETING STRATEGIES

Ultimate goal: maximum US nationwide coverage Enables furthering economies of scale and higher effi ciency

Over 277 million Americans (approx. 91%) can choose between three or more providers while 250 million of those Americans (approx. 82%) can choose between only top four

COMPETITION:GEOGRAPHIC COVERAGE

Mobile virtual network operators (MVNOs) Companies that purchase

airtime from a major wireless network then resell it with their own logo

Increasing as communications and media leaders have recognized potential growthMobile strategies developed by Comcast and Time Warner Cable

Google looked into bidding in 700MHz auction in 2008

EXTERNAL COMPETITION

BARRIERS TO ENTRY

Barriers to entry are high and increasing primarily due to…

Regulating spectrum scarcity

High costsMarket saturation

Spectrum scarcity refers to a finite number of companies being able to operate cellular/PCS services with a designated geographic location and frequency Distributed through licenses within a specified area Closed to new entrants until next auction Cost at time of auction is high; over $19 billion was spent in

2008 700 MHz auction

BARRIER:SPECTRUM SCARCITY REGULATIONS

High initial costs Base stations, towers, and other necessary infrastructure

reaches the billionsCosts of R&D and other investments

Dependency on product innovation and up-to-date technologies

Marketing strategies

BARRIER:HIGH COSTS

Existing fi rms already established their strong positions Cost advantages due to

economies of scale Ability to spread expenses

over large customer base “one-stop” bundles

differentiate from pure wireless providers and reduce churn rates

Slowing growth in customer base

BARRIER:MARKET SATURATION

• - Bundling and Versioning• - Three Part Tariff• - Network Externalities• - Tacit Collusion• - Penalty Pricing• - Discounts• - cell phones

PRICING STRATEGIES

Feature bundling on cell phones -> facilitates feature bundling on contracts Customers pushed onto smart phones Increases access to additional features

Versioning Family plan vs Individual plan

Extensive bundling seen in cell phone plans Considerable variance between companies Common themes: Avoid pure bundling, target

heterogeneous preferences

BUNDLING AND VERSIONING

Focus on mixed bundling

Most profi table bundles listed more prominently

In some cases, no price diff erence between bundled and non bundled services

Customer ‘opts-in’ to services

AT&T

Pure and mixed bundling

Similar services grouped together

Customer forced to ‘opt-out’ of some services

Fewer options than AT&T, but stil l many additional services off ered

Minutes and text packages off ered as initial service bundles Can also add text

package after choosing minutes

VERIZON

Lower utilization of mixed bundling, focus on pure bundles

Customer required to opt-in to several free services

Huge number of bundles -> confusion pricing

T-MOBILE

Focus on pure bundling

Search obfuscation used more prominently (‘premium data add-on)

Fewest additional service options

SPRINT

Monthly fee and per minute feeNow, mostly three-part tariffs: monthly

fee with included minutes but high overage fee

Customers choose three-part tariff over two-part tariff because of flat-rate bias

Most customers underestimate usage (use only half of minutes allowable on average)

Those that do exceed allowance, exceed by 40% on average

THREE-PART TARIFFS

Many versions so consumer surplus extracted from those less willing to search for correct plan

Customers underestimate uncertainty about usage (overconfidence) by 81% and underestimate volatility of usage (projection bias) by 57%

When first signing up, average customer underestimates usage by 40%

Companies gain an average of $60 per customerSlow to correct mistake and switch planAT&T “rollover” plan targets sophisticated

consumers who understand that usage changes monthly

CONFUSION PRICING

PLANS AND ADD-ONS

AT&T VerizonT-Mobile Sprint0

5

10

15

20

25

30

PlansAdd-Ons

Companies create network externalities as an incentive to gain new customers Free texting within Verizon network Free minutes within all networks

Only significant after critical mass reached

Customers benefit from others on the same network

The greater the size of the network, the greater the benefit to user

NETWORK EXTERNALITIES

How does it work? Industry is an oligopoly

Top four firms dominate almost the entire market

Homogenous products Same phone (e.g. iPhone from AT&T or

Verizon?), data services (text, e-mail, etc) Agreement on price is easier to come by

and cheating is easier to catch

Nondurable goods Less incentive to cheat because it is a

one-time sale product rather than a product from which sellers could gain a series of sales

TACIT COLLUSION

Service providers typically pre-announce rate changes they plan on implementingAdvanced notice gives competing firms time to respond

Can test the market and competitors

TACIT COLLUSION:PRE-ANNOUNCED RATE CHANGES

Rate changes in the industry have been high and infrequent, yet coordinated across all four fi rms FOCUS: Text Messages

Supply is almost unlimited so in a competitive market prices should decrease not increase over time Since 2005 price per text has doubled.

IBISworld Service providers do not claim that these

increases were driven by higher costs so other methods must be at work.

Doubling of prices pushes prices from inelastic portion of demand curve to elastic portion to capture unrealized revenue

TACIT COLLUSION:INFREQUENT HIGH CHANGES IN RATES

Underestimates

Overconfident

Unattentive

PENALTY PRICING: THE “TYPICAL” CONSUMER

• Barriers of Adoption

• Unpredictability of use

• Profi t Margin due to over and under usage.

Minutes

Verizon.40-.45

T-Mobile.45

Sprint.40-.45

AT&T.40-.45

SMS/MMS

Verizon.20/.25

T-Mobile.20

Sprint.20/.25

AT&T.20/.30

Sources: VerizonWireless.comATT.comSprint.comT-mobile.com

THE FEES:

About 16.5 million people exceed their cell phone minutes every month in the US (according to cellknight.com)

In 2005, Minute-Watch.com show that if the average family took their cell phone overage charges and invested them in a standard index mutual fund (yielding 10.65%) for 22 years, they would have over $19,500 - enough to send a child to many state colleges for two years.

AN IDEA…NUMBERS WISE

Penetrative

Competitive

Permanent

DISCOUNTING

Advertized coverage All claim

GREAT reception.

What drives consumers to pick one over the other?

VERIZON VS. AT&T IN ITHACA

Sprint(above) Verizon(below)

T-Mobile(above) AT&T(below)

Peak and Off-Peak Pricing Incentive to reduce the quantity of users on the network at high times and spread them out over other times which saves them infrastructure costs and prevents overloads

Started out as different rates for different times Evolved to the free

nights and weekends

• Fast growing

AT&T Data network

• Sole control of the iPhone market and large option of data phones

Too high usage

• Not prepared for such high usageNetwork

Crash

• Grandfathering the previous plans

Eliminate Unlimited plans as a new option

CELL PHONE MANUFACTURER MARKET

BundlingTying

ContractSpecific plans/add-ons

Inter-temporal price discrimination

Network Externalities

Subsidized

CELL PHONES AS A PRICING STRATEGY

INVESTMENT AND RECOMMENDATIONS

Venture Capitalist High barriers to entry Competitive advantage of established firms enter market as a (Mobile Virtual Network Operator) Focus on attractive data packages

Stock Market Analyst Voice and SMS capabilities and prices maturing Future success dependent on 4G deployment

Verizon: Invest

INVESTMENT

Race to 4G Carrier with the most comprehensive 4G network secures a

substantial competitive advantageUtilize Network Externalities Data usage

Data usage within network free (non unlimited plans) iPhone live?

Subsidize Consumers more willing to accept expensive plans when

high tech smart phones more accessibleReach for the Cloud(s)

Improvements in networks’ data capabilities Cloud computing

Huge potential market, especially among corporate clients Further use of network externality

RECOMMENDATIONS

http://www.ashworthcreative.com/blog/wp-content/uploads/2011/02/cellphone_usage.jpg

QUESTIONS/INFOGRAPHIC