Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
It almost goes without saying, but our communications world has changed a lot over the past 2-3 years. Mobile phones from Apple Inc. (AAPL) and those powered by Google Inc.’s (GOOG) Android operating system launched new levels of data usage, and adoption of short messaging services (known to most as texting) on a stand-alone basis or through Twitter has been significant. But what about voice? Is there growth left in that category, particularly in the post-paid/contract base of the largest carriers? Can changes in voice strategy impact 2010 and 2011 earnings?
Talking about voice plans is boring. It harkens back to the days of Ma Bell (interestingly enough, one of the features of the voice plans on AT&T Mobility’s (T) website is that “there are no long distance or roaming charges on our plans.” Long distance – really?). It’s what is old about the wireless industry. It doesn’t sell more Droids. And voice doesn’t have a logo like Twitter, Facebook, or (gasp) Skype. Can’t we go back to talking about data.
Voice, however, must be addressed in 2010/2011 strategies. Why?
1. It’s the majority of revenues. While boring, voice pays the bills. Take a typical post-paid customer. The foundation of that bill is voice – likely $40 per month minimum “entrance fee” unless they are on a family plan. Even with the entry of Leap Wireless International Inc.’s (LEAP) Cricket and MetroPCS Communications Inc. (PCS) services, the voice foundation continues to hold.
2. Because of data and texting products, voice volumes are falling. This means that voice profitability is increasing every month, even with minute rollover, even with in-network calling. Let’s go back to the $40 per month plan. Assuming it covers 500 anytime minutes, a large if not unlimited bucket of night and weekend minutes, and in-network calling, it’s likely to generate somewhere around 900-1,200 total minutes per individual user. That equates to 3.3 cents to 4.4 cents per minute yield. Compare that yield to Wal-Mart Stores Inc.’s (WMT) implied yield for their StraightTalk “lite” product which is somewhere around 2 cents per minute. And, as we know, StraightTalk uses the same post-paid carrier networks as those higher yielding products. It’s safe to say that a post-paid margin on voice is high, and growing higher each day. That’s a harder margin to replace with data as volumes continue to grow.
3. The free phone as a voice lure is dead. It used to be that a couple of well-placed Nokia Corp. (NOK, Sanyo Corp., Morotola Inc. (MOT) or Sony Ericsson candy bar or flip phones would lure customers into adopting wireless services. And it worked – four years ago. Now, nearly every feature phone and many smart phones are available for free with a two-year contract. Who wants a clamshell-shaped dialer when you can have a keyboard? And is Wal-Mart’s free more attractive than Sprint Nextel Corp.’s (S)?
4. Voice costs are also falling, thanks to the wireless “network effect.” Go back to the 900-1,200 minutes from the earlier point. Those minutes primarily terminated to landline phones, generating big profits for the traditional telephone divisions of AT&T Inc. and Verizon Communications Inc. (VZ) (terminating access revenues, particularly for out of region minutes, generated lots of cash). That is no longer the case. Let’s assume that four years ago (pre cord cutting, pre app revolution, pre mobile-to-mobile marketing) the minutes terminated at a 60/40 clip, with 60% representing minutes terminating to others and 40% representing in-network or mobile-terminating minutes. The 540 to 720 off-net minutes now falls to 360 to 480 minutes (assuming that the 60/40 now shifts to 40/60). That 180 to 240 minute change represents about $1 in cash cost per user savings for each post-paid user in the network, simply from the “network effect.” On a $40 plan, that’s an additional 2.5% of operating margin, and, for a post-paid base the size of Verizon Wireless, that’s an additional $1 billion in cost savings.
5. For some carriers, more voice relevance equates to more roaming revenues. Roaming revenues are the least talked about part of the wireless business but, on a per-minute basis, carry the greatest profit margins. As behavior changes and networks expand, roaming revenues come under increasing pressure. Less talkers = less voice roaming revenues. U.S. Cellular Corp.’s (USM) recent earnings announcement clearly shows their dependence on roaming revenues and profits. It’s a second-level effect, but preserving talking as a behavior helps this small but very profitable revenue stream.
With many options (free phones, in-network calling, and calling circles) gone or already in play, what can rejuvenate the voice market? Here are some ideas:
1. Make conference calling easier for business customers. Many of you remember the Google Voice flap from last year, and loyal Google Voice users know that they continue to block calls to many Free Conference sites. I still scratch my head that the carriers haven’t banded together to collectively solve this issue. If conference line minutes from a particular service were included in my plan (call it Google Group Connect or Microsoft Meeting), would I continue to call these services? What if instead of playing the theme to the “Pink Panther,” you played an ad for Southwest Airlines or ESPN Sports Center while I waited on hold for the conference to start? Conference calling has economics that are closer to mobile-to-mobile/on-network than off-net. Also, this would significantly reduce access expenses to the free conference callers (which costs the carriers tens of millions of dollars each month). It’s an easy product to implement, and requires voice (not over the top VoIP) to be viable. (By the way, Sprint Nextel had a product in the marketplace that addressed this issue, but seems to have stopped the Sprint PCS to Audio Conferencing product.
2. Offer deeply discounted landline service on wireless plans above $XX. This could apply to either businesses or consumers, and could take many forms. The landline/wireless bundle hasn’t taken off except in a few instances (CBeyond’s innovative structure for small business T1 is a prime example of bundle effectiveness). Would I keep my home phone and mobile plan for an additional $10 per month? What if that local line were connected through a free femtocell that also improved mobile coverage? Wireless and wireline voice bundles, particularly for consumers and small businesses, have struggled to take flight. In-building coverage continues to be problematic for data and voice regardless of the network. Cable will not go away with their more ubiquitous bundles. There’s a solution here for the taking.
3. Make it easy to discover and identify others in an increasingly mobile world. Imagine if my friends at Amazon.com Inc. (a href=http://stocks.rcrnews.com/rcrwireless./quote?Symbol=AMZN target=_blank>AMZN) introduced the Kindle without the Amazon Store. Ridiculous. Or LinkedIn identified messages from some arcane member number (like the CompuServe and Prodigy e-mail addresses of old) as opposed to a name. Ludicrous. That’s what the mobile industry is doing today without a common directory service. The Kindle was successful because of its ability to immediately satisfy my need for a periodical or book. It’s why their vision is “Download books, anytime, anywhere in less than 60 seconds.” Sony Corp.’s (SNE) e-reader satisfied electronic reading needs long before Kindle, but Amazon brought its customer base an immediate gratification to the masses. Mobile Symmetry is trying to fulfill that vision for Mobile Directories. The same applies to display. Our research shows that only 20% of individuals answer their phone when the display reads “unknown caller.” The rest of the individuals let it roll to voice mail. Data networks now allow for immediate gratification – catch up with the times, make it an opt-in database to protect privacy, and make Mobile Symmetry a reality. Be the Kindle, not the Sony E-Reader. Be LinkedIn, not CompuServe.
Voice can be more relevant. There is more growth beyond StraightTalk. But carriers will need to cooperate to make these solutions work. Otherwise, at least half of their revenue will be out-apped in the next five years. More on this topic next week.
On a side note I want to thank you for all of the offers (and subsequent actions) to help get Mobile Symmetry off to a strong start. We are quickly nearing the finish line, and I’ll need all of the help I can get in September and October. If you have a group that would like to Beta the product, please drop me a note at [email protected] Our team has become quite good at testing – just a couple more weeks left to go.
Your thoughts and suggestions are always welcome.
Jim Patterson is CEO & co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. He was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. He welcomes your comments [email protected]