Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
A critical question for wireless operators in the US is whether prospective customers of wide-area mobile data will treat the service as an undifferentiated service, as many do with their Internet service provider (ISP), or will they prefer subsidies for their mobile computing devices that come with a long term service contract. The stakes are large – the multi-billion dollar gamble that Sprint is making with its investment in Clearwire.
An essential element within the Clearwire business case is (they contend) that their target market does not want a subsidy and will want a lower monthly service price and no long term contract. This element is almost as critical as the other part of their plan to use WiMAX technology to leapfrog the cellular competition with higher speed technology. According to Barry West, president of Clearwire, “In order to keep costs down, you can’t subsidize the device.”
The problem is that it is not possible to be completely certain whether this important part of their business plan is accurate. Asking prospective customers about their preferences today about subsidies on mobile data devices for wide-area wireless services in the future is about as reliable as asking high school students what kind of job they want to do when they are adults. Many of us can attest that there are too many variables to get valid and actionable results. As a market research professional, it is important to be realistic about what questions you can answer through surveys. In the case of subsidies, we like to think that we would not be influenced by such merchandising tactics, but consumer behavior often shows otherwise.
This issue suddenly has relevance because RadioShack was the first US retailer to offer an Acer Aspire One, an ultra-mobile PC with a list price of $500 for $100 when purchased with a two-year agreement for a mobile data plan through AT&T Mobility. This deal expired on Dec. 24, to be replaced with a discounted price of $200 for a two year agreement. The monthly price of the mobile data service agreement is $60.
The subsidy for the initial promotion was nominally $400. More accurately, the subsidy was about $250 and is now about $150, as the “street price” for the Acer Aspire is in the mid-$300 range. This is the first time that a US cellular carrier has offered a full computing device, rather than an external modem at a subsidized price. The success or failure of the initiative is liable to affect the future complexion of the wireless industry.
Converging trends
The reason why the issue of subsidies is of great importance has to do with several trends that are converging that could change the competitive landscape. This is more than determining whether one US wireless operator (i.e., Sprint) gains a technological advantage, such as faster nominal speed and greater spectral efficiency, over its competition over the next few years.
The presence of a subsidy from a wireless operator has made a substantial difference in the acquisition of wireless handsets. We see a large increase in the rate of trial of wireless services when the handset is subsidized. This is true historically in the US, as handsets were not always subsidized. There is also slower adoption of wireless when you compare countries that prohibit the subsidization of handsets to countries that permit this practice.
If users make the shift to expecting subsidies for computing devices, it will have significant implications on the computing industry. If consumers take to having wireless operators subsidize their mobile computing devices, the wireless operators will grow in influence in the computing industry.
If subsidies do not make a difference, other for other than for a minority of users, then wireless operators will trend towards being a bit pipe provider. This shift will not come overnight. It will evolve over a decade. However, the change, one way or the other, is inexorable.
The rise of data
The basis for this conclusion is that mobile data is increasingly growing as a part of the revenue of cellular carriers. Cellular operators now report mobile data revenue as a separate line item. For example, AT&T’s third quarter 2008 earnings package was 20 pages. An entire page was devoted to their mobile data results that were up over 50% from the third quarter earning in 2007. Other operators have reported similar increases.
In the case of AT&T Mobility, almost one-quarter of their revenue is from mobile data, up from 18% the same quarter in the previous year. To put this in perspective, mobile data was about 3% of wireless revenue just a decade earlier.
It is over-simplistic to extrapolate these data trends to predict a date when mobile data revenue will exceed wireless voice revenue. However, the date will come in the next decade when the US wireless industry will see 25% of its revenue from wireless voice and 75% from mobile data. The price per minute for wireless voice services has been declining annually by double digits for years, while the use of cellular data has been booming. At some point in the not-too-distant future, wireless voice will become a promotional give-away to attract mobile data users.
If data subsidies become the norm for mobile devices, this will involve a shift in the distribution of laptops and ultra-mobile PCs. Wireless carriers and their authorized resellers will assume a greater role in the sale of computing devices that use wide-area wireless connectivity. The PC industry has seen a shift in its channels of distribution from PC retailers (CompUSA) towards big box stores (Best Buy), mail order (Dell), and other Internet-based solutions. Success of a subsidy would add wireless carriers to the available sales channel.
Before one dismisses this idea of most computing devices connected being sold through wide-area wireless network sales channels as folly, it is important to consider that global sales of smartphones have outpaced global sales of laptops since 2006. By that measure, wireless operators already connect to the majority of mobile computing devices.
Putting the entry-level Palm Centro in the same category as a high-end laptop may not seem “fair” to some. The point is that the wireless networks have experience in support data devices.
The presence of the multi-year contract in exchange for a subsidy has proven to be an effective tactic for handsets. However, it has not worked quite as well for external cellular modems. The issue with external cellular modems is that they, in themselves, do not cost much to begin with although the value is very high.
The question is whether users, both consumers and businesses, will make the cultural shift and become hooked on subsidies for devices. If this merchandising tactic of subsidies for wide-area wireless services does translate over to mobile computing devices, it will limit the success of Clearwire. Sprint is looking to leapfrog its cellular competitors. However, if they get this one issue wrong, then they will have allowed the other cellular carriers to buy time and catch up to WiMAX speeds and spectral efficiency with LTE.
On the other hand, Barry West of Clearwire may be spot on. US consumers have consistently resisted subsidies for their PCs in other scenarios. Over the past decade, many firms, both large and small, have launched programs to offer subsidized PCs. At one time or another, Prodigy, Best Buy, EarthLink, eMachines/Gateway, and Free-PC, has offered some variation of subsidized PC in exchange for some consideration, typically a long-term service contract. Either the subsidy program evaporated or the firm went out of busi
ness.
The challenge before WiMAX operators is to differentiate their mobile data service that lacks voice service. The current plan for Clearwire appears to be to achieve a critical mass of customers, using low price. Clearwire expects to win a price war by leveraging the higher spectral efficiency of WiMAX when compared to 3G data networks.
Cellular carriers can sustain a price battle until their investment in LTE technology levels the playing field. In the mean time, we will either see cellular carriers continue to grow as a sales channel for computing devices, substantial price wars for mobile data service, or both.
Questions or comments about this column? Contact Bill at [email protected]. Contact RCR Wireless at [email protected].