Editor’s Note: Welcome to 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.
For this column, a simple economics lesson of supply and demand. Bear with me as I build this argument; we have to talk about the oil industry before getting to good ol’ wireless.
No doubt you have recently read the news about the plummeting price of oil. If you have not read the stories, you have certainly seen the benefit when you fill up at the pump. Basically, the price of oil has fallen from around $100 per barrel to less than $60. Obviously, the production costs for oil have not fallen as fast and many of the costs are fixed. Essentially, the demand for oil is uneven, since many of the world’s economies are still recovering from the recession (or still in it). In recession, countries use less oil (fewer people commuting to work, etc.), but as they recover, the demand for oil will increase.
The Organization of the Petroleum Exporting Countries can influence the price of oil by turning the tap on or off. If the price of oil is too high (which can constrain economic growth), then OPEC pumps more black stuff out of the ground and the price stabilizes or falls. When the price drops due to a slow in demand (as is the situation now), OPEC can cut production, constraining supply and thereby increasing the price of oil. Simple supply and demand.
What is different this time is that as the price of oil has fallen recently, OPEC decided a few weeks ago not to turn off the taps and kept the supply high. This has pushed the price of oil lower. Why are they doing this? Mainly because in the last few years, new oil supplies have been realized (especially in North America) through fracking. New technology allows oil to be extracted from shale – hence the “new” oil fields in the Dakotas, Texas, etc. But shale oil is expensive to extract, meaning that a high oil price is needed to maintain the fracking industry.
The other issue is that OPEC is formed of countries with big companies producing oil that have very deep pockets; think of the sovereign wealth funds that have been established by oil over the last 40 years. Fracking is typically supported by smaller oil companies (although the big companies are involved) that have gained a reputation as being more “wild cat” in nature. These companies do not have deep pockets and endless resources. Hence, by forcing the price of oil low, OPEC is basically testing these companies to see how long they can last. The longer the price of oil stays low, the more small companies will cease operation or go out of business and when demand for oil increases again, OPEC will have increased its market share.
So what does this have to do with the wireless industry? AT&T and Verizon Communications have deep pockets and the majority of the wireless market share in the U.S. Their networks are big and getting bigger, they have extensive business operations and offer home TV and Internet services. Their marketing budgets rival the gross domestic products of some small countries. They have strong negotiating positions with vendors and suppliers. And they employ a couple-hundred-thousand people.
Sprint and T-Mobile US are wireless-only operations, have networks that are either being extended or rebuilt and each have less than half the number of subscribers of Verizon Wireless or AT&T Mobility. But they, especially T-Mobile US, have been causing trouble recently by dropping prices, increasing data buckets and changing the economics of the wireless industry for the consumer. Few will be surprised to see T-Mobile US take over the No. 3 spot from Sprint in the fourth quarter.
So back to our oil analogy: AT&T and Verizon are OPEC in this scenario. They have the majority of the market share, deep pockets and are under some threat from the frackers – Sprint and especially T-Mobile US. T-Mobile US and Sprint have dropped prices; AT&T Mobility and Verizon Wireless have been forced to respond, which has impacted their economics. But AT&T Mobility and Verizon Wireless have also taken the lead on some pricing initiatives. For example, AT&T Mobility has offered special incentives that vastly increase the amount of data offered for a few extra dollars.
Just as OPEC can wait out the frackers, AT&T Mobility and Verizon Wireless can play the pricing and value game for longer than T-Mobile US and Sprint. This is essentially a game of dare – how low dare you go with pricing? And for how long can you keep prices low before you have to start getting a return on those expensive network investments? AT&T Mobility and Verizon Wireless, just like OPEC, have slowed their capital spend in some areas, but keep improving their LTE networks. Sprint and T-Mobile US are investing in network and trying to grab market share from the “big two” so that when prices stabilize they can improve their economics. The question is, as with the fracking operations in the Dakotas, how long can they last in the face of OPEC pressure?
Iain Gillott, the founder and president of iGR, is an acknowledged wireless and mobile industry authority and an accomplished presenter. Gillott has been involved in the wireless industry, as both a vendor and analyst, for more than 20 years. IGR was founded in 2000 as iGillottResearch in order to provide in-depth market analysis and data focused exclusively on the wireless and mobile industry. Before founding iGR, Gillott was a group VP in IDC’s telecommunications practice, managing IDC’s worldwide research on wireless and mobile communications and Internet access, telecom brands, residential and small business telecommunications and telecom billing services. Prior to joining IDC, Gillott was in various technical roles and a proposal manager at EDS (now Hewlett-Packard), responsible for preparing new business proposals to wireless and mobile operators.
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