Analysts are a funny lot, sometimes they can put a spin on something or call attention to what should be a fairly obvious megatrend and it can cause a ruckus.
JP Morgan's Mike McCormack is an excellent example, writing:
"With high wireless penetration, more aggressive competition from prepaid, and the struggling economy as a backdrop, wireless subscriber growth at AT&T and Verizon continues to decline. After falling below 10% for the first time in more than five years last quarter, postpaid subscriber growth was 8.8% and 8.7% for AT&T and Verizon, respectively, in 1Q09. While postpaid add growth at AT&T has outperformed declines at Verizon, we believe the company is unlikely to duplicate its past success absent a meaningful product refresh from Apple (which would likely impact margins)."
Uh, yes. The US is a mature mobile market. There are only so many people in the country and many of those people and most of the ones who want mobile phones already have them. Once you reach the point where everyone who wants something already has it then double digit growth is going to be hard to achieve. The game then becomes a zero sum effort and your gains will come at the expense of your competition. These things should be obvious.
Sometimes, you find that the analysts can actually miss a pretty big trend, or at least be surprised when it rears up and bites them in the posterior:
"The move to devices driving subscriber behavior is disturbing, in our view, taking the carriers out of the driver’s seat and commoditizing the carrier’s networks."
Couple things here. One is that for the past several years, both the wireless operators and the OEMs have all realized that devices sell and that having sexy cool devices is of vital, critical importance, particularly in markets like North America where you find that phone and wireless service tend to come from the same place and that subsidized handsets are the rule rather than the exception. There is a reason why device makers feel an intense and burning need to get their devices to market in a hurry. In other markets, like Europe, where GSM has been dominant forever, the phone market is much more like the PC market here, there is no binding between AT&T or Comcast and your Dell or HP PC, your Nokia can work on any network and when it is time for an upgrade you can go to Carphone Warehouse, score a phone, pop your SIM in and be done.
In the US, where the subscriber has been trained to view the handset as being tied to the MNO, probably a mindset going back to the good ole days of the Western Electric Model 500 and before, where even the handset was viewed as belonging to the phone company. As an interesting aside, I know from personal experience that the Western Electric 1500, the touch tone replacement for the Model 500, was so well built that it would stop a .38 Special bullet at point blank range. I doubt that my HTC Raphael (or Touch Pro or Fuze) would do the same. Two year contracts and subsidies, where the wireless network operator pays for a big chunk of the handset up front, are a big part of this game. Of course it ends up being a contest on two levels, one being to have the least offensive plain phone for making phone calls at a close to zero dollar post-subsidy price and the other being to have the coolest possible phone at what has historically been about $200 post-subsidy, altough there are signs that this is moving in the direction of $100.
Clearly, with no unplowed, virgin fields remaining, there will be increased competition in mature markets, North America being one of them. There will be pressure to ship better devices, faster, cheaper with more bells and whistles. With many of these phones shipping with data capabilities, increasingly including things like email and web browsers that are actually worth using, savings are unlikely to come from reduced network utilization.
What are the operators going to do?
There are some, like us at InnoPath, who would say that there are a couple things that they can, should and in some cases already are doing that will help. One of the things that North American Tier 1s are already starting to do is to use FOTA (Firmware Over The Air) to fix bugs over the air. Long and short of it is that phones ship with bugs, and that complex phones with lots of features that are rushed to market may ship with a number of bugs. With FOTA, these bugs are easily fixed and fixed in a way that is transparent and easy to the subscriber. Saving the cost of recalls and returned devices can make a significant impact, in some cases $200 or more per incident.
Another thing that operators can do to help deteriorating margins is to enhance their customer care organizations with mobile device management. We have seen that support, particularly smartphone support, is hard and expensive to deliver well. Indeed, smartphones cost roughly 4x as much to support as their dumbphone cousins and the stakes for failing to deliver on support are higher too. With a dumbphone, maybe you lose a voice sub. With a smartphone, maybe you lose a high ARPU data services customer or leave a bunch of money on the table as the sub who never could get email or internet to work ends up cancelling data services which are not needed if email is broken. We have also seen the price that an operator can pay for treating support as a cost center - witness the example of the North American Tier 1 who fired its worse customers, only to find itself in a sea of churn. Better support, delivered in a more cost effective manner, ensuring that high ARPU services actually work, well, that sounds like something that would be real nice to have in a maturing market.
However, it is not just the mobile network operators who can benefit from this type of technology. You find that some OEMs are responsible for supporting their own devices. One noteworthy example is Apple, with the iPhone. Now that the iPhone has conquered the top of the smartphone market in the US, the only place left for growth is down, expanding into lower cost market segments. While this will help provide volume, there will be downward pressure on margins. When looking at millions of devices in North America alone, the ability to shave a couple minutes off every support call can start to look appealing. Apple isn't the only one, Nokia provides FOTA updates for some devices already and other OEMs are increasingly interested in OTA support and the advantages it can bring in terms of time to market and better end user experience.
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