Predicting the Market for Wireless Services

by Eddie Hold
Vice President and Research Director, Wireless Services
January 6, 2006

The advent of a New Year always brings the urge for resolutions, be they personal or business focused. While the major wireless operators hopefully didn’t wait till the ball dropped to decide what their New Year plans should be, the below provides a list of what we expect to be near the top of most agendas within the wireless world. While the ill-effects of New Year celebrations should now only be a dim and distant memory, many operators will be facing a far more challenging market more prone to have one reaching for the pain killers. With increased competition in the shape of upstart MVNOs, and a relatively saturated consumer base (more than 65% of the US population has already bought into the wireless dream) carriers will need to innovate in order to maintain their current market position. To make matters more interesting, it seems likely that the retail status quo may begin to see a shake up with handset manufacturers looking to sell outside of the strict confines of the mobile operator, and retail big box players looking to expand their focus on wireless sales. All told, this could be a very interesting year.

1. Voice Pricing War

The holiday season has always been a time of giving for the major mobile operators, with more minutes for the buck. December 2005 was no exception to this with Cingular adopting a T-Mobile-esque pricing strategy (1500 anytime minutes, plus unlimited mobile to mobile for $49.99). However, unlike previous years, when three quarters of the year are spent in relative harmony, restricting the highly aggressive pricing moves to the silly season of the holidays, expect 2006 to bring with it increased price jockeying. The launch of new MVNOs, such as ESPN Mobile and Amp’d increase the competitive nature of the market, but more importantly, the narrowing lead that Cingular holds on to in terms of subscribers - Cingular, Verizon Wireless and Sprint are all jockeying for the number one slot this year – may lead to some highly aggressive moves but one or all. At the same time, T-Mobile, which consistently enjoys high subscriber growth, has improved its network thanks to 850 MHz roaming deals and can now begin to position itself even more aggressively.

2. The Fallacy of Four-play

Four-play (also known as quadruple play) is the bundling of fixed line voice services (local and long distance), wireless and video. 2005 was supposedly the darling year for this to take off, but as with triple play before it (the idea, but without video) little real evidence emerged that it has been any more of a success than in previous years. Indeed, while Sprint has signed up with cable companies to launch four-play solutions, other carriers such as Alltel have taken the opposite tack, spinning off the wireline side to focus on being a wireless company. 2006 is unlikely to see Four-Play become any more of a success, as consumers remain leery of tying into the same operator for both wireless and wireline solutions. As a result, while the four-play (and triple play) concepts will continue to be pushed by the wireline parents, consumers will continue to purchase the wireless component as a distinctly separate purchase, and not necessarily with allegiance to their provider of wireline services.

3. Wireless Replacement of Fixed Line Voice Service

Wireless operators that are not shackled to the interests of fixed line parents will begin to focus on integrated, home-based voice solutions leveraging Wi-Fi, or similar solutions, to provide unlimited calls from the home via a broadband connection. Such a solution enables wireless to strengthen its hold on the consumer purse, as well as guaranteeing strong signal coverage within the home, thanks to the Wi-Fi box and its locality within the home. By so doing, these operators (T-Mobile being an obvious candidate for such a solution) will expand their sphere of competition beyond a pure wireless play and will instead become a significant threat to the fixed line parents of carriers such as Verizon Wireless and Cingular.

4. The Third Screen Mantra

Convergence between fixed and wireless services within the home will focus less on the voice component (see “The Fallacy of Four-Play above), instead concentrating on providing a converged solution for data services such as video. Clearly this began in 2005 with the launch of Verizon Wireless’s VCAST and the later launch of Sprint’s Power Vision. However, these are relatively limited solutions with a paltry array of compelling content at this time. 2006 will be the year of movie deals and TV syndication arrangements between mobile operators and the networks. Amp’d Mobile, for one, is aggressively focused on this area, and the major incumbent operators are following a similar path. However, the real key to success in this area will be the unification of DVR solutions with mobile devices, allowing the customer to view recorded programs on multiple devices, be it an iPod, a mobile phone or (of course) the computer and big screen TV at home. Tivo is already working on such a solution for iPod users and – barring the obvious and rather thorny issues of re-purposing copyrighted material – you can expect to see this type of solution hit the markets by mid year. Sprint announced a similar concept when it announced the Cable Company joint venture in November 2005.

5. Music Enters the Big Time for Wireless Devices

Last year saw the emergence of nascent music services deployed on wireless devices. The first real step in this direction was the launch of Motorola’s ROKR device, using iTunes as the music interface of choice. Widely anticipated, and then almost universally dismissed as a lackluster device of limited value, the ROKR nether the less heralded the mobile operators’ intention to add yet another tool to the mobile phone. Follow-ups to this first start include the addition of iTunes to the RAZR phone. More importantly, Sprint launched a music download service, allowing customers to buy music while on the go. However, at $2.50 a tune, this launch too failed to truly hit the mark with consumers. This year will see a flurry of activity within the music arena with operators vying for consumer attention. Amp’d Mobile, the MVNO upstart, looks set to bring music to a more realistic price point, with a rumored $0.99 per tune – in line with computer-based music download services. This will force other operators to take a fresh look at their own pricing, as well as how they can meet consumer needs while still squeezing out a profit at the same time.

6. Big Box Retailers Become More Independently Focused

It may be a little premature to consider the role of the Big Box retailers within the arena of wireless distribution. However, it is likely that 2006 will see the first baby steps on a road to greater independence from the mobile operators whose wares the Big Box providers sell. The mobile operators are currently both the product source and the greatest competition for the Big Box retailers, in a situation unlike any other that the retailers currently face. But while the mobile operators will clearly always be fundamental to the ultimate product – in terms of the wireless service offered to the consumer, the Big Box retailers have the opportunity to expand beyond the small range of handsets that are currently sold in a bid to differentiate their sales offering. This is the dream for many handset manufacturers who hope to reduce their direct dependence on the mobile operators, allowing them to sell devices to the consumer market that the operator has not chosen to sell directly. Nokia has already begun such a strategy, and now sells its high-end devices via Comp USA in a bid to break free of mobile operator limitations.

While the operators will hardly be cheering from the sidelines at this independence, they have to balance the pros and cons of such a move carefully. After all, such an approach could significantly boost a mobile operator’s subscriber growth if the strategy is positioned well, while also reducing the direct cost of sales for the operator (the Big Box retailer would be responsible for the acquisition of handsets and any potential consumer-focused rebates). The move is certainly not without precedent, with many European stores adopting similar device strategies.

7. Gaming on the Move

The past couple of years have seen mobile gaming struggling to find the true secret to success, both in terms of device (such as the failure of Nokia’s NGage) and the games themselves. While the convergence of gaming and mobility is a relatively natural fit, the mobile phone is not necessarily the correct device for that fit. And while mobile operators are always quick to respond with claims of gaming download revenue, the total revenue remains a very small part of the average revenue per user (compare the success of gaming on a mobile phone to that of a PSP or Game Boy, for example). Fundamentally, the numeric keypad that is so essential for making phone calls is not a particularly suitable gaming control for action games.

However, with the entrance of Electronic Arts into the mobile arena, there is the potential to develop games that have tighter synergy with gaming consoles such as the PlayStation. Complementary gaming solutions may appeal more on a mobile device. Further, gaming companies are becoming a little more realistic about what will work on a mobile phone, with many focusing less on action games and more on trivia quiz type solutions that can be played in a few minutes.

8. The Real Emergence of Bluetooth

No prediction list is complete without a claim that this year (pick any year from the past four or five) will be the year when Bluetooth takes off. To an extent, the real breakthrough came in 2005 with Bluetooth provided on a considerable number of devices. However, 2006 will be the real breakthrough with a greater number of Bluetooth peripherals that will truly prove the benefits of the wireless solution. Headsets have become more sophisticated (and more importantly, smaller so they don’t look like a small brick wedged precariously begin one’s ear) and consumer brands are now beginning to adopt what was previously strictly a device manufacturer’s playground. Take for example, the launch of the Motorola/Oakley RAZRWire sunglasses. But more telling is the fact that more cars are leaving the factory with Bluetooth capability, and there are more sources for post production installation. Best Buy, for example, now sells – and more importantly installs – Bluetooth car kits, signaling a new expansion for the big box retailer that will likely be mirrored by competitors this year.

9. Broadband For All?

The past year saw an explosion in so-called 3G coverage, with Verizon Wireless and Sprint deploying coverage across significant swathes of their networks. Cingular remained focused primarily on EDGE, but managed to squeeze a UMTS rollout (limited to 16 markets) in before the end of the year. 2006 will see coverage expand significantly for Sprint, Verizon Wireless and Cingular, while T-Mobile is likely to react by launching the much-rumored EDGE network nationwide. T-Mobile could potentially lay catch-up by leveraging its Wi-Fi network in a more integrated manner, via handsets that support cellular and Wi-Fi connectivity – the SideKick being an obvious device for such a move.

10. MVNO Fallout

Literally hundreds of MVNOs are poised to launch in the US over the next few years, but many will disappear just as quickly as they launch. Without a clear understanding of the wireless market, and a specific consumer niche to target, these MVNOs will face an up-hill battle to gain significant market share. Even big name brands, such as Disney and ESPN Mobile, will come under pressure unless they can match the pricing schemes of the major operators in terms of voice and data services, as well as handset pricing. While a household brand name is certainly useful for attracting consumer interest in a new mobile offering, the wireless game remains focused around the key tenets of pricing, coverage and choice (of handsets). 2006 will be the year for MVNO launches, but by the end of the year it should be relatively clear which MVNOs are likely to survive and which will crash and burn.

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