Wednesday, February 25, 2015

Will Connected Car be the First Billion-Dollar New Revenue Source for Mobile Operators?

Mobile data analyst Chetan Sharma argues that, over time, despite U.S. mobile service provider revenue growth from high speed access, Internet access will not grow fast enough to offset voice revenue losses.


Neither will device sales  or wholesale revenues grow fast enough, even in conjunction with mobile data revenue growth, to offset sharp declines in voice.


Without new sources of revenue, mobile service provider revenue therefore will shrink.


That, in a nutshell, is the strategic challenge mobile operators face. The longer-term challenge is to discover or create entirely new services and products to replace legacy products that cannot sustain revenue growth.


On that score, Sharma notes, brand new services grew revenue 92 percent, though those gains might have been garnered by application or device suppliers, not necessarily service providers.

The need for entirely-new product categories is the reason service providers are looking to home security, healthcare, insurance, automotive, enterprise mobility, advertising, security, and other product areas.


For AT&T, connected cars increasingly are important. In its connected devices segment, 62 percent of new subscriptions in the segment come from cars.


Verizon reported $585 million in 2014 connected car revenue, up 45 percent from 2013 levels. At the current run rate, connected cars will be a billion dollar business for Verizon by 2016.


AT&T reported 2.8 million connected car connections and 140,000 home security connections in 2014.


Connected car revenue clearly is among the potential new revenue sources worth “at least $1 billion in annual revenue” for any particular tier-one service provider.


That is significant because no tier-one service provider can afford to waste time on new revenue opportunities that fail to reach the “billions” revenue threshold required to “move the revenue needle.”


U.S. mobile data service profit margin trends in 2014 show why the focus on creating new revenue sources is so important.


From 2010 to 2013, U.S. mobile data pricing (per unit sold) declined by only single digits year over year.


But in the first nine months of 2014, data pricing dropped by 77 percent, according to industry analyst Chetan Sharma.


At the same time, average (mean) mobile data consumption increased to about 2 gigabytes (Gb) a month. Sharma notes it took 20 years for consumption to reach 1 Gb per month usage levels.


The increase to 2 Gb took about a year.


In addition to plunging prices (less revenue per unit sold) and higher usage (more network cost), marketing costs have grown as competition has become more intense.


Overall U.S. operating expense rose 20 percent, year over year. Income was flat while earnings grew three percent.


So was 2014 an aberration? In some ways, it has to be. Can mobile data pricing (per unit sold) continue to drop at breath-taking rates? Long term, one might argue, they simply cannot decline that precipitously, every year, though steady declines at lower rates are expected.

Some might note the other key figure is the amount of incremental new buying that happens as per-unit rates drop. Lower prices tend to cause higher consumption. As veterans of the long distance business, or undersea capacity business well understand, higher volume can compensate for lower unit prices.

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