There Essentially are No New Customers for U.S. Mobile

“There is no infusion of new customers in the system,” Hans Vestberg, Verizon CEO, said on the firm’s fourth quarter 2022 earnings call. What he meant was that the U.S. mobile services market is essentially saturated. And that has direct implications for business strategy, as market share gains must come at the expense of other competitors. 

Whether one looks at smartphone usage or subscriber numbers, the U.S. market has reached a point where virtually everybody who wants to use a cell phone already does so.

source: Pew Research 

Of course, revenue is a different matter from subscriptions. It is possible to grow revenue per account. 

source: Lightshed Partners 

Connectivity service provider revenue growth rates have been slowing globallyl. Growth rates of about 2.4 percent (subscribers)  are predicted by Analysys Mason. IDC is a bit less optimistic, forecasting 1.9 percent growth over the next five years. 

Looking only at fixed broadband and mobility services, Omdia predicts growth of up to 14 percent. Total revenues will grow at negative or slower rates, as voice, messaging and enterprise revenues contract in many markets. 

Precedence Research thinks revenue growth could reach nearly five percent per year through 2030. Most of that growth, everyone expects, will come in developing regions which are adding subscribers. 

It further means that revenue per account growth will come mostly from the ability to add new products that are purchased by existing customers. That can involve product bundles or shifting customers to higher-priced plans. 

A saturated and competitive market also means decisions about how much promotional activity can be tolerated, which customer segments must not be chased and when to trade quantity for quality, in terms of accounts. 

As Vestberg described it, looking at the postpaid segment of the market, “there are, of course, a certain amount of switchers in the market, and then there are a certain amount of people going from pre- to postpaid.” Tactically, that implies taking share of accounts when customers are switching providers and also moving prepaid customers to higher-priced postpaid plans. 

Verizon is reliant on its mobile business for 85 percent of total earnings. All products in the fixed networks business represent just 15 percent of earnings.

Disappointed by 5G? Don't Be

It is not hard at all to find observers who basically say they are let down by 5G and that it has not lived up to its promises. That is fair enough, even if the networks still are under construction, spectrum is still being activated and sexy new use cases and applications are yet to be commercialized.

We could have, and many did, have the same complaints about 3G and 4G before 5G. Undoubtedly, some will have complaints about 6G. 

While each digital generation (2G through 5G) has eventually produced innovations not seen before, that process of emergence does take time. It would not be unusual for five or more years to pass before anything approaching ubiquity occurs. 

For starters, any national network in a continent-sized country can take three or more years to build. Developers cannot make assumptions about network capabilities much before that. Add a couple more years for adoption to reach critical mass. That is about five years. Add another couple of years for developers to really start proving in new use cases. That adds up to seven years. 

And all along, it will take time for people and entities to figure out where the value lies, for firms to raise money, refocus developers and then market their innovations. 

It really should no longer come as a surprise that development takes longer than many expect. Important information technology innovations can take a decade or more to be fully understood and adopted by organizations, for example. Results can take even longer to be quantifiable. 

The productivity paradox seems to exist. Before investment in IT became widespread, the expected return on investment in terms of productivity was three percent to four percent, in line with what was seen in mechanization and automation of the farm and factory sectors.

When IT was applied over two decades from 1970 to 1990, the normal return on investment was only one percent.

This productivity paradox is not new. Information technology investments did not measurably help improve white collar job productivity for decades. In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.

So the productivity paradox is not new.  Massive investments in technology do not always result in measurable gains. In fact, sometimes negative productivity results. 

Information technology investments did not measurably help improve white collar job productivity for decades in the 1980s and earlier.  In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.

Some now argue there is a similar lag between the massive introduction of new information technology and measurable productivity results, and that this lag might conceivably take a decade or two decades to emerge. 

The Solow productivity paradox suggests that applied technology can boost--or lower--productivity. Though perhaps shocking, it appears that technology adoption productivity impact can be negative. 

The productivity paradox was what we began to call it. In fact, investing in more information technology has often and consistently failed to boost productivity. Others would argue the gains are there; just hard to measure. Still, it is hard to claim improvement when we cannot measure it. 

5G is not so different. Neither was 4G or 3G. The better analogy might be the improvements in fixed network internet access (home broadband). Applications now are different because bandwidth climbed from less than 1.5 Mbps to 10 Mbps to 100 Mbps to 1 Gbps. They will change again as we move into multi-gigabit capabilities. 

But early 10 Mbps was not a failure. Neither was 100 Mbps and neither will 1 Gbps eventually prove out. We have had 30 to 40 years of consumer bandwidth growth. We did not see massive leaps at the beginning of each of those transitions. 

We keep looking for such leaps with every mobile generation, since each mobile generation has increased bandwidth by 10 times, with 10 times lower latency. And yet great change has happened. Personal computers once were the connected devices. Now smartphones are the connected devices. Next up, sensors and machines will be the connected devices. 

Email once was the lead application. Then we started using websites with audio and video and image. Then we started doing transactions. Now we watch video, listen to audio and play networked games. 

We used to have PCs tethered by cables; now we are untethered on phones, tablets, watches and TVs. 

It takes time. So disappointment with 5G should be expected.

Mobility Drove 69% of AT&T Revenue in 4Q 2022

For anyone who has covered or analyzed the U.S. connectivity business for some decades, it now is somewhat shocking how much revenue is produced by the mobility business, compared to the fixed networks business, even granting the importance of the fixed network for business and home broadband. 

AT&T, for example, earned $31.3 billion in the fourth quarter of 2022. Mobility generated $21.5 billion of that amount. The fixed networks business generated $8.8 billion. In other words, mobility drove nearly 69 percent of total revenue. 

source: AT&T

The fixed networks business revenue was $5.6 billion, or about 18 percent of revenue, while consumer fixed network revenues represented about 10 percent of total revenue. As important as the fiber-to-home business is, it is responsible for less than 10 percent of AT&T revenues, as voice revenues and copper access are part of those revenues. 

 

 

source: AT&T

Of course, each product has different profit margins, so revenue does not tell the whole story. It is possible that business service profit margins and consumer broadband, for example, are higher than for the consumer mobility business. In that case, smaller revenue contributions might generate higher amounts of firm profit. 

Still, the law of large numbers is evident. A one-percent improvement in mobility segment revenues or profit should have higher firm impact than a similar one-percent increase in either business or consumer fixed network services.

No More Mobile Generations?

The notion that mobile generations are inflexible is reasonable enough. But, in principle, the driving force is the same underlying connectivity standards in general: over time, silicon gets better; compression gets better; transceivers get better. So we have Ethernet at 10 Mbps, then 100 Mbps, then a gigabit, then multi-gigabit and 10 Gbps and 100 Gbps. 

But mobile next-generation networks are designed around much more than layer two transport, including application layer services.

Obviously there are more complexities with mobile services in terms of app support that have to be accommodated. Ethernet is just transport (layer two). 

The issue perhaps is how extensible the framework can be. As Ethernet has evolved to support higher speeds, it is obvious why many would want the same sort of development for mobile network speeds. 

source: TTI 

That is an understandable and easy argument for some to make. If layer two transport is the only requirement, an extensible layer two standard makes sense. Mobile operators also operate at the app layer, though. There is no reason that should necessarily interfere with ongoing development of transport layers, with some caveats. Radio technology advances. 

So perhaps the issue is whether radio layers can be layered in a way that allows development in a more-graceful way. 

Others in the ecosystem might well be happy with transport upgrades on the Ethernet model. Mobile service providers might have other reasons for wanting app layer additions.

Verizon has a Messaging Problem

Verizon, we might note, has a bit of a messaging problem. Having always marketed itself as the “best” quality provider, if it cannot make that claim, there is a disconnect. That now seems the case for mobile services, where T-Mobile often leads. 

Verizon also faces the same problem in the fixed networks business. Despite Verizon’s decades-long positioning as the company that deployed the most fiber-to-home, it now ranks at the bottom of major internet service providers for median speeds. 

To be sure, the dispersion between best and last is arguably not so relevant, as all the leading ISPs sport median speeds high enough that few consumers could actually perceive the difference.  

source: Ookla

Still, that is a problem. Verizon’s messaging always has been about being “the best,” the “fastest,” the highest quality. That is not the case any longer. And Verizon’s pricing premium has been b on that claimed quality leadership. 

That puts the premium positioning at risk, along with the profit margins. 

Of course, one might argue the other leading contenders also have to work on their positioning. T-Mobile has been the feisty challenger, but now it also can claim to be the quality leader. T-Mobile perhaps has competed on “value,” but also now can compete on “quality.” 

AT&T has had a less-consistent message. Honestly, I have had a hard time figuring out how to position AT&T in the market. It hasn’t been the clear quality leader, nor the clear price or value leader. 

The cable companies somewhat predictably have focused on value and simplicity, so are closer to the T-Mobile pitch. 

But all three leading mobile service providers have opportunities or challenges around market positioning. Verizon has a disconnect. T-Mobile has opportunities to be both “best” and “value” at the same time, if it so chooses. It might also, despite the apparent contradiction, have pricing power upside. 

AT&T’s issue, it still seems, is that it is not clearly the “best” or the “most affordable,” which shapes the messaging opportunities. 

Everyone has work to do.

Bundling and Superapps

In many parts of the internet or connectivity businesses, “bundling” is the way value is created. Consumer-focused internet service providers or mobile operators bundle in video streaming subscriptions or combine mobile and fixed service. 

But the value of bundling seems to vary from market to market. In some markets, the "natural" bundle has not seemed to be "fixed plus mobile service," as logical as that sounds in some markets. But bundling and related concepts such as "ecosystems" often are attempted in many industries. The older idea of walled gardens is an example of bundling.

Data centers create ecosystems of value around the colocated networks, app providers and business relationships that add value based on physical proximity in the data centers. 

So now app providers also are looking to create value by bundling, creating superapps that provide multiple functions all within one walled garden. That can include functions such as messaging, payments, e-commerce, content and other features that create an ecosystem. The advantage is the ability to capture user behavior and data while immediately using that data to enhance value across all the apps and features. 

Other value also is created: increased usage, more engagement, payment opportunities and decreased churn. More “stickiness,” in other words. 

Some bundles make more sense than others. Up to this point, superapps have not seemed so logical in western hemisphere markets, Europe, Africa or the Middle East and parts of Asia. 

Inevitably, superapps will be tried in those regions.

Super Apps and Mobility are Hard to Untangle

As some have argued social media is inextricable from mobility and smartphones, so superapps are hard to separate from mobile usage contexts. 

Less 5G Buzz? That's What Happens When it is "Just the Mobile Network"

There is a reason we shoiuld see less hype and buzz around 5G: as it becomes ubituitous it no longer is new, exciting or different. It's just mobile service. So expect less buzz.

Not even all the new uses enabled largely by "smart" features of the network are going to get as much attention.

Most retail connectivity providers (telcos, especially) prefer smart network to “dumb network” architectures. That is to say, they prefer the ability to actively manage traffic flows on their networks to maintain quality of experience, compared to most data network operators (pure internet service providers, for example) that might use architectural mechanisms to reduce latency, but mostly want the network to operate transparently, with feature creation at the edge of the network, not inside the network.

That preference for a smart network is behind the network slicing capability of 5G networks, for example, where the network itself creates the features. Others (enterprises and some data networking\service providers) can create their network features entirely from the edge, using appliances that use the network, but do not require much else than transport and capacity. 

“Smart” networks also presumably have the ability to add other features beyond “connectivity.” That helps with generating higher average revenue per account. “Transparent” or “dumb” networks cede higher functionality to edge devices and end-user-created features. 

At some point, though, even smart networks just become part of end user expectations. At some point, 5G is just “the mobile network.” It stops being new and different, and simply becomes part of the fabric of internet, data and communications usage. 

source: Statista 

For a growing number of customers and users, 5G already has nearly become synonymous with “the mobile network” and the “features of my phone.” New use cases will emerge over time, but the buzz over 5G mostly ends when it is just “the mobile network and a feature of my phone and service plan.”

A Clever Bit of 5G Marketing by Yes Network

Credit Yes Network in Malaysia for a clever bit of 5G marketing. As one of the smallest Malyasia mobile operators, Yes has to work harder on its marketing and positioning. It claimed to be the first “all-4G” network in Malaysia, with no legacy 3G or older networks. It now says it is the first 5G network in Malaysia. 

As a subsidiary of YTL Power International Berhad and has been able to build its own infrastructure, to a great extent. 

Marketing always seems to be a top competency and a recent effort to showcase its 5G network involves a kiosk that uses Wi-Fi to create a hotspot, with the access provided by the 5G network.

source: Lowyat  

The setup is pitched as a way for users to experience Yes 5G without having to sign up for a subscription. It’s pretty clever. The actual connection uses wi-fi, not a direct 5G link. But the experience is supposed to showcase 5G performance, as the access link or backhaul uses 5G. 

It is pretty clever. But CEO Wing Lee seems to have a team with a knack for marketing.

6G is Inevitable, New Use Cases are Not

6G is inevitable, even if we cannot say much with certainty about it. At the physical layer, we know 6G will be at least 10 times faster, with lower latency than 5G. That has been true of virtually every next-generation digital network since 2G. But most of the differentiation is going to come elsewhere. 

At least as some working with the IEEE envision it, 6G attributes will be most important in terms of architecture: open, distributed, cloud native, more dynamic in resource allocation, disaggregated functions and the ability to support a device from more than one cell location. 

Network slicing--the ability to create virtual sub-networks--should acquire greater granularity. Third-party users might have greater ability to orchestrate their services and features, end to end. 

None of that is too surprising. The desire for network design for decades has been a configurable and dynamic network that decades ago was known as “bandwidth on demand.” The difference now is simply the greater range of parameters that are desired, in terms of dynamic configuration. 

What new use cases and applications could develop remains open. Rarely do designers of any next-generation have a good grasp of what commercial innovations will develop. That is more a matter of discovery than planning. Video and gaming were areas where 4G was predicted to support. 

And video entertainment delivery did turn out to be a big driver of 4G value. Some believed turn-by-turn driving directions would be among the top five new applications, but were wrong in predicting augmented reality would be a big feature. Not too many predicted video conferencing on mobiles would become so popular. 

Many observers expect possible killer apps for 5G will develop to support enterprise use cases, though proponents believe new consumer use cases could develop. Since the time of 3G, though, such forecasts have tended to fall short. But optimism about potential new 5G use cases will remind some of us of similar predictions for 3G and 4G.