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Where Has All the Mobile Revenue Gone?

Sarah Thomas
8/7/2014
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For the first time ever in the US wireless industry, service revenue growth stagnated in the second quarter, and T-Mobile is partly to blame.

It's easy to blame the "uncarrier" for a lot of the dynamics of the second quarter, but here's why: T-Mobile US Inc. was the first to introduce new equipment installation plans in place of subsidies, causing the other operators to respond. As a result, service revenue was naturally lower, as hardware sales went up in its place. (See Tablets, Prepaid, Competition Shake Up Q2, T-Mobile Kills Contracts, Launches LTE Network and AT&T's Next to Shorten Wait for Device Upgrades.)

That isn't the whole story, however. Moffett Research analyst Craig Moffett points out that, adjusted for the effect of equipment installation plans, service revenue growth is up only 1.7% year-over-year -- less than half the growth rate of a year ago. And on a sequential basis, even after the adjustment, the growth rate is negative.

"Service revenue growth in the US wireless market dropped to… wait for it… 0.0% in the second quarter," Moffett wrote in a research note. "That's right. As measured by service revenue, the US wireless industry has not grown one iota in the past year. That has never happened before. Ever."


Find links to all of Light Reading's second-quarter wireless earnings coverage here.


Instead, the growth story of the second quarter was mobile data services, according to industry analyst Chetan Sharma, who actually had service revenue declining in the second quarter, not just remaining flat. He notes that while US mobile service revenue declined 2%, or around $1 billion, in the second quarter, mobile data services continued to increase and are on track to exceed $100 billion this year. Data currently makes up 55% of overall revenue for the operators, driven by tablet usage and tiered data pricing.

Unfortunately for mobile operators, the growth in mobile data services isn't offsetting the effect of killing subsidies and declining voice revenue, at least not yet.

Verizon Wireless and AT&T Inc. (NYSE: T) dominated the quarter with 68% of mobile data service revenue and 68% of the subscription base, Sharma says. That makes them the number two (Verizon) and three (AT&T) mobile data revenue generators in the world, while Sprint Corp. (NYSE: S) and T-Mobile remain in the top 10.

It's likely that these second-quarter metrics are the start of a trend, rather than just a blip. Thanks in large part to T-Mobile's competitive moves, followed by a cascade of responses, the pricing dynamics have changed in the industry. Operators are turning toward driving more data usage, new pricing promotions and service partnerships to make up for it -- trends that you can also expect to continue going forward. (See Carriers Warm Up to Service Innovation, Sprint Plans More Bundled-Content Offers and AT&T Gets 81% of Subs Off Unlimited Data.)

— Sarah Reedy, Senior Editor, Light Reading

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Yulot
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Yulot,
User Rank: Moderator
8/11/2014 | 10:34:40 AM
ARPU & competition
My recent (+/- 2years) of the US wireless and telecom market, compared to that of Europe or other regions, makes me conclude that this is mainly a competition matter.

ARPU in the US is much higher compared to Europe, but this is not so much the result of a different consumer behaviour, rather than that of competition levels: despite appearances, the US are more like an oligopoly rather than a real competitive market. A few big companies are basically splitting a huge rich market and are pretty much close to fixing prices. Technology wise and marketing wise, the service offered is - again as far as my experience goes - inferior, inflexible and expensive (more relevant to the fixed/3ple play with low throughput, bad TV packages, etc, and wireless roaming, domestic wireless is good).

T-Mobile recently made an attempt at increasing market share, by low balling prices and suddenly, everybody else starts dropping their pants and not that surprisingly, ARPU goes down.

This has happened in Europe for the last 10 years at least, because the markets are smaller, with comparatively way more players fighting for a small group of clients, and losing money every year. The result is quite brutal in terms of industry impact (operators business being commoditized, only response to the drop in profit are regular reorganisations, etc), but pretty consumer friendly.

Depending on which side of the fence you sit, it may be a good or a bad thing. So my conclusion (albeit not a scoop) is: monetizing operator's business remains a hard thing to do in a competitive market.
Gabriel Brown
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Gabriel Brown,
User Rank: Light Sabre
8/11/2014 | 10:17:49 AM
Re: Blip or trend?
Competition between operators is the biggest threat to profitability in the mobile sector. Just ask Europe. We have low prices and un-great networks as a result.
bobmachin
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bobmachin,
User Rank: Moderator
8/11/2014 | 6:53:24 AM
Re: tablet effect
There certainly will be there will continue to be high demand for mobile data, for all the reasons you mention, and more. But the question is what will consumers be willing to pay for? There seems to be a threshold over which consumers will not go for what they perceive to be basic connectivity - and that includes data connections. Past that limit, they will only pay for 'premium services', including content and interactive lifestyle services, over which the operator typically has no monopoly or particularly strong market position (unless they invest heavily, as operators such as BT in the UK have in sports and entertainment broadcasting). It feels like operators have to look elsewhere for incremental revenue, and particularly to cross-industry joint ventures that rely on embedded communications and which offer operators the chance to leverage their other capabilities - high volume transaction processing, billing, customer care, analytics and so on - the M2M/ IoT space.

 

 
danielcawrey
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danielcawrey,
User Rank: Light Sabre
8/9/2014 | 7:09:40 PM
Re: tablet effect
I have high expectations that mobile carriers will be able to make lots of money from data services.

Voice may be declining, but there will continue to be high demand for mobile data. This growth will be driven by more smartphones/tablets, wearable devices and internet of things-enabled objects. 
MordyK
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MordyK,
User Rank: Light Sabre
8/9/2014 | 1:35:40 PM
Re: Blip or trend?
Mendyk, Either way it shows an unwillingness on the consumer's part to increase the amount they're willing to pay for services, which means carriers need to find opportunities for revenue that don't rely on the consumer for the revenue.
mendyk
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mendyk,
User Rank: Light Sabre
8/9/2014 | 8:56:55 AM
Re: Blip or trend?
If bills were in fact growing across most of the user base, this wouldn't be an issue. But sagging ARPU suggests otherwise. The most likely explanation is that some users are paying more because they now use their smartphones as cranial adjuncts, but more users are content to sign up for lower-price plans.
MordyK
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MordyK,
User Rank: Light Sabre
8/8/2014 | 5:04:52 PM
Re: Blip or trend?
I would advocate a new approach to customer experiences and services that are revenue generating, but don't add any new costs to users and increase their already growing bills.
mendyk
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mendyk,
User Rank: Light Sabre
8/7/2014 | 4:49:47 PM
Re: Blip or trend?
This scenario has played out many times in other markets. As a service reaches its saturation point, revenue stagnates. Growth comes from either raising prices or introducing additions to the service in question. As you point out, Carol, the dilemma for mobile operators is that they still have to pump money into their networks to handle capacity while revenue growth looks less and less likely. Which makes the looming price war all that more difficult to understand.
cnwedit
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cnwedit,
User Rank: Light Beer
8/7/2014 | 4:34:34 PM
Re: Blip or trend?
This seems like a significant cause for concern, especially if, as Craig Moffett says, the mobile revenue growth over the past year has been zero. Where does the money come from for new network capacity to handle all that new data traffic?
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