Telecom Market Spotlight: North America

In this Market Spotlight, we're homing in on Canada and the U.S.A. -- two big markets, both with enough high-level economic and telecom data, to frame some current telecom trends. The limited country coverage on this Spotlight, though, leaves us to consider a very brief bit of summary data (see Table 1), before plunging into the hot topic du jour: mobile video.

Table 1: North America: Mobile Telecom Potential in a Nutshell

There is indeed a link between Table 1 and the choice of mobile video, and it’s a rather important one for the future of North American telecom. Americans outnumber Canadians by about 10 to 1, and telecom service revenues are in roughly the same proportion:Pyramid Research estimates that Canada spent nearly $39 billion on telecom services in 2008, representing less than 10 percent of North American communications services revenues. So, from this point of view, the U.S. pretty much is North America.

And that matters because the U.S. is finally and rapidly (after a slow start in the 1980s and early 1990s) beginning to approach mobile saturation in terms of per-population penetration. This is in striking contrast to Canada, which, in terms of mobile penetration of population, is below that of other developed markets with similar GDPs, and is roughly at the level the U.S. reached in 2004. In terms of services and 3G deployments, however, Canada is similar to the U.S. – for example, the Canadian-based Rogers has become the first operator in North America to begin rolling out HSPA+.

The result is that U.S. mobile/wireless has become a very big business in North America and is supporting a lot of operators, service providers, and vendors – to the tune of $210 billion in 2008, according to the industry body, the Telecommunications Industry Association (TIA) .

But looming saturation (never mind the recession) is beginning to slow things down. The TIA’s figures show that 2008 was the first year in which the growth in U.S. wireless service revenues fell into single percentage digits, while revenues for wireless devices ended a six-year run of double-digit percentage growth by reaching only 5 percent. So the search is on for a few Next Big Things to keep the mobile/wireless business moving upwards.

The answer, of course, is data – in the sense of anything but voice, really. And this gains added force when the effects of the recession are included, as the recent U.S. Stimulus Package is intended to put over $7 billion towards broadband investment, broadband generally being seen by many as an enabler and driver for economic recovery. The TIA (a natural cheerleader for telecom, of course) includes healthcare IT, smart grid technology, public-safety networks, education, businesses, and consumers as all potential beneficiaries of broadband.

Overall, in its "2009 ICT Market Review & Forecast," issued in May 2009, the TIA expects U.S. telecom revenues to decrease by 6.4 percent in the next two years (and by 5.5 percent in 2009 alone), but to increase by 14.4 percent during 2011-12, partly as a result of the stimulus. Wireless and business data revenues would increase from $64 billion in 2008 to $110 billion in 2012, an increase of 73 percent.

A moving target
But the equation, A Big Share of Lots of Future Dollars = Data + Broadband + Wireless/Mobility, sits within a complex and evolving environment, and no one is yet certain how it will work out, or how well operators and service providers will be able to adapt to, or exploit, opportunities.

“E-stores and applications for the mass market are a hot item right now, and carriers are trying to compete with Apple’s iPhone concept in trying to open up their internal systems for cloud computing and new advanced applications,” says Kristi Siple, senior director of business development at OSS vendor Comptel Corp. (Nasdaq, Helsinki: CTL1V). “This requires operators to develop much more complex value chains – and it is a big OSS move to be house-, home- or device-focused, become more customer-focused and, more importantly, be open to third-party systems.”

She points out that having to respond more to customer requirements is also resulting in a push for tiered data plans within broadband.

“Business customers, as well as consumers, want to have flexible bandwidth options for advanced services like movies; at the same time, service providers are increasingly aware that a fixed-price, all-you-can-eat approach is not a sustainable business model. This is raising the issue on policy control and bandwidth management,” says Siple.

And Kenneth Stewart, director of business development for the mobile settlements provider, MACH , sees big implications stemming from a much-increased consumer sophistication with technology, demonstrated by the growing number of smartphones.

“Increased data usage will inevitably make up a large part of operators’ ARPU, as voice ARPU is declining,” Stewart says. “Look at the iPhone. There are roughly 10 million in the North American market now. Although that represents less than 6 percent of the global mobile phone market, it accounts for around two-thirds of all mobile Internet access.”

Since video is a bandwidth user par excellence and massively familiar and successful through movies, linear TV, on-demand TV and movies, Web video, and so on, mobile video would seem to offer a pretty clear path forward. So how is it faring today?

Here’s a hyperlinked contents list:

— Tim Hills is a freelance telecommunications writer and journalist. He's a regular author of Light Reading reports.

Next Page: Mobile Video in Context

Mobile video is a fairly broad term and, for the purpose of this Market Spotlight, includes paid video clips, music videos, TV episodes, TV programming, and movies. And not all mobile video need directly involve a video service provided by the mobile operator. For example:

Adding to this variety, Pyramid Research points out in its new report, "Mobile Video Services: A Five-Year Global Market Forecast," that a characteristic of mobile video is that, in terms of service provision, it gives the operator a number of broad options, including:

A raft of technologies to support mobile video has thus appeared, and includes free over-the-air broadcast transmissions and unicast connections via the mobile network, DVB-H, DMB, MediaFLO, CMMB, and ISDB-Tmm. In the U.S., mobile video services are available via both unicast and broadcast technologies:

Meet the users
An interesting question is: Who is going to be using this stuff? A March 2009 Pew report ("The Mobile Difference -- Wireless connectivity has drawn many users more deeply into digital life," by John Horrigan, Associate Director, Research, Pew Internet & American Life Project) provides a glimpse at an answer. Based on a December 2007 survey of 3,553 American adults, the report found that users could be fitted into 10 groups that, in turn, divided into two broad categories:

The U.S. is not, of course, alone in having such a divide. The European Commission , for example, recently lamented (in the awkwardly named, and yet quietly compelling, "Europe's Digital Competitiveness Report, Volume 1: i2010 -- Annual Information Society Report 2009. Benchmarking i2010: Trends and main achievements") the fact that, although broadband was available to 90 percent of the European Union’s population, only 50 percent of households actually took the service -- and one third of EU citizens had never used the Internet.

Next Page: North America & Mobile Video

Mobile video is potentially a big telecom growth story, both worldwide and in North America. Pyramid Research estimates that more than 500 million people around the world will be paying for mobile video services directly delivered to their handsets in 2014 -- a five-fold increase from that of 2008, and implying a penetration rate of 8.5 percent of total mobile subscriptions. Revenues will reach $16 billion in revenue worldwide, and, in leading markets such as Italy and the U.S., video will account for more than 15 percent of non-voice mobile market revenues in 2014.

Currently, of course, North America is a long way from that rosy state of affairs. Pyramid estimates that there were 14.2 million mobile video subscribers in North America in 2008, accounting for about 14 percent of the world total (see the chart below) and about 5 percent of total U.S. mobile subscribers; for Canada, the figure was somewhat over 3 percent. U.S. mobile video service revenues were about $1 billion in 2008, but were tiny in Canada at less than US$50 million.

“A highly competitive U.S. marketplace drives a multipronged approach to mobile video,” says Gabriela Baez, Pyramid Research Managing Director, and co-author of the recent report, "Mobile Video Services: A Five-Year Global Market Forecast."

“The battle among service providers is fierce, resulting in the constant introduction of new services to the market," says Baez. "AT&T and Verizon Wireless offer a wide range of content via unicast video and TV services, and flat-rate data plans are within reach of many users. Both operators use the MediaFLO service to differentiate themselves and compete with others in the broadcast arena.”

Table 2 shows the lineup for U.S. mobile video/TV services in March 2009.

Table 2: Available US mobile video/TV services, March 2009

Baez points out that various factors make the U.S. an attractive and sophisticated market for mobile entertainment services. These include a high and rapidly growing penetration of 3G networks (accounting for nearly 40 percent of subscriptions at the end of 2008) and a “notable” surge in advanced handsets and smartphones in the marketplace.

“In 2008, these new devices made significant strides in convincing mass-market users to adopt new and exciting mobile services, such as location-based services, social networking, and video,” she says.Add to the mix a huge entertainment industry, a fairly relaxed U.S. regulatory regime (the delivery of unicast mobile video is not in general subject to any particular regulatory treatment beyond the enforcement of digital rights), several giant, integrated telecom service providers – like AT&T, Verizon, Sprint Corp. (NYSE: S), T-Mobile US Inc. , and Comcast Corp. (Nasdaq: CMCSA, CMCSK) – and also many smaller players, and the result looks highly promising for the mobile industry.

But, obviously, there are challenges and issues. One important one is that users and third-party application and content providers will use combinations of low-cost data tariffs and various access mechanisms (such as DSL/fiber and WiFi) in order to bypass the mobile operator as much as possible.

“As third-party developers create bandwidth-hungry services for mobile handsets, bandwidth substitution strategies will grow in importance. One example is Sling Media Inc. ’s release of Slingbox support for mobile devices. The Slingbox connects users to their home pay-TV services via the Internet over WiFi or a mobile broadband connection. This service excludes the mobile operator, with the exception of the data usage,” says Baez.

More fundamentally, there is a limit to the number of couches and potatoes to sit on them that even the U.S. can provide. TV’s saturation of the U.S. population is becoming a real possibility, given the high penetration of pay-TV services and increasing viewership of TV and video over the Internet. This could potentially lower the attractiveness of mobile video and TV if the content is not differentiated.

Finally, there is the impact of mobile video on other video/TV providers, and how the latter will respond. This is obviously a contentious issue for the media industry as a whole, and the commentators are naturally having a field day.

Standard linear broadcast TV as purveyed by the traditional networks is clearly getting into a mess in the U.S. – everyone agrees that the good times are passing as channels and Web TV proliferate, audiences fragment, and advertising revenues shrivel, split, and migrate to the Web. As an example, Light Reading reported in June 2009 that NBC's prime-time rating had recently sunk to a record low in-season 4 rating (or about 4 million U.S. TV households, compared to Hulu's 42 million unique video viewers) – showing, as Light Reading put it, “the impact of the tumultuous world of online video, currently accessed by 140 million U.S. consumers, and the TV networks' uncertain fortunes." (See TV vs. Web Video.)

But a recent report from The Nielsen Co. , noted by Contentinople, suggests that the imminent demise of standard TV is going to be a more protracted and complex business – and having multiple sources of TV has actually increased total TV consumption. (See Nielsen: TV, Internet & Mobile Usage Skyrockets).

According to the report, the average U.S. consumer watched a record 151 hours of television per month in the last quarter of 2008 – and that those using the Web or mobile video as well as conventional TV watched an additional three and four hours, respectively, per month. The conclusion? Nielsen thinks that U.S. consumers are opting for each of the three methods according to convenience, quality, and access.

Indeed, some are arguing that the irruption of mobile video will help to revitalize existing major players, such as the cable operators. As Cable Digital News reported in July 2009, the new technologies and products that the Internet and mobile video players have brought to the table, including MPEG-4 video encoding, more powerful PCs, game consoles, and software-based content protection, are seen by some cable executives as potentially helping their own industry to improve its offerings. (See In Praise of Barbarians .)

Already, for example, Cablevision Systems Corp. (NYSE: CVC) seems to be moving cautiously in a direction that could lead to an eventual mobile service offering as it has launched a mobile version of its Optimum.net Web portal, designed for all forms of cellular handsets but tailored for its 2.5 million cable modem subscribers. (See Cablevision Mobilizes Content Play).

— Tim Hills is a freelance telecommunications writer and journalist. He's a regular author of Light Reading reports.

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