Tillman Elser,
Isabelle
Nunberg,
Nikkita Mehta,
Julie
Greenberg

 The Industry
• General Background
• Consumers
• Main Players
• Competition
 Pricing Strategies
• Bundling and Versioning
• Three Part Tariff
• Network Externalities
• Tacit Collusion
• Penalty Pricing
• Discounts
• Cell phone pricing
Recommendations
• Investments

• - General Background
• - Consumers
• - Main Players
• - Competition

 Wireless voice communication
 Text Messaging services (SMS)
 Advanced PCS
(personal communication services)
 Other data services
 Other wireless services

 Lower pricing -> competitive advantage over wired services
 Consumers embracing newer/more expensive technology
 Retail presence decreasing in importance
IBISWorld

 Corporate clients (15%)
 Stable market characterized by long term contracts and predictable patterns of usage
 Most concerned with reliability (voice) and speed (data)
 Big target for 4G technology
 Small/Medium Businesses (30%)
 Laptop data plans and fixed mobile services attractive to this market
 General consumer/residential clients (55%)
 Most price sensitive
 Demand growing fastest in this group

 Heterogeneous preferences for cell phone usage
 High use
 Low use
 Focus on Data
 Focus on Voice
 Focus on Text vs

 24.8% - Cost of service
 14.5% - Depreciation
 12.5% - Equipment
Purchases
 8.4% - Wages
 5.9% - Advertising
 6.7% - Rent/Utilities fees
 6.5% - Profit
 ~20% other expenses
30,00%
25,00%
20,00%
15,00%
10,00%
5,00%
0,00%

 1G
 Analog, usage stopped in 2008
 2G
 Basic voice and data functionality
 Popularity declining as newer standards develop
 14.4Kb/s
 2.5G
 Stepping Stone from 2G to 3G
 50-150Kb/s speed
 Wireless Application Protocol (WAP) mobile Internet as well as
MMS
 Most advanced iteration of 2.5G is the EDGE network (AT&T/T-
Mobile)
 200-1000Kb/s

 3G
 Current standard among smartphones
 Beginning to assume market dominance from 2G and
2.5G
 Speeds of 300-600Kb/s
 3.5G
 Middle ground between 3G and 4G
 Speeds up to 14.4Mb/s
 AT&T/T-Mobile
 4G
 Epitomizes shift from voice to data among telecommunications carriers
 Conflict between WiMax (Sprint) and LTE (Verizon) standards
 Speeds up to 100Mb/s for mobile devices (1Gb/s for stationary devices)

 Trends of M&A
 Method to gain subscribers and coverage
 Saturated market: harder to build new customer base
 Economies of scale
 Higher margins and available capital enable firms to invest in their networks and services

 Top 4 Firms Market Shares:
 Verizon Wireless: 33.4%
 AT&T Inc.: 31.2%
 Sprint Nextel Corporation: 16.2%
 Deutsche Telekom AG (T-Mobile): 11.0%
 CR4 = 91.8
 HHI = 2472.44

 33.4% of market (market leader)
 Part of Verizon Communications– VW contributes almost 2/3 of revenue
 Originally merger of three companies
 Acquired Alltel in 2009 to give VW largest market share in industry
 Now transitioning to 4G LTE
 Revenue growth of 11.7% annually over past 5 years
 In 2011, expected to generate $66.1 billion in revenue and net income of over $4.4 billion

 31.2% of market
 Largest market share until Verizon-Alltel merger
 Started as joint venture called Cingular Wireless
 In 2006, AT&T acquired both companies and became
AT&T Inc.
 AT&T wireless contributes to ½ of company revenue
 Plans to acquire T-Mobile within next 12 months
 Problem of congestion on data networks
 Revenue growth of 10.3% annually over past 5 years
 In 2011, expected to generate $61 billion in revenue and net income of $16.5 billion

 16.2% of market
 Sprint and Nextel merged in 2005
 Only major company losing subscribers
 Backs WiMax instead of LTE for 4G network
 Annual revenue decline of 4.1% and has failed to turn a profit since 2006

 11% of market
 Brand of Deutsche Telekom AG in US
 First wireless carrier to offer Android phones
 Large carrier of WiFi with T-Mobile Hot Spots
 Plans for AT&T to acquire T-Mobile
 In 2011, will generate $28.2 billion in revenue and net income of $1.8 billion

 HIGHEST in whole telecommunications sector
 WHY?
 Churn rate of 1.5% to 3.5% per month
 Types:
 Price
 Service offerings & quality of service
 Product innovation
 Network dependability and call quality
 Marketing strategies
 Geographic coverage

 Firms all offer similar products, coverage, and services  price competition is vital
 Try to undercut competition
 Discounts, network externalities, etc.
 Partly enabled by recent M&A activity by improving firms’ economies of scale

 Service becomes important weapon in the industry as customers increasingly value reliability and attention
 High investment in upgraded technologies and networks
 Customer service becomes vital in gaining customer loyalty and reducing churn rates
 Expansion of service offerings: “one-stop” bundles
 Telecommunications Act of 1996

 New technologies incredibly useful in increasing usage, margins, and customer base
 Short life cycles for products and applications
 New technology includes:
 E-mail
 GPS mapping
 TV feeds
 E-commerce . . .
 3G  4G

 Promotional tactics
 Rebates, discounts, etc
 Advertising
 Supply side: Combative advertising
 Mature market; goal is to shift consumer demand toward advertising firm but not expanding consumer demand
 Demand side
 Persuasive: alters consumers tastes based on service providers’ attributes, strengthens barriers to entry especially in industry with economies of scale
 Complementary: appeals to “social prestige” with new phones, appeals to attributes complementary to use (coverage, overage, etc.)

 Ultimate goal: maximum US nationwide coverage
 Enables furthering economies of scale and higher efficiency
 Over 277 million Americans (approx. 91%) can choose between three or more providers while 250 million of those
Americans (approx. 82%) can choose between only top four

 Mobile virtual network operators (MVNOs)
 Companies that purchase airtime from a major wireless network then resell it with their own logo
 Increasing as communications and media leaders have recognized potential growth
 Mobile strategies developed by
Comcast and Time Warner
Cable
 Google looked into bidding in
700MHz auction in 2008

 Barriers to entry are high and increasing primarily due to…
 Regulating spectrum scarcity
 High costs
 Market saturation

 Spectrum scarcity refers to a finite number of companies being able to operate cellular/PCS services with a designated geographic location and frequency
 Distributed through licenses within a specified area
 Closed to new entrants until next auction
 Cost at time of auction is high; over $19 billion was spent in 2008
700 MHz auction

 High initial costs
 Base stations, towers, and other necessary infrastructure reaches the billions
 Costs of R&D and other investments
 Dependency on product innovation and up-to-date technologies
 Marketing strategies

 Existing firms already established their strong positions
 Cost advantages due to economies of scale
 Ability to spread expenses over large customer base
 “one-stop” bundles differentiate from pure wireless providers and reduce churn rates
 Slowing growth in customer base

• - Bundling and Versioning
• - Three Part Tariff
• - Network Externalities
• - Tacit Collusion
• - Penalty Pricing
• - Discounts
• - cell phones

 Feature bundling on cell phones -> facilitates feature bundling on contracts
 Customers pushed onto smart phones
 Increases access to additional features
 Versioning
 Family plan vs Individual plan
 Extensive bundling seen in cell phone plans
 Considerable variance between companies
 Common themes: Avoid pure bundling, target heterogeneous preferences

 Focus on mixed bundling
 Most profitable bundles listed more prominently
 In some cases, no price difference between bundled and non bundled services
 Customer ‘opts-in’ to services

 Pure and mixed bundling
 Similar services grouped together
 Customer forced to
‘opt-out’ of some services
 Fewer options than
AT&T, but still many additional services offered
 Minutes and text packages offered as initial service bundles
 Can also add text package after choosing minutes

 Lower utilization of mixed bundling, focus on pure bundles
 Customer required to opt-in to several free services
 Huge number of bundles -> confusion pricing

 Focus on pure bundling
 Search obfuscation used more prominently
(‘premium data addon)
 Fewest additional service options

 Monthly fee and per minute fee
 Now, mostly three-part tariffs: monthly fee with included minutes but high overage fee
 Customers choose three-part tariff over twopart tariff because of flat-rate bias
 Most customers underestimate usage (use only half of minutes allowable on average)
 Those that do exceed allowance, exceed by
40% on average

 Many versions so consumer surplus extracted from those less willing to search for correct plan
 Customers underestimate uncertainty about usage
(overconfidence) by 81% and underestimate volatility of usage (projection bias) by 57%
 When first signing up, average customer underestimates usage by 40%
 Companies gain an average of $60 per customer
 Slow to correct mistake and switch plan
 AT&T “rollover” plan targets sophisticated consumers who understand that usage changes monthly

30
25
20
15
10
5
0
AT&T Verizon T-Mobile Sprint
Plans
Add-Ons

 Companies create network externalities as an incentive to gain new customers
 Free texting within Verizon network
 Free minutes within all networks
 Only significant after critical mass reached
 Customers benefit from others on the same network
 The greater the size of the network, the greater the benefit to user

 How does it work?
 Industry is an oligopoly
 Top four firms dominate almost the entire market
 Homogenous products
 Same phone (e.g. iPhone from AT&T or
Verizon?), data services (text, e-mail, etc)
 Agreement on price is easier to come by and cheating is easier to catch
 Nondurable goods
 Less incentive to cheat because it is a one -time sale product rather than a product from which sellers could gain a series of sales

 Service providers typically preannounce rate changes they plan on implementing
 Advanced notice gives competing firms time to respond
 Can test the market and competitors

 Rate changes in the industry have been high and infrequent, yet coordinated across all four firms
 FOCUS: Text Messages
 Supply is almost unlimited so in a competitive market prices should decrease not increase over time
 Since 2005 price per text has doubled. IBISworld
 Service providers do not claim that these increases were driven by higher costs so other methods must be at work.
 Doubling of prices pushes prices from inelastic portion of demand curve to elastic portion to capture unrealized revenue

Overconfident
Unattentive
• Barriers of Adoption
• Unpredictability of use
• Profit Margin due to over and under usage.
Underestimates

Verizon
.40-.45
T-Mobile
.45
Sprint
.40-.45
AT&T
.40-.45
Verizon
.20/.25
T-Mobile
.20
Sprint
.20/.25
AT&T
.20/.30
THE FEES:
Sources:
VerizonWireless
.com
ATT.com
Sprint.com
T-mobile.com

 About 16.5 million people exceed their cell phone minutes every month in the US
(according to cellknight.com)
 In 2005, Minute-Watch.com show that if the average family took their cell phone overage charges and invested them in a standard index mutual fund
(yielding 10.65%) for 22 years, they would have over $19,500 enough to send a child to many state colleges for two years.
AN IDEA…
NUMBERS
WISE





Sprint(above) Verizon(below)
 Advertized coverage
 All claim
GREAT reception.
 What drives consumers to pick one over the other?
T-Mobile(above) AT&T(below)

 Peak and Off-
Peak Pricing
 Incentive to reduce the quantity of users on the network at high times and spread them out over other times which saves them infrastructure costs and prevents overloads
 Started out as different rates for different times
 Evolved to the free nights and weekends
AT&T Data network
• Fast growing
Too high usage
• Sole control of the iPhone market and large option of data phones
Network
Crash
• Not prepared for such high usage
Eliminate
Unlimited plans as a new option
• Grandfathering the previous plans

 Bundling
 Tying
 Contract
 Specific plans/add-ons
 Inter-temporal price discrimination
 Network
Externalities
 Subsidized

 Venture Capitalist
 High barriers to entry
 Competitive advantage of established firms
  enter market as a (Mobile Virtual Network Operator)
 Focus on attractive data packages
 Stock Market Analyst
 Voice and SMS capabilities and prices maturing
 Future success dependent on 4G deployment
 Verizon: Invest

 Race to 4G
 Carrier with the most comprehensive 4G network secures a substantial competitive advantage
 Utilize Network Externalities  Data usage
 Data usage within network free (non unlimited plans)
 iPhone live?
 Subsidize
 Consumers more willing to accept expensive plans when high tech smart phones more accessible
 Reach for the Cloud(s)
 Improvements in networks’ data capabilities  Cloud computing
 Huge potential market, especially among corporate clients
 Further use of network externality

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