Wireless Telecommunications
Industry
Matthew Cohen, Andrew Pike, Michael Nolan, Michael Dell’Amico
Our Project
An investigation into the pricing of data in the American Wireless Telecommunications Industry
supplemented by a comparison with the European Industry
Why data?
•
Excellent dataset
Compares the costs of data from all over the world
Open Technology Institute – technologists, policy experts, urban planners committed to freedom and social
justice in the digital age
•
Increasing socioeconomic importance of the Internet
Sprint and AT&T merger, Net neutrality, smartphone generation
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Increasing Socioeconomic Importance of the Internet
Source: IbisWorld
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
US Industry Structure
Industry Overview
•
•
2014 Key Figures
•
•
•
•
•
Key Demand Drivers
Revenue: $242.1bn
Profit: $61bn
Annual Growth 10-15: 2.2%
Projected Annual Growth 2015-2020: 2.2%
•
•
•
•
Price
Connectivity
Business cycles and profit margins
Changes in technology
# Businesses: 596
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Cost Structure
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Market Value
$250
7
6
$200
5
Growth Rate (%)
USD (in billions)
4
$150
3
2
$100
1
0
$50
-1
$-
-2
2010
2011
2012
2013
2014 (Expected)
Year
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
400
8
350
7
300
6
250
5
200
4
150
3
100
2
50
1
0
0
2010
2011
2012
2013
Growth Rate (%)
# of Subscribers (in millions)
Market Volume
2014 (Expected)
Year
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Key Players
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Market Share
Market Share (2014)
1.9%
14.8%
35.0%
Verizon Wireless
AT&T Inc.
15.3%
Sprint Nextel Corporation
Deutsche Telekom AG
Other
C4: 98.1%
HHI: 2777.35
33.1%
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Measuring Competition
Revenue Comparison
$140,000
USD (in millions)
$120,000
$100,000
$80,000
AT&T Inc.
Verizon Wireless
$60,000
Sprint Corporation
$40,000
Deutsche Telekom AG
$20,000
$2009
2010
Introduction
2011
Year
US Structure
2012
US Strategies
2013
EU Structure
EU Strategies
Conclusions
Measuring Competition
Profitability Comparison
20.0%
Profit Margin
10.0%
0.0%
2009
2010
2011
2012
2013
AT&T Inc.
Verizon Wireless
-10.0%
Sprint Corporation
-20.0%
Deutsche Telekom AG
-30.0%
-40.0%
Year
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Porter’s Five Forces Analysis
Rivalry
Threat
of new
Entrants
Supplier
Power
Buyer
Buyer
Power
Substitutes
Substitutes
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Porter’s Five Forces Analysis
•
•
Threat of New Entrants
•
•
•
•
Significant capital requirement
MVNO – Low cost option
Government regulation increasing barriers
Introduction
Threat of Substitutes
US Structure
•
Fixed-line telephony, data communication,
VoIP
Major players protected through bundling
services
US Strategies
EU Structure
EU Strategies
Conclusions
Porter’s Five Forces Analysis
•
•
Buyer Power
•
•
•
•
•
•
Large number of buyers
•
Degree of Rivalry
Specifically corporate buyers
Competition and concentration
Intensified by presence of large players
Pre-pay services and shorter contracts
Low service differentiation
High demand for wireless weakens buyer
power
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Porter’s Five Forces Analysis
Rivalry
Threat
of new
Entrants
Supplier
Power
Buyer
Buyer
Power
Substitutes
Substitutes
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
US Pricing Strategies
Setting Up the Analysis
1. Used Open Technology Institute dataset
2. Selected 4 American cities and then European cities with comparable
populations (for European analysis—stay tuned!)
3. Cleaned the dataset of other cities
4. Added continent, country, ISP, data band codes
5. Added Price per GB column
6. Deleted Variable without N/a for price per GB
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Second-Degree Price Discrimination
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Number of Diff Capacity Plans Offered In Data Band
6
5
Frequency
4
AT&T
3
Sprint
T-Mobile
Verizon
2
1
0
1 to 4.99
5 to 9.99
10 to 19.99
20 to 39.99
40 or more
Data Cap (GB)
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Tacit Collusion
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Third-Degree Price Discrimination
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Sprint offers additional high speed plans
in San Francisco
• Uses dongle fees to allow high WTP
customers to select fastest speed
City
Provider Network Monthly Cost ($)
San Francisco Sprint 4G (Wimax)
34.99
San Francisco Sprint 4G (Wimax)
49.99
San Francisco Sprint 4G (Wimax)
79.99
San Francisco Sprint
4G (LTE)
34.99
San Francisco Sprint
4G (LTE)
49.99
San Francisco Sprint
4G (LTE)
79.99
LA/NYC/DC
Sprint
3G/4G
49.99
LA/NYC/DC
Sprint
3G/4G
79.99
Introduction
US Structure
US Strategies
EU Structure
Data Cap
3
6
12
3
6
12
6
12
EU Strategies
Dongle Fee
0
0
0
19.99
19.99
19.99
49.99
49.99
Conclusions
Verizon only offers a higher speed plan in
San Francisco
• Charges $20 more for the same data
cap with regular 4G in other cities
City
San Francisco
San Francisco
San Francisco
San Francisco
LA/NYC/DC
LA/NYC/DC
LA/NYC/DC
LA/NYC/DC
Introduction
US Structure
Provider
Verizon
Verizon
Verizon
Verizon
Verizon
Verizon
Verizon
Verizon
US Strategies
Network
4G (LTE)
4G (LTE)
4G (LTE)
4G (LTE)
4G
4G
4G
4G
EU Structure
Monthly
Cost ($)
50
60
70
80
50
60
70
80
Data Cap
4
6
8
10
8
10
12
14
EU Strategies
Price Per GB
12.5
10
8.75
8
6.25
6
5.83
5.71
Conclusions
Family Plans
*NOT FROM OTI DATASET, COLLECTED ONLINE
Lines
T-Mobile
Verizon
AT&T
Sprint
2
$80
w/2GB
$100
w/6GB
$100
w/2Gb
$120
w/4GB
$130
w/6GB
$90
w/2GB
$120
w/4GB
$130
w/6GB
$75
w/2GB
$90
w/4GB
$120
w/8GB
3
$90
w/3GB
$120
w/9GB
$140
w/3GB
$160
w/6GB
$175
w/8GB
$145
w/4GB
$155
$145
$115
$145
$145
w/6GB w/10GB w/4GB w/20GB w/20GB
4
$100
$140
$120
w/4GB w/12GB w/4GB
5
$120
$160
$145
$175
195
$205
$175
$205
$175
$175
$175
w/5GB w/15GB w/6GB w/10GB w/14GB w/6GB w/10GB w/15GB w/20GB w/20GB w/20GB
$145
$170
$170
$160
$190
$140
$160
$160
w/8GB w/12 GB w/4GB w/10GB w/15 GB w/4GB w/20GB w/20GB
T-Mobile is best
for families with
lower data
consumption
Sprint is best for
families with high
data consumption
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Network Effects
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Contract Pricing
Verizon
T-Mobile
Sprint
AT&T
Data Cap
Penalty
Activation
Fee
Dongle Fee
Monthly ($)
Dongle
Purchase ($)
Contract
Length
15/GB
35
20
199.99
0
15/GB
35
20
19.9
24
Throttle
10
2
48
12
LA, NYC
Throttle
10
2
48
24
San Fran
Throttle
10
3
72
24
San Fran
0.05/MB (50/GB)
36
N/A
19.99
24
NYC
0.05/MB (50/GB)
36
N/A
49.99
24
LA, DC
0.05/MB (50/GB)
36
N/A
0
24
San Fran
10/GB
36
N/A
19.99
12
10/GB
36
N/A
94.99
24
10/GB
36
N/A
169.99
0
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Location
All
All
Conclusions
Transition away from subsidized pricing
• Mobile Device Subsidies cause the carriers to pay for most of the
cost of the devices
16GB iPhone 5s full retail price = $649.99
OPTION 1 results in a $20 loss per customer for Sprint!
Multiplied by millions of subscribers = Bad News
•
•
Option 1
Option 2
Upfront
Monthly
Payment for Payment
Device
for Phone
$149.99
$0.00
$0
$27.08
AT&T & Verizon will likely continue in fear of giving consumers any
additional reason to to switch carriers
US Structure
US Strategies
Contract
2 years
2 years
$80-$60= 20*24=
480+149.99= $629.99
Sprint and T-Mobile are trying to move away from this model
Introduction
Cost of
Phone
Service
$80.00
$60
$629.99 - $649.99 = -$20
loss for sprint.
EU Structure
EU Strategies
Conclusions
Confusion Pricing
Providers offer different
data capacities so that
there is no direct
comparison
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Confusion Pricing
Have to convert
into Price per GB
to easily compare
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Confusion Pricing
• Consumers tend to overestimate how much data they will
consume
• Verizon and other carriers use this to their advantage
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Anything Else We See in the Data?
Rising costs
indicate capacity
constraints after
data cap of 20GB
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Outliers
We were unsure
whether or not to
eliminate outliers
when calculating the
average price
because they were
skewing our data
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Outliers
We kept the data
point because it was
accurate and
corresponded to the
other price trends.
The extremely high
price per GB on the
previous slide is
due to the low data
cap and fixed costs
being evenly
spread across plans
Instead we
created bands of
data caps
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
European Industry
Structure
Industry In Europe
Market Value (Europe)
$250
0
USD (in billions)
-2
$150
-3
$100
-4
$50
Growth Rate
-1
$200
-5
$-
-6
2010
2011
2012
Year
2013
2014 (Expected)
• Market value on a decline in the past couple of years but an uptrend is expected.
• Sharp decline can be attributed to the European financial crisis.
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Industry In Europe
Market Volume (Europe)
2.5
980
2
960
1.5
940
1
920
Growth Rate
# of Subscribers (in millions)
1000
0.5
900
880
0
2010
2011
2012
Year
2013
2014 (Expected)
• Market volume is reaching close to 1 billion subscribers
• The growth rate is expected to recover from the financial crisis in Europe
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
INDUSTRY IN EUROPE
Geographic Segmentation (2014)
18.0%
Germany
United Kingdom
42.3%
Italy
13.7%
France
Spain
Rest of Europe
11.2%
5.1% 9.6%
• Germany, United Kingdom, and Italy are the top three consumers of wireless
telecommunication services
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Major Players in Europe
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Major Players in Europe
Market Share (2014)
14.7%
9.7%
Vodafone Group
Deutsche Telekom
Orange Group
7.0%
62.4%
Telefonica S.A.
Other
6.2%
CR4 = 14.7% + 9.7 + 7.0 + 6.2 = 37.6%
HHI (top 4) = (14.7%)^2 + (9.7%)^2 + (7.0)^2 + (6.2)^2 = 377.62
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
MEASURING COMPETITION
Revenue Comparison
$90,000
$80,000
USD (in millions)
$70,000
$60,000
$50,000
Deutsche Telekom
$40,000
Orange Group
$30,000
Telefonica S.A.
$20,000
Vodafone Group
$10,000
$2009
2010
Introduction
2011
Year
2012
US Structure
US Strategies
2013
EU Structure
EU Strategies
Conclusions
MEASURING COMPETITION
Profitability Comparison
160.0%
140.0%
Profit Margin
120.0%
100.0%
Deutsche Telekom
80.0%
Orange Group
60.0%
Telefonica S.A.
40.0%
Vodafone Group
20.0%
0.0%
-20.0%
2009
2010
Introduction
2011
Year
2012
2013
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Porter’s Five Forces in Europe
Similar forces to American Industry
European Crisis is a factor that needs to be considered relative to
America:
• Impacts all 5 forces
• More competition on prices
• Compete for more customers
• Less competition on threat of new entrants
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
European Pricing
Strategies
Choice of Cities for Data Analysis
#
independent Plans per
carriers
carrier
Country
City
Population
Obs
USA
New York
8.406 million
24
4
6.0
UK
London
8.308 million
25
6
4.2
USA
Los Angeles
3.884 million
28
4
7.0
Germany
Berlin
3.502 million
19
6
3.2
USA
San Francisco
837,442
19
4
4.8
Latvia
Riga
703,260
17
4
4.3
USA
Washington, DC
658,893
23
3
7.7
Denmark
Copenhagen
569,557
31
8
3.9
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Comparing American and European plans
USA = 9.473±7.513
Europe = 7.629±8.179
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Frequency distribution of plans
USA = 9.473±7.513
Europe = 7.629±8.179
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Scatter plot without outliers
USA = 7.999±1.965
Europe = 6.643 ±4.933
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Mean Price Per GB
UNITED STATES
EUROPE
45
40
Price per GB ($)
35
30
25
20
15
10
5
0
Less than 1
1 to 4.99
Introduction
5 to 9.99 10 to 19.99 20 to 39.99 40 or more
Data Capactiy Band (GB)
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Distribution by Data Bands
n = 92
n = 94
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
How do pricing strategies differ?
USA = 7.999±1.965
Europe = 6.643 ±4.933
2nd degree price
discrimination –
cheaper and more
diverse options on
average
Tacit collusion less
evident
Confusion pricing is
less apparent. Plans
offered at same data
caps to allow easy
comparison
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Conclusions
Further analysis required
• Larger sample size to
address geographic
variation
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Europe has lower prices and more options
•
The European market is more
competitive
•
•
•
•
Smaller geographic area, so lower
fixed startup costs.
Regulation also requires that larger
companies must rent excess
capacity at reasonable rates to
smaller companies.
Auctions for wireless spectrums
Higher WTP in United States for
Data
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Is that better?
• Consumers pay lower prices, so
•
providers earn lower profits
•
Introduction
US Structure
The European market is shrinking due to
the economy and new entrants are
struggling to cover costs
Scale provides efficiencies and thus cost
savings
US Strategies
EU Structure
EU Strategies
Conclusions
Is that better?
• American companies
are more profitable
and therefore more
able to invest in
upgrading
infrastructure
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
How could the government improve things?
• Encourage competition through regulation to
improve quality, reduce prices
•
•
Mandatory affordable leasing of excess capacity
Block mergers
• Commit to Net Neutrality!
Introduction
US Structure
US Strategies
EU Structure
EU Strategies
Conclusions
Thanks for listening!
Comments or Questions?