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October 10, 2008

Thought Leadership for the Wireless Industry
In This Issue
Wireless and the Economy
Improving the Retail Experience

New England Mobile Summit
October 21, Boston
Conference organizer and chair

Mobile Internet World
Oct. 22-23, Boston
Advisor and Speaker

Wireless Influencers 2008
Oct 26-28, Laguna Niguel, CA
Moderating content and applications track

Fierce Wireless
Virtual Trade Show
Future of 4G
October 15

CTIA Wireless IT & Entertainment
Sept., San Francisco
Moderated session

Dear Colleagues,
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At the peak of the stock market a little over a year ago, who would have imagined: that the Dow would plunge to as low as 8,200; the Red Sox would be playing the 97-game- winning Tampa Bay Rays in the 2008 American League Championship; and that the Presidential choice would be between Obama and McCain, with someone by the name of Sarah Palin as part of the mix?

I feel an urgency to address the impact of the economic downturn on the wireless industry - revisiting a piece I wrote for Fierce Wireless in July.  Also included in this Lens are some comments on how to improve the retail store experience, and an INmobile interview with myself and Jon Auerbach, General Partner at Charles River Ventures, on the state of the New England mobile economy in advance of our October 21 Summit in Boston.
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Wireless and the Economy

When I first wrote about the effects of the downturn for Fierce in July, I remarked that the wireless industry has so far escaped relatively unscathed by the economic downturn.  Well, four months, an 8,000 points Dow, the unraveling of Wall Street as we've know it and trillions in global bailouts later, consider the wireless industry scathed, like every sector of the wireless economy.  Here is my assessment of what is happening, and what opportunities it might create.

First, the good news.  There are two necessities in today's communication and digital media world:  a mobile phone and an Internet connection.  Everything else is fair game for a second look - yes, even cable.  Organic subscriber growth, such as it is in a maturing market, will be affected, because it is already coming from the market's age and income outliers.   But people will not give up their wireless subscriptions.  And globally, there is still lots of headroom.  Again, growth might slow, but it will not stop. 

I think we have already seen the market start to adjust.  How?  Wireless operator offerings have taken a move toward greater flexibility and simplicity.  AT&T and Verizon, who for years had essentially ignored or outsourced prepaid, have renewed their focus on this market segment, which a series of more compelling, mainstream offerings.  Verizon's recent announcement of  a month-to-month offer is both a step in its Open Development Initiative, as well as trying to present a clearer and more flexible value proposition to the consumer ("no, you don't need a contract, but yes, those fancy phones do cost us something"). 

We are also seeing some important changes in the device market.  I have had heard several indications from numerous sources that chip orders from Asian factories are down significantly - which we will probably see reflected in third quarter and certainly fourth quarter handset numbers.  The smartphone market is still showing impressive growth, spurred by a rash of exciting new products, at attractive (sub-$200) price points.  I am of two minds with respect to smartphones.  Although one of the appeals of smartphones is a consolidation of functions, I feel that forecasts for these devices should be trimmed, because in a down economy more people will wait to buy one, and there will be fewer subscribers who will be prepared to go "off contract" and pay full retail price for these devices. 

I think the segment of the device market that will be most affected will be the mid-tier feature phones.  Smartphones are driven by a high velocity of product innovation and improvement at this point.  And I have noticed, in some of the pre-holiday device introductions and some store channel checks, a greater emphasis on lower-end devices:  very competent, capable phones that can be had for less than $50. 

A significant effect on the market would be a slowing in the handset replacement rate, which in the U.S. still averages an aggressive 1.7 years.  It will take some time before we really see a change here, but if it is material, there is a multiplier effect: fewer accessory sales, subscribers waiting to renew their contracts, and slowing of data growth, which is driven in part by new handset sales.

Discretionary Spending Will be Affected

The most significant effect will be on "discretionary" spending.  Here, we must recognize that wireless is part of the broader communications/digital media/entertainment landscape, and there will be fierce competition for a dwindling supply of disposable income.  The areas I think we will see the greatest effect include:
  • Fixed access lines.  Expect an acceleration in fixed access line losses, as the next group of individuals/households where everyone has a cellphone will start viewing the landline connection as  "nice to have" rather than "need to have" as they consolidate accounts. 
  • Mobile data:
  • Text messaging will stay relatively immune, as it is an affordable alternative and the heaviest users are less price elastic. 
  • Mobile content will be affected.  We are already seeing a decline in mobile content sales, especially off-deck.  In part this is due to the substitutive effect of browsing and data plans but a ringtone or a game is in the "nice to have" category. 
  • Data subscription services.   Monthly subscriptions to services like mobile video/TV, location, etc that are not part of a broader data plan will be affected, as customers take a hard look at the value they are deriving from the $10-15 per month they spend on these services, and weigh this against the panoply of digital entertainment options competing for their smaller wallet.
  • Mobile broadband subscriptions.  I think we will see growth slow here, because we are entering the next round of adopters in the United States, where it is not as much of a necessity.  The slowdown will be mitigated by growth in other markets - linked to 3G rollouts - and if operators become more flexible in how these services are priced and offered (see below).
  • Capital Expenditures.  Capex numbers remain relatively robust, driven by continued data traffic growth and rollout of advanced networks (AT&T, T-Mobile, and 4G WiMax from Clearwire).  However, I could see 2009-10 plans being scaled back.  Data growth could come back to earth, and credit facilities to fund capex have certainly been impacted.  An overall economic slowdown will affect the drivers of capex:  sales of high-end devices; voice and data capacity growth, new home construction, and so on.  Additionally, we could see a delay in some of the planned 4G spend if operators are forced to cut costs. 
  • Operational expenditures.  We are already seeing operators take a close look at how they can reduce their billing and customer care costs.  For example, they have improved their Web-based self-service options as a way to reduce calls to customer care.  Automatic payment (especially from bank accounts) reduces paper and postage costs.   Even Verizon's startling new $0.03 per message fee to SMS content providers is, in part, due to the costs they incur in customer care because of a few bad actors.
What are the Opportunities?

The most progressive thinkers will see opportunity in this time of adversity.  Here are some recommendations:

1.    Bundling Plans.  Some of the integrated telcos, such as AT&T and Verizon, should be more creative with bundled plans, as a way to stem landline losses.  The economy, Metro/Leap, and home zone offerings from Sprint and T-Mobile are all in the mix here.  Wireless and wireline should be viewed holistically:  share of household communication minutes should be the objective.

2.    Greater Flexibility in Data Pricing.  There has been a lot of growth in the $20 or so add-on data plans that include a pretty broad range of services.  I believe operators will slowly add more to this bundle in order to keep ARPU up.  I would also like to see more innovative pricing options, such as per day or per week pricing. 

3.    Revisit 3G Broadband Pricing.  In order to sustain growth in this part of the market, pricing will have to become cheaper and more flexible.  This should include less expensive "add-on" options for high-ARPU subscribers, better "phone as modem" options, and improved offerings for occasional use.  Those in the fixed broadband business (AT&T, Verizon, cable companies) should also look at a compelling mobile add-on for their subscribers.  Just as they want to "own the home", they should think about "owning" the breadth of their customers' data access, wherever they are. 

4.    Advertising.   In mobile, we are at the beginning of the mobile advertising market, and I think there is an opportunity for thinking about advertising as a value exchange for some aspects of data/content access.  If spending on mobile data starts to slow, we might take a cue from the television and Internet markets, which are heavily advertiser supported, and offering free or reduced-priced content in return for willingness to view ads. 

5.    Tools to Manage Costs.  We all know wireless costs can get out of control, with data access charges, roaming/overage, texting, and so on.  Some of the more progressive operators have been improving their tools to customers for controlling costs (for example to main account holders of family plans) and service plan optimization.  If done right, there's a good opportunity here to build customer loyalty without impacting revenues.
Improving the Wireless Retail Experience
In my September Fierce column, I give mixed reviews to the average store experience. Many operational aspects have improved, which have resulted in shorter wait times and a more streamlined sign-up process. But with wireless becoming a bigger part of the digital lifestyle, there is a lot more work to be done with respect to training, merchandising, and improving the look and feel of wireless stores.  Read more...
New England Mobile Summit
New England Mobile Summit
We're excited about the upcoming New England Mobile Summit, October 21 as part of Mobile Internet World.  We have CEOs of more than 10 companies, and have recently added Michael Grossi, former SVP at Helio and Vlad Stejnoha, Chief Scientist at Nuance to the agenda.

INmobile Interview with Lowenstein and Charles River Ventures' Jon Auerbach