The Future of Mobile Data Services presented by G.A. Brosnan at - PowerPoint PPT Presentation

The Future of Mobile Data Services presented by G.A. Brosnan at the Fourteenth Annual Wireless and Optical Communications Conference April 23, 2005

2 Purpose and Talking Points � Identify trends in the American mobile data services market and forecast prevailing prices in 2015 � Approach and organization of talk 1. Market as it exists today 2. Supply Side: Costs of providing services, pricing trends 3. Demand Side: Household disposable income, the propensity to substitute wireless services for traditional wireline services 4. Conclusions and Forecasts

Today’s Marketplace

4 Wireless Subscription Rates, May 2004 Subscribers Subscribers Subscribers CAGR (%) Per 100 (Millions) (Millions) 1998-2003 Inhabitants, 1998 2003 2003 Hong Kong 3.174 7.241 17.9 105.75 Italy 20.489 55.918 22.2 101.76 Czech Republic 0.965 9.709 58.7 96.46 Spain 6.437 37.507 42.3 91.61 Norway 2.106 4.163 14.6 90.89 Portugal 3.074 9.341 24.9 90.38 Finland 2.846 4.700 10.6 90.06 Sweden 4.109 7.949 17.9 88.89 Denmark 1.931 4.785 19.9 88.72 Austria 2.293 7.094 25.3 87.88 Ireland 0.946 3.400 29.2 84.47 United Kingdom 14.878 49.677 35.2 84.07 Singapore 1.0925 3.313 31.9 79.56 Belgium 1.756 8.135 46.7 78.56 Germany 13.913 64.800 36.0 78.54 France 11.210 41.683 30.0 69.59 Korea 14.019 33.592 19.1 69.37 Japan 47.308 86.659 12.9 67.96 United States 69.209 158.722 18.1 54.30 World 317.675 1,340.667 33.4 21.91

5 US mobile Internet usage lags other developed nations Percentage of Mobile Subscribers using some kind of Mobile Internet services 0 25 50 75 100 Japan 79.2 China 33.9 Argentina 33 29.1 Finland Canada 20 Germany 13.8 12 Singapore France 11.7 United States 8.9 Source: ITU, 2004

6 Mobile Data as a Percentage of Total Revenue, 2003 25 20 15 Data Messaging 10 5 0 Vodafone Vodafone UK Vodafone Vodafone Italy Verizon Japan Germany Wireless Source: Vodafone 20-F, June 2004; Financial Times, July 2, 2004

7 US Switched Data Prices (July 2004) Unlimited Wireless Usage, Carrier Pay-per Use Technology Monthly Fee $19.99 Monthly $49.99 Subscription includes first 8 Mbytes AT&T Wireless GPRS/EDGE $6.144/Mbyte (after exceeding 8Mbytes) $9.99 Monthly 54.99 Subscription includes first 2 Mbytes Cingular GPRS/EDGE $10.24M/byte (after exceeding 2 Mbytes) $19.99 Monthly 59.99 Subscription includes first 5 Mbytes Nextel iDEN $9.22/Mbyte(after exceeding 2 Mbytes) $40.00 Monthly 80.00 Subscription includes (limited to 1xRTT/1xEV- first 20 Mbytes 300Mbyte) Sprint PCS DO $2.05/Mbyte(after exceeding 2 Mbytes) T-Mobile USA GPRS n/a 29.99 Verizon Wireless 1xEV-DO n/a 79.99 Source: Company Websites, July 2004

Supply Side

9 Wireless Service Provider Cost Structure Subscriber Service Delivery Network Acquisition • • • Terminal Customer care Coverage subsidies and billing cost/square mile • • • Promotion Service creation Capacity • Distribution and management cost/MegaByte • • Content and Site rental • interconnection Leased lines and other transport

10 Wireless Service Provider Cost Structure Operating Income 15% Service OPEX Depreciation 40% 15% Subscriber Acquisition and Retention Netw ork OPEX 15% 15% Source: Nokia, Mitretek

11 Cost of Delivering Mobile Data WCDMA CDMA2000 1X CDMA2000 1xEV Revenue/User/Month (1) $40.00 $40.00 $40.00 Network Cost/User/Month $18.49 $15.81 $5.90 SGA/User/Month (3) $16.00 $16.00 $16.00 $5.51 8.19 18.10 Earnings before Interest & Taxes EBIT margin 14% 20% 45% Average Cost/Megabyte (2) $0.069 $0.059 $0.022 Source: Qualcomm

12 Recent Pricing Trends $0.47 $0.50 $0.44 $0.43 $0.38 $0.37 $0.40 $0.29 $0.30 $0.22 $0.18 $0.12 $0.11 $0.20 $0.10 $0.00 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Average Revenue Per Minute for US Wireless Service Source: CTIA 130 120 Mobile 110 Index Value All Telecom 100 90 CPI 80 Long Distance 70 Local Telecom 60 50 1997 1998 1999 2000 2001 2002 2003 Source: Bureau of Labor Statistics Change in Consumer Price Index

13 Long-term Trends in Communications Pricing � General trend has been towards simpler pricing and decreasing price discrimination � Historical evidence suggests that flat-rate pricing has proven to be the most effective method for stimulating demand � Some economists suggest that as marginal costs approach zero for telecom services, a flat rate may be the only practical pricing method

14 U.S. Postal Service Rates for First Class Mail Year Parcel Price 1799 Single Letters $0.008 No more than 40 0.10 miles 0.125 41 - 90 miles 0.17 91 - 150 miles 0.20 151 - 300 miles 0.25 301 - 500 miles over 500 miles 1845 Single letters 0.05 0.10 No more than 300 miles Over 300 miles 1863 First half ounce 0.03 1885 First ounce 0.03 2004 First ounce 0.37 Source: A. M. Odlyzko

Demand Side

16 Average Annual Household Telecom Expenditure 1200 2.5 1000 2 Average Annual 800 Percentage US Dollars Household Telecom 1.5 Expenditures 600 Telecom Expenditures as 1 a Percentage of Total Household Expenditures 400 0.5 200 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Sources: Bureau of Labor Statistics, FCC

17 Telecom Expenditures as a Percentage of Total Household Expenditures 4 3.5 3 Percentage 2.5 Mobile 2 Fixed 1.5 1 0.5 0 5 7 9 1 3 E E E E E E 9 9 9 0 0 5 7 9 1 3 5 9 9 9 0 0 0 0 0 1 1 1 1 1 1 2 2 0 0 0 0 0 0 2 2 2 2 2 2 Sources: Bureau of Labor Statistics, Mitretek

18 Wireless Substitution � IM Migrates to Mobile – According to In-Stat/MDR, there were 27.2M AOL IM users, 22.7M MSN IM users, and 15.6M Yahoo IM users in 2003 – AOL reported that the use of IM doubled during 2003. More than 2B IM messages are sent and received daily, surpassing the 400M e-mails sent daily by AOL users � “ Cutting the Cord” – According to Ovum, approximately 12 percent of EU households are mobile only households; in Finland, 29 percent of households have “cut the cord” – According to the FCC, only about five percent of US households are mobile only; In-Stat/MDR estimates that 29.8 percent will cut the cord by 2008

19 Conclusions and Forecasts � Flat-rate pricing for unlimited data transmission will be the dominant pricing model in 2015 � Service providers will offer flat-rate plans and bundle new and innovative services in order to maintain targeted ARPU figures � Best commercial retail flat-rate monthly will be approximately US$15.00 ( 2004 dollars ) � U.S. mobile service subscription rate will exceed 90 percent of inhabitants (i.e., approximately 281 million subscribers) � Of those subscribing to mobile services, no less than two- thirds will be users of data services

20 Conclusions and Forecasts (continued) � Spending for telecom services will constitute about 2.5 percent of total household expenditures � Average monthly household spending for wireless services - including voice and data - will be about US$86 (2004 dollars) � Nominal price of delivering one megabyte of wireless data will be less that $0.02. According to classical economic theory, prices (eventually) decline and approximate the marginal cost of providing the good or service.