Monday, December 16, 2013

The US wireless carrier market is firmly stuck in the past

Over the past year or so, there has been a lot of talk about how the US wireless market is leading the way globally and that a new dawn is coming for the carriers. This line of reasoning is mainly built on the argument that the carriers here (especially Verizon) are at the forefront with 4G LTE deployment.

I would beg to differ. I think the US wireless market is one of the last, globally, to be liberated from its bloated past and suffer a massive reality check. I see two major trends affecting the US wireless market in the short and medium term that spell trouble for the carriers and will be awesome for everyone else.

Market-internal competition

There are finally very promising signs that competition is finally coming to the US wireless market. So far not because of any regulatory intervention, but because the smaller carriers may have realized that they need to do more than just exist to attract customers.

The most promising example of this is the T-Mobile "uncarrier" re-branding and focus on bringing additional added value to the marketplace through an innovative approach to plans, pricing and services. This has been a long time coming at T-Mobile after being "the forgotten child" in the Telekom portfolio for so long. I have high hopes that Sprint will also turn in this direction in the near future after the Softbank acquisition. Hopefully they can help Sprint focus on their competitive advantage in high-frequency spectrum which should make it possible for them to deliver data speeds on their network only seen abroad.

While you might say that Sprint and T-Mobile will never be able to surpass AT&T and Verizon, they do not have to in order to have an outsized impact on over-all margins and market innovation.

I expect to see US wireless carrier margins to take a significant hit, especially for AT&T and Verizon over the coming 12-24 months. How big a hit and when, depends on several things. First, if Sprint actually decides to compete instead of focusing on mergers that won't happen. And second, if the FCC will be able to bring the 600Mhz spectrum to the market in a way that will ensure maximum competition in the marketplace instead of in closed spectrum auctions.

The margins may not fully reach European levels but they should close the gap significantly.

External, innovative competition

Globally we are today seeing wireless carriers struggling to compete with and even making sense of Over-The-Top (OTT) services like Skype, WhatsApp, iMessage etc that bypasses the carriers completely and just run over their data networks. 

The OTT players are innovating at a pace and delivering services that the carriers have never been able to, and possibly never wanted to match.

While this trend is not new and not even US-specific, the combination of market-internal and external, innovative competition happening at the same time will spell trouble for the carriers. In many parts of the world, the market-internal competition had already run its course when the external pressures built up. In the US, the negative delta will be more significant and happen over a shorter period of time.

The carriers have yet to understand this trend and move decisively to try and capitalize on the opportunities it present. I will try and write a post in the near future on how they can do this.

In any case, expect a beautiful creative destruction on the carrier side, and an explosion of cheaper, better and new services benefiting users. 



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