Compared to other industries, wireless has been relatively unscathed, so far, by the economic downturn. Third-quarter wireless operator results were surprisingly good. A stream of exciting new handsets has propped up the device market, and has been a catalyst for subscribers signing onto data plans.
But storm clouds are brewing. Leading handset OEMs are planning for a contraction of the market, anywhere from flat to down 10 percent globally, for 2009. PC card makers, accustomed to 70 percent average growth in the past three years, are seeing a pronounced slowdown. And certain sectors of the data market--notably content of the "discretionary" type, such as ringtones, games and off-portal content--have stopped growing. Take away the iPhone/Blackberry effect (data plans, App store downloads) and that ever-affordable small luxury--text messaging--and data growth might cool. Finally, we are starting to see a steady stream of layoffs, in nearly every sector of the industry. Three cornerstone companies, representing services (Sprint), devices (Motorola), and infrastructure (Nortel) are in serious trouble--much of their own making--but the economy ain't helping. I don't think they have a place in the lengthening government bailout queue, but there could be tens of thousands of jobs lost.
By any measure, it looks like 2009 is going to be a challenging year. But I think we have an opportunity to fare better than many other comparable industries. It will take some proactive, and collective, measures, involving some short term pain. My Wireless Stimulus Plan falls into three categories.
1. Stimulate the Handset Market
If there is any time to start being creative about the subsidy "dichotomy" that exists in the wireless market, it is now. The subscriber who wants the subsidized price for a hot new phone must switch operators or be eligible for an upgrade. If they are in mid-contract, some operators will offer a partially subsidized price on some phones. This creates all sorts of incongruities in the market, and certainly is not that much incentive to "trade up." What about the subscriber who bought a Blackberry Pearl three months ago for the subsidized price of $149 who now not only sees an ad for the same device for $49, but cannot get the new Storm for anywhere close to $200? I think we need to start exploring some creative middle ground. Some specific suggestions to stimulate handset sales:
- Offer more favorable handset pricing to customers signing on for a higher ARPU plan, such adding a good data package.
- Reward customers who are providing clear "household NPV" or loyalty--such as multi-line households, high spending individuals, long-term customers, and so on. The wireless industry still lacks good processes for adjusting its offers based on different customer profiles.
The newest smartphones are selling briskly, and the share of "budget phone" sales is growing. The part of the market that is going to need the greatest attention will be garden-variety feature phones.
2. Creativity in Pricing Plans
"All-inclusive" has been the theme this year. Take-up of these plans has been solid (Sprint) to tepid (Verizon). Operators are trying hard to avoid a price war, especially as cost per gross add has crept up. I think we need to focus on two items for 2009:
- A more holistic look at household communications spend. Landline losses are accelerating. At AT&T and Verizon, there's some robbing Peter (landline, DSL) to pay Paul (wireless, FIOS/U-verse), but they are also losing a fair share of fixed lines to cable and even landline "replacement" plans from pure-play wireless operators such as Metro PCS and T-Mobile USA. The integrated telcos must make a more concerted effort to capture as much of a household's communications costs as possible. Why cede the landline business so readily? How about offering some creative bundles of landline/wireless minutes, or a "keep your landline" incentive? There's a host of Femto solutions to add to the mix that should make the "household" space quite interesting in 2009.
- Stimulate data sales. Wireless operators should have a concerted strategy to get as many subscribers as possible onto a data plan. Take a page out of the cable business, which has been effective in encouraging subscribers to upgrade to a series of ancillary services, from digital cable to "triple play" plans and now DVR. AT&T has been successful with its $30/month iPhone data plan, but I think the typical price for a data plan (unlimited messaging, email and browsing) is going settle at the $20-25 range over the next couple of years. Another option to stimulate content sales, and tryouts of all the budding app stores, widgets, and device portals, is to offer some bundle of content along with a data plan (for example, $30 gets you our data plan and five apps).
- Greater choice, flexibility for broadband wireless. These services are great but remain expensive. In a tough economy, it is going to be hard to penetrate the next "rung" of the addressable market for wireless broadband access. Plus, alternative options are expanding, i.e., WiFi-enabled handsets, proliferation of free WiFi, and 3G price aggressiveness from upstarts (T-Mobile, Metro, etc). Given usage patterns, there's not that much room for maneuvering if these services are to be profitable on a standalone basis. But there is room for greater flexibility, such as per-day or per-week pricing for occasional travelers, better "tethering" options, and bundles (so it's not always an either/or choice between a Blackberry plan and a PC card plan). Also, it's time for the PC OEMs to get off their duff and start marketing these services too.
Again, the integrated telcos need to show some creativity here, especially before Clearwire is available in more markets, with the possibility that "Cable in Wireless, Act 3" gets it right. AT&T and Verizon should offer their home broadband subscribers a wireless add-on package for a modest price (I like $19.99), with the "broadband everywhere" moniker.
3. Rationalize Retail and Customer Service. Wireless operators, rather accidentally, have become some of the largest retailers in the country, operating tens of thousands of outlets on a direct or indirect basis. I think there are, collectively, too many "doors," and the metrics are rather fragile, since a lot of traffic in the stores is non-revenue generating. No doubt the broader downturn in consumer electronics will cause some closings via attrition (i.e., Circuit City), while other doors will shut due to consolidation (i.e.,Verizon-Alltel).
Finally, customer service continues to be a very high cost to the wireless operators. There's a juxtaposition here, as increased sales of high-end devices are leading to calls from customers with PC-like problems. Operators are, for the most part, absorbing the cost for calls about issues that are increasingly outside their core service. I'm not sure how much longer the current model is sustainable. I would expect there to be enhanced efforts toward self service; some tough negotiations with vendors to take some of this on themselves; and higher levels of outsourcing. Operators might also borrow a page from cable, which is to limit the scope of problems they are prepared to address. And don't dismiss the possibility that operators will start charging some customers for service, a la Apple and HP.
To those who argue that many of my suggestions are revenue dilutive, I respond that it will be difficult to sustain business as usual. I believe some short-term pain is necessary to avoid dire circumstances down the road, which would lead to significant industry job loss, contraction of capex, and loss of appetite for risk and innovation.
Mark Lowenstein is Managing Director of Mobile Ecosystem. Click here to subscribe to his Lens on Wireless newsletter.