Third Quarter 2002 U.S. Wireless Forecast 2000-2006

Market Overview
Wireless/Mobile Services provides a quarterly forecast for the United States and Canada through its North American Wireless Forecast product. We include in the projection not only subscriber and total ARPU, but also voice and data subscriber, ARPU, and revenue figures, as well as users by technology and projected handset sales. This Yankee Group Research Note focuses on the U.S. market.

Forecast Analysis
Forecast Methodology
For its U.S. forecast, the Yankee Group is using a quarterly updated S-curve with a terminal penetration rate of 75%. We use subscriber numbers from the fourth quarter of 1996 to the present as the basis of our forecast. To fine-tune this forecast, we independently calculate the historic subscriber numbers and compare them with the actual results. The average error term between forecast and actual is +/-2.6%.`

Forecast Results
The Yankee Group forecasts that total wireless subscribers will reach almost 200 million by the end of 2006, representing a total market of almost $120 billion, compared to 132.5 million subscribers by the end of 2002 with approximately $78 billion. Prepaid subscribers will grow from about 14 million in 2001 to over 49 million by 2006. Overall, we predict a healthy subscriber growth rate of roughly 10% in 2002 and 2003, slowing to a still respectable 5% in 2006. Nevertheless, this is a dramatic decline from the greater than 20% growth we have seen in the past. We do not view this deceleration of growth as an alarm sign, but merely as a side product of a market entering maturity and approaching saturation.Our concern in the area is twofold: the lack of traction of wireless data among the mass consumer market combined with significant data ARPU (i.e., 10% of ARPU in the proximity of what European wireless carriers are reporting); and the accelerating pace of price competition on the voice side. Currently, only two carriers are on the record for data ARPU: Sprint quotes numbers slightly higher than $1 per month and Verizon derives around $0.50 per month from data. All other carriers have been quiet on their financial success, or the lack thereof, with wireless data. In a market that is starving for good news, this leads us to the conclusion that data revenue for all other carriers is almost certainly less than $1 per month, probably even below Verizon's $0.50 figure. Exhibit 1 shows our subscriber, ARPU, and revenue forecast segmented by voice and data.

Exhibit 1Voice and Data Subscriber, ARPU, and Revenue Forecast
Source: the Yankee Group, 2002

Voice and Data Market Segmentation
	2000	2001	2002	2003	2004	2005	2006	CAGR
Voice Services
Voice Users (in Millions)	108.1	132.5	146.7	163.5	177.8	189.5	198.9	10.7%
Voice ARPU (U.S. Dollars per Month)	$54.82	$53.74	$52.25	$51.36	$50.47	$49.64	$48.37	-2.1%
Voice Service Revenues (in Billions of U.S. Dollars per Annum)	$71.1	$78.3	$88.7	$96.4	$104.3	$110.3	$114.2	8.2%
Mobile Data Services
Mobile Data Users (in Millions)	3.4	9.5	23.4	49.0	81.5	109.8	128.6	82.7%
Mobile Data ARPU (U.S. Dollars per Month)	$0.10	$0.35	$0.45	$0.80	$1.95	$3.25	$4.95	275.9%
Mobile Data Revenues (in Billions of U.S. Dollars per Annum)	0.002	$0.02	$0.07	$0.2	$1.1	$2.9	$5.8	88.8%

Because of the limited success of wireless data to date, we have halved our data ARPU forecast for 2006. There has not yet been an uptake in data that is so dramatic that the wireless carriers have broken it out in their financial reporting, as have their European brethren. We believe the wireless industry should shy away from competing solely on price and market based on unique selling propositions and brand name. Otherwise, the mainstream data price levels will fall to impulse price points of less than $5. Bucket sizes will increase substantially, possibly even becoming unlimited usage buckets.

In our view, AT&T Wireless's unlimited usage charter offer will be withdrawn soon while other carriers have not begun to offer unlimited usage plans of their own. If unlimited usage plans become a standard offering, the Yankee Group will have to revise its ARPU and revenue forecasts downward.

Bottom Line
 • Voice subscribers are expected to grow by 35% over the next five years. The Yankee Group is still hopeful that voice APRU decline can be relatively modest over this time period, but further observation and analysis are required.
 • Data users will increase significantly over the next five years, but revenues will be modest. Wireless data users will reach more than 128 million by 2006 but will only contribute less than $6 billion in revenues, under 5% of industry revenues.

Recommendations
 • The wireless industry must resist the temptation to trade a short-term gain ushered in by a standard fare unlimited pricing plan, as this might undermine the financial viability of the industry as a whole. The dangers of a self-destructive price war are looming. So unlimited usage plans should be an endgame move, at best.
 • The wireless industry should compete on differentiation and brand rather than on price. Price competition in any industry leads to a lower profit level for all industry players than competition on differentiation on price. These excess profits from a differentiation and brand competition scenario could then be used to improve coverage and customer service as well as provide dividends to investors.

The Yankee Group originally published this article on 25 September 2003.