Wireless: Examining the race to the bottom
The wireless industry is facing quite a conundrum: Subscriber growth is faster than the relatively pokey video business, but revenue per subscriber is falling.
Toss in the movement by Apple, Google and others to make wireless carriers mere dumb pipes and there's turbulence ahead.
Stat of the week came from Bernstein analyst Craig Moffett. In a research note, Moffett said that the U.S. video business (think cable) is growing 50 percent faster than the wireless industry. Video (cable) aggregate revenue growth is up 5.3 percent in the last 12 months compared to 3.6 percent for wireless.
Moffett's big takeaway is that there are two many wireless players relative to the cable industry. He writes:
There are plenty of explanations for the troubles of the Wireless industry. The Wireless industry, like most Telecommunications businesses, is characterized by high fixed and low variable costs. Networks are increasingly undifferentiated. Handset makers (à la Apple) are gaining market power. The service is expensive; for a family of four, a bill of $200 per month is not unusual. Scale is everything… and growth is slowing. Worse yet, management teams appear to have wildly inflated views of their ability to grow in an industry that is no longer growing. But what really makes the Wireless industry so unstable is much simpler. There are just too many cooks in the kitchen.
Simply put, Moffett argues that the dumb pipe is meeting the price war. And it's deadly for the wireless industry, which still has a bevy of players.
To wit:
- Sprint cuts its Boost Unlimited price from $100 to $50 and screws over T-Mobile.
- Leap and MetroPCS cut prices to be lower than Sprint. Virgin Mobile, which is being acquired by Sprint, also cut prices.
- Tracfone is wholesaling the networks of AT&T and Verizon at $45 a month.
- Now everyone is having trouble justifying a premium.
Moffett adds that this industry dismemberment has been expected in the video industry for years. However, the downfall hasn't happened yet. Why? There just aren't enough players. Cable companies have a structural advantage and the broadband business is solid. In fact, Moffett convincingly argues that broadband service will become the primary business of cable companies, which will be the only modem in town for most locales.
Also see: U.S. national broadband strategy: Funding is the elephant in the room