Wireless Telecommunications Industry Matthew Cohen, Andrew Pike, Michael Nolan, Michael...

Wireless Telecommunications

IndustryMatthew Cohen, Andrew Pike, Michael Nolan, Michael

Dell’Amico

Our Project

Introduction US Structure US Strategies EU Structure EU StrategiesConclusion

s

An investigation into the pricing of data in the American Wireless Telecommunications Industry supplemented by a comparison with the European Industry

Why data?

• Excellent dataset

Compares the costs of data from all over the world

Open Technology Institute – technologists, policy experts, urban planners committed to freedom and social justice in the digital age

• Increasing socioeconomic importance of the Internet

Sprint and AT&T merger, Net neutrality, smartphone generation

Source: IbisWorld

Increasing Socioeconomic Importance of the Internet


s

US Industry Structure

Industry Overview

• 2014 Key Figures

• Revenue: $242.1bn

• Profit: $61bn

• Annual Growth 10-15: 2.2%

• Projected Annual Growth 2015-2020: 2.2%

• # Businesses: 596

• Key Demand Drivers

• Price

• Connectivity

• Business cycles and profit margins

• Changes in technology


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Cost Structure


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Market Value

2010 2011 2012 2013 2014 (Expected) $-

$50

$100

$150

$200

$250

-2

-1

0

1

2

3

4

5

6

7

Year

USD

(in

billions)

Gro

wth

Rate

(%

)


s

Market Volume

2010 2011 2012 2013 2014 (Expected)0

50

100

150

200

250

300

350

400

0

1

2

3

4

5

6

7

8

Year

# o

f Subscri

bers

(in

millions)

Gro

wth

Rate

(%

)


s

Key Players


s

35.0%

33.1%

15.3%

14.8%1.9%

Market Share (2014)

Verizon WirelessAT&T Inc.Sprint Nextel CorporationDeutsche Telekom AGOther

Market Share


s

C4: 98.1%

HHI: 2777.35

Measuring Competition

2009 2010 2011 2012 2013 $-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

Revenue Comparison

AT&T Inc.Verizon WirelessSprint CorporationDeutsche Telekom AG

Year

USD

(in

mill

ions

)


s

Measuring Competition

2009 2010 2011 2012 2013

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

Profitability Comparison

AT&T Inc.Verizon WirelessSprint CorporationDeutsche Telekom AG

Year

Profi

t Mar

gin


s

Porter’s Five Forces Analysis

Supplier Power

Rivalry

Buyer Power

Substitutes


s

Buyer Power

Substitutes

Threat of new Entrant

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• Threat of New Entrants

• Significant capital requirement

• MVNO – Low cost option

• Government regulation increasing barriers

• Threat of Substitutes

• Fixed-line telephony, data communication, VoIP

• Major players protected through bundling services


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• Buyer Power

• Large number of buyers

• Specifically corporate buyers

• Competition and concentration

• High demand for wireless weakens buyer power

• Degree of Rivalry

• Intensified by presence of large players

• Pre-pay services and shorter contracts

• Low service differentiation


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Supplier Power

Rivalry

Buyer Power

Substitutes


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Buyer Power

Substitutes

Threat of new Entrant

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US Pricing Strategies

Setting Up the Analysis

1.Used Open Technology Institute dataset

2.Selected 4 American cities and then European cities with comparable populations (for European analysis—stay tuned!)

3.Cleaned the dataset of other cities

4.Added continent, country, ISP, data band codes

5.Added Price per GB column

6.Deleted Variable without N/a for price per GB


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Second-Degree Price Discrimination


s

1 to 4.99 5 to 9.99 10 to 19.99 20 to 39.99 40 or more0

1

2

3

4

5

6

Number of Diff Capacity Plans Offered In Data Band

AT&TSprintT-MobileVerizon

Data Cap (GB)

Freq

uenc

y


s

Tacit Collusion


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Third-Degree Price Discrimination


s


s

City Provider Network Monthly Cost ($) Data Cap Dongle FeeSan Francisco Sprint 4G (Wimax) 34.99 3 0San Francisco Sprint 4G (Wimax) 49.99 6 0San Francisco Sprint 4G (Wimax) 79.99 12 0San Francisco Sprint 4G (LTE) 34.99 3 19.99San Francisco Sprint 4G (LTE) 49.99 6 19.99San Francisco Sprint 4G (LTE) 79.99 12 19.99

LA/NYC/DC Sprint 3G/4G 49.99 6 49.99LA/NYC/DC Sprint 3G/4G 79.99 12 49.99

Sprint offers additional high speed plans in San Francisco• Uses dongle fees to allow high

WTP customers to select fastest speed


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City Provider NetworkMonthly Cost ($) Data Cap Price Per GB

San Francisco Verizon 4G (LTE) 50 4 12.5San Francisco Verizon 4G (LTE) 60 6 10San Francisco Verizon 4G (LTE) 70 8 8.75San Francisco Verizon 4G (LTE) 80 10 8

LA/NYC/DC Verizon 4G 50 8 6.25LA/NYC/DC Verizon 4G 60 10 6LA/NYC/DC Verizon 4G 70 12 5.83LA/NYC/DC Verizon 4G 80 14 5.71

Verizon only offers a higher speed plan in San Francisco• Charges $20 more for the

same data cap with regular 4G in other cities


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Family Plans

T-Mobile is best for

families with lower data

consumption

Sprint is best for families

with high data consumption


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Lines T-Mobile Verizon AT&T Sprint

2 $80 w/2GB

$100 w/6GB

$100 w/2Gb

$120 w/4GB

$130 w/6GB

$90 w/2GB

$120 w/4GB

$130 w/6GB

$75 w/2GB

$90 w/4GB

$120 w/8GB

3 $90 w/3GB

$120 w/9GB

$140 w/3GB

$160 w/6GB

$175 w/8GB

$145 w/4GB

$155 w/6GB

$145 w/10GB

$115 w/4GB

$145 w/20GB

$145 w/20GB

4 $100 w/4GB

$140 w/12GB

$120 w/4GB

$145 w/8GB

$170 w/12 GB

$170 w/4GB

$160 w/10GB

$190 w/15 GB

$140 w/4GB

$160 w/20GB

$160 w/20GB

5 $120 w/5GB

$160 w/15GB

$145 w/6GB

$175 w/10GB

195 w/14GB

$205 w/6GB

$175 w/10GB

$205 w/15GB

$175 w/20GB

$175 w/20GB

$175 w/20GB

*NOT FROM OTI DATASET, COLLECTED ONLINE

Network Effects


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Data CapPenalty

Activation Fee

Dongle Fee Monthly ($)

Dongle Purchase ($)

Contract Length

Location

Verizon

15/GB 35 20 199.99 0 All15/GB 35 20 19.9 24

T-Mobile

Throttle 10 2 48 12 LA, NYC

Throttle 10 2 48 24 San Fran

Throttle 10 3 72 24 San Fran

Sprint

0.05/MB (50/GB) 36 N/A 19.99 24 NYC0.05/MB (50/GB) 36 N/A 49.99 24 LA, DC0.05/MB (50/GB) 36 N/A 0 24 San Fran

AT&T

10/GB 36 N/A 19.99 12

All10/GB 36 N/A 94.99 24

10/GB 36 N/A 169.99 0

Contract Pricing


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Transition away from subsidized pricing

• Mobile Device Subsidies cause the carriers to pay for most of the cost of the devices Upfront

Payment for Device

Monthly Payment for Phone

Cost of Phone Service Contract

Option 1 $149.99 $0.00 $80.00 2 yearsOption 2 $0 $27.08 $60 2 years

16GB iPhone 5s full retail price = $649.99

OPTION 1 results in a $20 loss per customer for Sprint! Multiplied by millions of subscribers = Bad News

$80-$60= 20*24= 480+149.99= $629.99

$629.99 - $649.99 = -$20 loss for sprint.

• Sprint and T-Mobile are trying to move away from this model

• AT&T & Verizon will likely continue in fear of giving consumers any additional reason to to switch carriers


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Confusion Pricing

Providers offer different data capacities so that there is no direct comparison


s

Have to convert into Price per GB to easily compare

Confusion Pricing


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Confusion Pricing• Consumers tend to overestimate how much data

they will consume• Verizon and other carriers use this to their advantage


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Anything Else We See in the Data?

Rising costs indicate capacity constraints after data cap of 20GB


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Outliers

We were unsure whether or not to eliminate outliers when calculating the average price because they were skewing our data


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OutliersWe kept the data point because it was accurate and corresponded to the other price trends.The extremely high price per GB on the previous slide is due to the low data cap and fixed costs being evenly spread across plansInstead we created bands of data caps


s

European Industry Structure

Industry In Europe

2010 2011 2012 2013 2014 (Expected) $-

$50

$100

$150

$200

$250

-6

-5

-4

-3

-2

-1

0

Market Value (Europe)

Year

US

D (

in b

illi

on

s)

Gro

wth

Ra

te

• Market value on a decline in the past couple of years but an uptrend is expected.

• Sharp decline can be attributed to the European financial crisis.


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Industry In Europe

• Market volume is reaching close to 1 billion subscribers• The growth rate is expected to recover from the financial crisis in Europe

2010 2011 2012 2013 2014 (Expected)880

900

920

940

960

980

1000

0

0.5

1

1.5

2

2.5

Market Volume (Europe)

Year

# o

f S

ub

scri

be

rs (

in m

illi

on

s)

Gro

wth

Ra

te


s

INDUSTRY IN EUROPE

• Germany, United Kingdom, and Italy are the top three consumers of wireless telecommunication services

18.0%

13.7%

11.2%

9.6%5.1%

42.3%

Geographic Segmentation (2014)

GermanyUnited KingdomItalyFranceSpainRest of Europe


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Major Players in Europe


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Major Players in Europe

CR4 = 14.7% + 9.7 + 7.0 + 6.2 = 37.6% HHI (top 4) = (14.7%)^2 + (9.7%)^2 + (7.0)^2 + (6.2)^2 = 377.62

14.7%

9.7%

7.0%

6.2%62.4%

Market Share (2014)

Vodafone GroupDeutsche TelekomOrange GroupTelefonica S.A.Other


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MEASURING COMPETITION

2009 2010 2011 2012 2013 $-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Revenue Comparison

Deutsche TelekomOrange GroupTelefonica S.A.Vodafone Group

Year

US

D (

in m

illion

s)

Introduction US Structure US Strategies

EU Structure EU Strategies

Conclusions

MEASURING COMPETITION

2009 2010 2011 2012 2013-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

Profitability Comparison

Deutsche TelekomOrange GroupTelefonica S.A.Vodafone Group

Year

Pro

fit

Marg

in

Introduction US Structure US Strategies

EU Structure EU Strategies

Conclusions

Porter’s Five Forces in Europe

Similar forces to American Industry

European Crisis is a factor that needs to be considered relative to America:• Impacts all 5 forces• More competition on prices• Compete for more customers

• Less competition on threat of new entrants


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European Pricing Strategies

Choice of Cities for Data Analysis

Country City Population Obs

# independent

carriersPlans per

carrier

USA New York 8.406 million 24 4 6.0

UK London 8.308 million 25 6 4.2

USA Los Angeles 3.884 million 28 4 7.0

Germany Berlin 3.502 million 19 6 3.2

USA San Francisco 837,442 19 4 4.8

Latvia Riga 703,260 17 4 4.3

USA Washington, DC 658,893 23 3 7.7

Denmark Copenhagen 569,557 31 8 3.9


s

USA = 9.473±7.513Europe = 7.629±8.179

Comparing American and European plans


s

USA = 9.473±7.513Europe = 7.629±8.179

Frequency distribution of plans


s

USA = 7.999±1.965Europe = 6.643 ±4.933


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Scatter plot without outliers

Less than 1 1 to 4.99 5 to 9.99 10 to 19.99 20 to 39.99 40 or more0

5

10

15

20

25

30

35

40

45

Mean Price Per GBUNITED STATES EUROPE

Data Capactiy Band (GB)

Pric

e pe

r GB

($)


s

n = 92n = 94

Distribution by Data Bands


s

USA = 7.999±1.965Europe = 6.643 ±4.933

How do pricing strategies differ?

2nd degree price discrimination – cheaper and more diverse options on average

Tacit collusion less evident

Confusion pricing is less apparent. Plans offered at same data caps to allow easy comparison


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Conclusions

Further analysis required

• Larger sample size to address geographic variation


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Europe has lower prices and more options

• The European market is more competitive

• Smaller geographic area, so lower fixed startup costs.

• Regulation also requires that larger companies must rent excess capacity at reasonable rates to smaller companies.

• Auctions for wireless spectrums

• Higher WTP in United States for Data


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Is that better?• Consumers pay lower

prices, so providers earn lower profits

• The European market is shrinking due to the economy and new entrants are struggling to cover costs

• Scale provides efficiencies and thus cost savings


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Is that better?

• American companies are more profitable and therefore more able to invest in upgrading infrastructure


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How could the government improve things?

• Encourage competition through regulation to improve quality, reduce prices

• Mandatory affordable leasing of excess capacity

• Block mergers

• Commit to Net Neutrality!


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Thanks for listening!Comments or Questions?

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