US: double standards

By Sean Jackson

The world’s most powerful nation is also one of the largest cellular markets on the planet, and looks likely to play host to multiple standards going forward.

With almost 260 million subscribers at the end of February this year, the US cellular market is the second largest in the world by number of users, after China. It will lose this ranking before too long, however, to India, which has far more room for growth. US penetration stood at 84.17 per cent at the end of 2007, according to Informa Telecoms&Media.

Compared to other mature markets, this penetration rate could be judged to be somewhat on the low side; in more than 60 markets around the world cellular penetration has already exceeded 100 per cent. While the US lacks the saturation of some countries, though, it does have the slow growth rate characteristic of mature markets. Informa attributes the nation’s penetration rate in part to the prevalence of CDMA in the US, which restricts the emergence of the trend towards multiple SIM ownership that has inflated penetration rates in other markets.

CDMA is the dominant technology in the US, a market that has always promoted technological competition in the cellular space rather than opted for a single standard and greater international compatibility. Figures from Informa for the end of 2006 gave the cdmaOne family of technologies a market share of 48.9 per cent against 39.4 per cent for the GSM camp.

But during 2007 the GSM family market share accelerated more rapidly, with Informa calculating it to be 45.32 per cent at the end of last year, compared to 51.06 per cent for CDMA. TDMA, the third 2G standard that operated in the US, has now all but disappeared. Sprint Nextel still operates the iDEN network that was Nextel’s legacy, although the carrier is now looking to migrate subscribers away from the technology.

Major consolidation has been undertaken in recent years with many regional players acquired by the leading national operators whose size and scale is the result of top level M&A activity. Sprint and Nextel merged in 2005, while the Bell South and AT&T merger in 2006 saw Cingular, the cellular network the two firms jointly owned, absorbed into AT&T and rebranded as AT&T Mobility. Despite the wave of consolidation, however, a large number of solid regional players remain in the market.

The four largest US carriers (in descending order by subscriber base) – AT&T Mobility, Verizon, Sprint and T-Mobile – accounted for 85.72 per cent of the market as of February this year. Verizon, part owned by Vodafone, and Sprint Nextel lead the CDMA charge, while AT&T and Deutsche Telekom’s T-Mobile are GSM family players.

Average revenue in the US is among the highest in the world at $50. The US market is also overwhelmingly postpaid – 89 per cent according to Informa. Lengthy contract terms are typical in the US and churn among postpaid customers is on the decrease as the carriers work to improve their customer service and retention strategies.

There is still room for growth, however, and the lower end of the market, which is primarily where this growth lies, is being courted with prepay offerings. While the lead operators have bought up many of the smaller players, they are looking to share risk as they attempt to win lower spend users by exploiting the MVNO model. Figures for 2005 put the national MVNO subscriber base at 12 million.

There have been some notable successes in the MVNO space, chief among them Virgin Mobile, which sits on the Sprint Nextel CDMA network and provides prepay services to more than five million customers. But there have also been some high profile failures, with sports broadcaster ESPN ditching its MVNO operation in 2006 after just eight months of business. Youth specialist Amp’d Mobile filed for Chapter 11 and was shut down in July last year, while Disney’s family-targeted MVNO also failed to make any headway and announced in September 2007 that it was shutting up shop.

While the US market is often characterised as playing catch-up to leading European markets, technology deployment is actually well advanced. Second-placed Verizon launched the first 3G network in the US in 2003 and upgrades to EV-DO Rev A are well underway. AT&T, meanwhile, has committed to HSUPA upgrades this year.

But it is the technology strategy of the leading players going forward that is most interesting in the US, as it offers a microcosm of the wider industry’s internal debate. Verizon has publicly committed to an LTE strategy, with the backing of Vodafone and AT&T has also given its support to the LTE standard. Sprint Nextel, however, has bet a substantial amount on mobile WiMAX, although the path has proven bumpy long before deployment.

Sprint originally had a deal with carrier Clearwire to share the buildout of a national mobile WiMAX network but the plans faltered late last year when Clearwire announced its withdrawal. This coincided with the departure from Sprint of CEO Gary Foresee, who was one of the biggest champions of the carrier’s mobile WiMAX strategy, which had drawn criticism from some quarters for diverting focus away from more pressing matters.

More recently, there have been suggestions that Sprint and Clearwire may have found a way to work together again, with the help of Intel, one of the leading proponents of mobile WiMAX. Nonetheless, question marks remain over the ease with which the United States’ first national mobile WiMAX network will be deployed.

Sprint’s difficulties continued into 2008, as it announced a loss of $29.5bn for the fourth quarter of 2007 on the back of a $29.7bn goodwill write down on the merger of the two companies. Wireless subscribers declined by 108,000 in the final quarter of last year, and revenues were at $8.6bn, a six per cent year-on-year decline.

The most significant development in the US market in 2008 has been the FCC’s 700MHz auction. At the time of writing, the auction is drawing to a close, with the FCC having generated almost $20bn in licensing revenues. The US regulator will not release the identities of the successful bidders until the auction is complete, however.

There was much speculation prior to the auction about the participation of Google. The internet search firm ruffled feathers in the US cellular market place when the FCC adopted one of its proposals which stipulated that winners of the spectrum had to allow consumers to use any device and lawful application on the network operating in the 700MHz spectrum.

Bidding for the C-Block of spectrum, in which Google took part, pushed the value to more than $4.7bn, triggering the open access rules. It was felt by many industry observers that Google had participated in the auction simply to ensure that the price went high enough for the open access rules to kick in.

As this issue of MCI was going to press, the FCC had twice increased the number of bid rounds allowed each day in an attempt to see the auction through to conclusion.

Informa forecasts that CDMA will retain technology leadership in the US market, principally because the three leading players all operate CDMA networks. CDMA subscriptions are projected to hit 164 million by 2011. GSM subscriptions, meanwhile, are anticipated to peak next year, at 111 million, before falling to 93 millioin in 2009. However, Informa is predicting a surge in WCDMA subscribers (part of the GSM family of standards) to 30.8 million by 2011, offsetting the decline in GSM subscriptions.

By the end of 2011, says Informa, the total customer number will have reached more than 293 million, reflecting a penetration rate of more than 93 per cent, while growth will have slowed to around two per cent.

With its leaning to CDMA, the US market has at times looked somewhat ostracised from the global cellular community that has been so effectively dominated by the GSM family of standards. Greater international roaming offerings have proven attractive to many corporate US users, however, which goes some way to explaining the growth that GSM carriers have enjoyed in the world’s most powerful nation.

If LTE proves to be the technology of choice for US carriers going forward – and it has the backing of both CDMA and GSM players in the States – then that relative isolation is likely to be overcome.