We are on the verge of seeing a shake-up of the cellular industry. It makes me chuckle every time I think about how AT&T and Verizon pulled off having us turn off landlines costing $35 dollars per month and swapping them for a plan whereby each individual family member pays $40 – $60 per month. But the lure of mobility lured us to cellular phones and the smartphone sealed the deal.
AT&T and Verizon have both made huge profits by selling mobile voice at high rates. I suspect the average cellphone user doesn’t use that many traditional long distance minutes and are probably paying 5 to 10 cents per minute for their cellular long distance. And the cell companies have virtually no cost from selling text messages and yet include a hefty charge for the service (bundled and hidden) in our bills each month. The price we pay for cellular data makes it among the most expensive bandwidth in the world.
But the best of times are close to over for these two big companies and there are numerous pressures that are going to cut into profits:
Top of the Demand Curve. Basically everybody in the US that wants a cellphone has one. The industry is saturated to the point where the industry as a whole can only grow by organic growth with the population rate.
Cable Company Competition. Comcast has announced that it is getting into the cellular business and will bundle it with its other products. For now Comcast will be relying on resold minutes from the Verizon network, but the company is also now bidding for spectrum in the current FCC auction. Charter has the same contractual relationship to buy Verizon minutes and is said to be contemplating a cellular product as well. Analysts are predicting that these two companies could gain a 20% market share after a few years in the business. There is also speculation that one of these companies will try to acquire T-Mobile as a way to jumpstart the cellular business.
WiFi Phones. There is a real move in urban areas to sell WiFi phones where most calling is placed over WiFi rather than over the cellular networks. It turns out that most people spend the majority of their time within range of WiFi, and there are already carriers offering inexpensive plans that bundle regular cellular minutes with WiFi calling. This trend is also growing due to the proliferation of public WiFi. Google has deployed WiFi kiosks all over New York City. Comcast has deployed millions of hot spots and enabled WiFi in neighborhoods using customer cable modems.
Increased Competition. The two big companies are seeing increased competition from competitors, mostly T-Mobile, but also a number of resellers. T-Mobile is growing rapidly and added over 1.9 million net customers in the second quarter of this year – and for the thirteenth consecutive quarter they have added over 1 million customers. For the longest time the two big companies dominated the market, but competition is finally eating into their near-monopoly. Probably the biggest consequence of competition is that we are now seeing the average revenue per cellular customer drop overall for the first time.
What’s Next for Cellular Companies? None of these trends are necessarily doom and gloom for the big cellular carriers if they can find new uses for their spectrum. And that’s where they are looking for growth. AT&T and Verizon are counting on revenue streams from new markets like connected cars and the Internet of Things to replace what they are losing in cellular revenue. And they are banking on 5G making them relevant in the broadband world.
But it’s clear that the days of pocketing huge profits from cellular voice is fading and the industry as a whole is going to have to look elsewhere for long-term profits.