RocSearch The US Telecommunications Industry Contents Outlines

Category: Accounting

The US telecommunications industry comprises establishments that provide voice telephony, data, internet, cable and satellite television services through wired and wireless networks. The industry is highly mature and more than 90% of the US population already has access to telecom services. Owing to this high penetration, the absolute growth in the industry has remained slow over the last five years with the industry growing at a CAGR of 4.3% over 2003-09 to reach revenues of US$517 billion in 2009.

The industry has historically been characterized by a dominance of wired telecom services which accounted for more than US$300 billion in revenues in 2009, a share of approximately 58%. However, the segment is witnessing a decline in total number of subscriber base, as consumers shift from wired phones to wireless services. As a result, wireless services are reporting the highest growth within the industry, with subscriber numbers already exceeding those of wired services.

The telecom sector is highly competitive, though dominated by three to five players who control majority of the subscriber base and industry revenues. AT&T, Verizon, T-Mobile, Sprint and Qwest are the leading players in various sub-segments of the industry. The wired and wireless segments are led by AT&T and Verizon with market shares of 28.8% and 31.1% respectively, but the market for internet services is relatively more fragmented with none of the operators having a market share of more than 20%. Operators have to compete fiercely to gain subscribers and market share in an increasingly saturating market and the industry has witnessed aggressive consolidation activity, simultaneously providing growth opportunities to smaller, emerging players who have managed to take away some of the subscriber base of the larger players, by offering comparable services at competitive prices.

The highly competitive nature of the market is also driving the need for continuous innovation and product development, as operators strive to differentiate their services through offerings that provide consumers with increased convenience, time and cost-advantage and the ability to access all forms of communications and entertainment related services through an integrated solution. In order to meet the demands for enhanced services, technologies such as 4G, LTE and WiMAX are attracting increased operator attention, resulting in the introduction of new offerings such as IPTV, and quadruple-play services. The growing popularity of feature-rich smartphones due to their affordability is also leading operators into investing in enhancing their wireless services on technology platforms which enable high-speed data transfers. The holistic effect of these developments has led to consumers increasingly preferring mobiles for their communication and entertainment requirements, and consequently revenues from mobile data usage are projected to grow at a much faster pace than revenues from mobile voice usage.

In light of the several developments impacting the industry and the high levels of user penetration, the industry is expected to grow at approximately 4.1% over the next three years and reach a value of US$608 billion by 2013. The growth is expected to be driven largely by the wireless segment, which is expected to grow at 6.6% and account for 46% of the industry's revenues in 2013, up from the current 42%. Wired services are also expected to grow, albeit much slowly at about 2.3%, a growth largely driven by increasing operator focus on bundled services and provision of data and internet services through their wire line networks. As a whole, the growth in the industry will remain dependent on operators' ability to improve their services, and broaden their offerings to provide consumers with comprehensive solutions addressing the need for both communication and entertainment related services.

Industry Definition

The US telecommunications industry comprises establishments that provide communication and related services and includes services such as voice and data telephony, voice over internet protocol (VoIP); cable and satellite television distribution services; internet access; and telecommunications reselling services.

The Telecommunications sector is primarily engaged in operating, and/or providing access to facilities for the transmission of voice, data, text, sound, and video and provides the primary means of communication of all forms to businesses, households, and individuals, and is governed by the Federal Communications Commission (FCC). The establishments engaged in this sector provide telecommunication services by operating transmission facilities and infrastructure that they own and/or lease.

The telecommunications sector comprises the following sub-segments:

Wired Services

The operators in this segment mainly provide telecommunications services such as wired (landline) telephone, digital subscriber line (DSL) Internet, and cable TV and Internet services, through physical cables that are installed at individual customers' premises. Wired telecommunications also includes direct-to-home satellite television distributors, which route TV, voice, Internet, data, and other content over a network of wires and cables, and control access to this content.

Wireless Services

Wireless telecommunications carriers provide telephone, Internet, data, and other services to customers through the transmission of signals by using network of radio towers. The signals are transmitted through an antenna directly to customers, who use devices, such as cell phones and mobile computers, to receive, interpret, and send information. The largest component of this industry segment consists of companies that provide cellular phone service, which has grown rapidly over the past decade. Other components include establishments that deliver mobile Internet services to individuals with Internet-enabled mobile phones and computers.

Industry Value Chain

The telecommunications industry comprises multiple participants that are involved at various stages of the value chain. A majority of these participants provide infrastructure and support services, and application development services, which form the foundation of an efficient service delivery by telecom operators.

Figure 1: Value Chain of Telecommunications Industry

Apart from the distribution partners, following are the key value chain participants:

Infrastructure Developers

Infrastructure developers provide the network necessary for consumers to perform voice and data services. They design, manufacture and assemble switches, gateways, and interfaces which provides basic infrastructure to the operators to enable communications amongst the subscribers. Examples of major infrastructure providers are Nokia-Siemens, Ericsson, Motorola and Alcatel-Lucent.

Application Developers

Application developers provide operating systems and applications for support services which act as an interface between the devices and the network hardware. They also enable platform sharing for content developers to ensure compatible content development. Developers such as Microsoft, Apple, Oracle, Sun etc. provide open and close sourced operating systems and a variety of enabling applications like WAP and HTML.

Content Developers

Content Developers enable personalized access to information by providing content in compatible format readily available and accessible to the consumers. They also enable operators to offer personalized content to the consumers.

Device Manufacturers

Device manufacturers develop devices which allow end users to access services offered by operators. Their innovation and R&D initiatives drive the industry's growth as network operators are encouraged to improve the functionality of the network services and lead to better content availability and accessibility for the consumer. Major device manufacturers include Nokia, Samsung, Apple and Dell.

Operators

Operators design, build and operate voice and data networks. They engage in selling these services to the end consumer either directly or indirectly through various retailers and Mobile Virtual Network Operators (MVNO). Leading operators in the US are AT&T, Verizon and Sprint.

Market Overview

The US telecommunication industry has grown at a CAGR of 4.3% between 2003 and 2009, to reach a market size of US$517 billion in 2009 (Figure 2). The revenues of the industry comprise revenues of both wired and wireless operators.

Figure 2: Market Size and y-o-y growth of US Telecommunication Industry (US$ billion)

Source: Telecommunications Industry Association

The industry has seen a positive growth over the last few years, except in 2009 when it declined 1.5% owing to the impacts of the economic slowdown witnessed in 2008. The weak market conditions led to lower consumer confidence and had a negative impact on the economic activity, limiting consumer expenditure on telecommunication services.

The number of subscribers for the fixed telephone lines declined at a rate of 2.7% per year for the six years ending 2009 whereas they increased at a rate of 10.9% and 4.8% per year for the wireless and internet category, respectively, over 2003-09.

Figure 3: Number of subscribers (million)

Source: International Telecommunication Union

As a result of the decline in total number of subscribers, the contribution of the landline industry to the total industry revenues has declined from 71.2% in 2003 to 58.3% in 2009 (Figure 4). In addition, with an FCC ruling in 2003 allowing consumers to transfer home telephone numbers to their wireless phones, consumers started shifting their wired phone connections to wireless operators, resulting in an increase in wireless penetration.

Figure 4: Share of Landline and Wireless Revenues (US$ billion)

Source: Telecommunications Industry Association

With their share in overall revenues increasing, and an over 10% annual growth, the wireless segment is driving the growth in the telecommunication market. Improvements in technology, equipment features and the availability of internet services wirelessly has significantly added to the growth of the wireless segment.

Figure 5: US Wireless Penetration (percent of total population)

Source: Telecommunications Industry Association

The growth in penetration and subscriber base for wireless operators is reflected in their operating indicators as well, with their ARPU increasing in 2009, despite a slowdown in the industry (Figure 6).

Figure 6: Wireless Average Revenue per User (ARPU) (US$)

Source: Telecommunications Industry Association

Even though wired telecom is witnessing a decline in total number of subscribers, industry analysts are of the view that wired telecom operators can continue to remain profitable and sustain themselves by shifting the focus of their core services from fixed-line telephony only to the provision of internet, data multimedia and broadcasting content - areas which have the highest growth potential. With broadband expected to become the primary means of communication in the coming years, ample growth opportunities exist for both wired and wireless operators in the US market.

Industry Trends

The US Telecommunications industry is expected to become increasingly mature over the next few years. It is expected that Americans will increasingly prefer the use of cellular phones over land lines for their voice telephony requirements, and they will use multiple mobile phones for voice calls as well as additional services, such as internet, messaging and more. There will be consolidation as major players will continue to acquire smaller operators and introduce innovative products and value-added services.

Strong Growth in Mobile Data Usage

The use of mobile phones as a medium of accessing internet and related services is emerging as a key trend in the sector. Data-related spending on mobile phones has nearly doubled during the past two years, rising to US$43 billion in 2009 from only US$23.2 billion in 2007. In 2009, mobile data revenues accounted for nearly 27% of the total cellular services revenue in the US, while in the third and fourth quarters of 2009, leading mobile operators reported that the share of mobile data revenues had crossed the 30% mark.

Figure 7: Wireless Services Revenue by Category (US$ billion)

Source: Telecommunications Industry Association

A gradual shift is also being witnessed towards bundled data plans that offer multiple services under the same plan. Flat-rate plans are also gaining popularity and all the major carriers seem to be offering flat-fee access plans for most of the new Smartphones being introduced in the market. Mobile video/audio streaming and mobile internet are the largest traffic generating services on Smartphones.

Figure 8: Total Traffic from Mobile Video Streaming, Mobile Audio Streaming and Mobile Internet Access in US (million gigabytes)

Source: Frost and Sullivan

According to latest statistics, the amount of data transferred using mobile phones has already grown four-fold since 2008, and it is expected to reach over 180 million gigabytes (GB) by 2015, highlighting the growth potential of the service.

Growth in Mobile Advertising

T-Mobile USA recently announced that Google would replace Yahoo! to provide the default search technology for its mobile devices

Google and Apple acquired AdMob and Quattro Wireless, respectively, to enhance their advertising capabilities

The mobile internet and mobile applications segments account for the majority of data usage on mobile phones. As a result of this trend, high growth is also being witnessed in mobile advertising. Partnerships and merger and acquisition activities have been quite significant in US mobile advertising space.

Advertising revenues for major operators continue to increase at a rapid pace, and the emergence of connected devices such as Apple's iPad and others is expected to provide a further stimulus to this revenue growth opportunity. These factors are likely to drive innovation and expedite the market development.

Market Consolidation

The US Telecommunications industry is witnessing significant restructuring activities as companies are expanding their coverage and service offerings in an attempt to be more competitive.

In order to secure regulatory approval for its January 2009 acquisition of Alltel, Verizon Wireless divested certain properties, which AT&T acquired in June 2010

In July 2009, NTT DoCoMo Inc. announced a deal with NextWave Wireless Inc. to acquire a 35% stake in PacketVideo Corporation to provide enhanced media services to its clients. In August 2010, it has offered to buy the remaining 65% equity, subject to regulatory approvals.

In December 2008, Clearwire Corporation completed a transaction with Sprint Nextel to combine their next-generation wireless Internet businesses, under a new company, Clearwire. Sprint partnered with Comcast Corp., Intel Corp., Time Warner Cable Inc., and Bright House Networks LLC for the joint venture.

Growing Demand for Bundled Services

AT&T offers U-VERSE Internet Protocol-based TV service while Verizon Communications offers an IPTV service called FiOS TV

By early 2010, AT&T had two million subscribers, while Verizon's service had 2.9 million subscribers

SureWest Digital TV service offers high-definition television over IP to Sacramento, California

Consolidated Communications' Digital Video Service offers many affordable plans for IPTV services in Illinois, Texas

Demand for bundled services is witnessing growth, encouraging companies to expand their service offerings. Cable companies and telecommunication service providers are competing with each other to offer complete packaged quadruple-play bundles of wireless, Internet, landline and television services. In order to remain competitive, leading telecommunication companies such as AT&T and Verizon Communications are entering the television market through the development of television and other entertainment networks.

With leading players stepping up their offerings, subscriber numbers of bundled services are increasing, and they have already exceeded subscribers who opt for non-bundled services. By 2013, this gap is expected to widen to 60 million subscribers.

Figure 9: Residential landlines by Bundled Status in the US (million)

Source: Telecommunications Industry Association

Increasing M-Commerce Sales

Mobile commerce sales are also witnessing an increasing trend with greater carrier adoption and implementation of enabling technologies, and more options for customers. Revenues from m-commerce in the US are expected to double in 2010 to US$2.4 billion from US$1.2 billion in 2009, following a 203% jump in 2009 from US$396 million in 2008. Growth has been fuelled by rapid adoption of Smartphone and associated services, and an increased competition between retailers. By 2015, shoppers worldwide are expected to spend US$119 billion on goods and services purchased via mobile phones, representing about 8% of total e-commerce sales. The US market is expected to be a large beneficiary of this growth.

Growth Drivers

Improved speeds and other value added features of the 3G and forthcoming 4G mobile technologies have provided the much needed impetus to the US Telecommunication market. Introduction of compact and versatile handset models with additional features (e.g., high resolution touch-screen, television programming, high-speed Internet access and navigation capabilities) is expected to boost wireless revenues.

Advances in Technology

Technological innovation is the prime force driving the telecommunication sector. There are a wide variety of technologies being developed and deployed in the US, such as:

3G services: Adoption is increasing at a rapid pace, with Smartphones such as Apple's iPhone, Google's Android-based devices, new generation of BlackBerry and Palm devices, and others responsible for a significant percent of new 3G subscribers

4G LTE: Mobile operators such as AT&T and Verizon Wireless have already made significant progress in 4G LTE (Long Term Evolution) technology. The first commercial LTE devices are expected by late 2010 or early 2011. Currently, Sprint Nextel offers 4G technology through the WiMAX (Worldwide Interoperability for Microwave Access) network. In May 2010, T-Mobile USA announced a continued broadening of its HSPA+ broadband network that offers 4G speeds in the northeastern US and select major cities

Integration with banking systems: Wireless phones are being developed that can be used for making contactless payments. Using this application, consumers can wave their phones in front of a point-of-purchase terminal (for example, a vending machine) and the phone will wirelessly transmit payment information, bypassing the need to swipe a credit card.

High Smartphone Penetration

Affordability of handsets and availability of new features have propelled the sales of Smartphones in the US. High-quality video on a larger screen, improved multimedia experience, device screen display characteristics and faster networks; longer session times and high frequency of content usage, availability of 'free' content, and full HTML browsing are some of the major drivers for increased data consumption on Smartphones.

Downloads and revenues from Smartphone application stores, especially for Apple and Android devices, are growing rapidly and have become significant market opportunities for content, commerce, and advertising solution providers.

In 2009, global downloads from Smartphone application stores exceeded 3.4 billion and more than 65% of these downloads were in the US. In terms of the revenue opportunity, out of a total estimated 2.9 billion yearly downloads, approximately 70% downloads are made by the US Smartphone users - mainly on the Apple and Android devices.

Issues and Challenges

Regulatory policies in the US telecommunication industry have been set and regulated primarily by the Federal Communications Commission (FCC). In an attempt to promote competition at the local level, the Telecommunications Act was framed and adopted in 1996. It allowed cable television and long-distance companies to enter local markets, local service providers to enter the long-distance arena, and all telephone companies to enter the cable television business.

In March 2010, the FCC unveiled a National Broadband Plan as part of the February 2009 US$787 billion American Recovery and Reinvestment Act economic stimulus legislation. The plan aims to spread high-speed Internet access over a larger share of the country. As a part of the plan's recommendations, 500 megahertz of commercial and federal spectrum is to be freed over the next ten years for wireless broadband services.

Regulatory Issues and Other Challenges

There are several regulations imposed on the telecommunication service providers. These include:

Wireless phone manufacturers have to meet certain requirements for their phones, such as radio frequency exposure limits

The FCC also requires wireless service providers to have the ability to trace emergency calls (i.e. 911)

The FCC and the Federal Aviation Administration ban wireless calls on commercial aircraft during flight due to potential interference with aircraft operations. There are also wireless phone regulations at the state and local level, such as those banning the use of these devices for making calls and texting while driving.

The FCC is also considering a plan that would require wireless carriers to warn consumers if they are incurring unusually high charges for roaming and data usage beyond their normal plan

The Food and Drug Administration monitors ongoing scientific research on possible adverse health effects from the use of wireless phone devices

Spectrum Shortage

The expansion of application stores and growth in the Smartphone universe is putting strains on the wireless spectrum. Hence, the FCC has been asked to allocate an additional 800 MHz of spectrum for the wireless industry by 2015. This will effectively triple the spectrum available for wireless carriers.

Competitive Landscape

The competitive environment in the telecommunication industry has been changing rapidly. Cable companies are competing with telecommunication service providers to offer complete packaged quadruple-play bundles of wireless, Internet, landline and television services. As of March 2009, ComCast had become the third largest residential phone service provider in the US due to the rapid adoption of the company's 'ComCast Digital Voice' service.

"Companies are offering complete packaged quadruple-play bundles of wireless, Internet, landline and television services."

On the other hand, telecommunication companies such as AT&T and Verizon Communications are entering the television market through the development of television and other entertainment networks. AT&T offers Internet Protocol-based TV service named U-Verse and had acquired a total of two million customers by early 2010. Verizon Communications offers a TV service called FiOS TV, which is a fiber-optic service that provides high definition content and had 2.9 million customers at the start of 2010.

"Price is a major area of competition and operators are coming up with innovative packages to provide the best deal to customers"

Another area of competition among telecommunication service providers is price. Price-based competition is revealed in the many innovative service plans and features that have been introduced by wireless operators.

Capital investments represent another dimension of competition. In 2009, despite continued macroeconomic difficulties, wireless operators in the US collectively reported capital expenditures of US$20.4 billion.

The industry continues to experience restructuring activities as companies expand their coverage and service offerings to become more competitive.

In April 2010, CenturyLink, a company that was created by the July 2009 merger of CenturyTel and EMBARQ, entered into an agreement to acquire Qwest Communications

In December 2009, Sprint Nextel acquired iPCS, which offered wireless mobility communication network products under the SPRINT brand name

In November 2009, AT&T completed its acquisition of Centennial Communications, a provider of wired and wireless communication services

In November 2009, Sprint Nextel completed its acquisition of Virgin Mobile USA

US Wireless Market

"The US wireless market is highly consolidated with the top four players accounting for about 80% of the wireless market."

The US wireless services market consists of operators that range from small, privately held firms to large multinational corporations. As of 31 December 2008, there were about 170 facilities-based providers of wireless service in the US.

The market is highly consolidated with the top four players comprising almost 80.3% of the market. Verizon is the leading operator with a market share of 31.1% followed by AT&T with 25.2%, Sprint Nextel and T-Mobile with 12.0%, respectively.

Figure 10: US Wireless Market Share in Q1 2009 and Q1 20101

Source: Wireless Intelligence, ComScore

1Market share by subscribers

In recent years, FCC decisions to release additional spectrum have paved the way for entry of new players such as Clearwire, cable companies including Comcast and Cox, as well as expansion by existing operators in terms of their network coverage, breadth of service offerings and service reliability.

"New entrants have grabbed market share from players such as Sprint who are losing out due to problems of network quality and customer service"New entrants have grown and succeeded rapidly, (as depicted by the increase in the share of 'Others'). For instance, since emerging from bankruptcy in August 2004, Leap Wireless has achieved significant growth and now ranks as the seventh largest wireless carrier in the US. The company recently introduced a nationwide service plan and serves all of the top 125 cities through a combination of its own network and roaming agreements. In 2009, Leap's net subscriber additions reached their highest level ever. Another example is MetroPCS, which launched its wireless service in the US in 2002 and now boasts a subscriber population of more than 7.6 million.

In addition, Sprint has lost market share due to problems with network quality and customer service. It has lost two million customers since 2009 leading to a decline in market share from 17.9% to 12.0% in a span of a year.

"Mobile data usage is increasing at a rapid rate. However, data revenues are expected to lag behind."

The Wireless segment has also seen an upsurge in mobile data revenues in the last few years. The revenue from mobile data services reached US$10 billion in the Q12009 and further increased to US$13.2 billion in Q22010. Verizon and AT&T together accounted for 75% of Q2's data revenue growth.

According to ABI Research, while mobile data usage in North America is expected to grow at 55% CAGR from 2009 to 2015, Mobile data revenues are expected to grow at a CAGR of about 18% only, thus presenting a challenge for operators as they look to manage the demands on their networks without a corresponding increase in income.

Figure 11: Contribution of Mobile Operators to the Total Mobile Data Revenues (2009)

Source: Frost & Sullivan

"Introduction of new technology such as 4G LTE and WiMax will take the level of competition to the next level."

Going forward, the market is expected to continue to witness intense competition with players taking wireless communication to the next level through introduction of new technology.

Verizon is planning to bring 4G Long-term Evolution (LTE) technology to 25 to 30 markets with 100 million potential customers by the end of 2010

AT&T plans to launch LTE trials later in 2010, with initial deployments underway sometime next year

MetroPCS also plans to introduce its 4G LTE network in selected metropolitan areas in the second half of 2010

Clearwire and Sprint Nextel are coming up with WiMax technology for high speed wireless communications

"The Fixed Line market is transforming with the focus shifting from voice to broadband services."US Fixed Line Market

Similar to the wireless market, the US fixed line market is also dominated by a few players. The top three operators, AT&T, Verizon and Qwest account for 61.7% of the market between them.

Figure 12: US Fixed Line Telecom Market Share (2008)2

Source: Datamonitor

2Market share by value

Operators have been cutting costs and improving systems to realize efficiency gains. Moreover, fixed-line companies are adapting to their surroundings by matching efforts from cable companies in terms of broadband and video offerings. These operators have the 'reach advantage' of their networks to carry the ever-growing internet traffic.

US Broadband Market

"The US Broadband market is relatively fragmented with the top nineteen players accounting for 93% of the market"

The US broadband market is relatively fragmented in comparison with the wireless and fixed-line markets. The top five operators account for 56.2% market share. Other operators in the market include Earth Link, Charter, Qwest and Cablevision.

Figure 13: US Broadband Market Share (2008)3

Source: ISP Planet

3Market share by subscribers

The companies in the broadband market operate in a highly competitive and technologically complex environment where it's likely that new technologies will further increase the number of operators/ competitors. For end-users, switching costs are not high and 'churn' remains a major issue for Internet Service Providers (ISPs).

In Q22010, the nineteen largest cable and telephone providers, representing 93% of the market, acquired 336,000 net additional high-speed internet subscribers. Net broadband additions in the quarter were the fewest in any quarter in nine years. While the second quarter is traditionally slower for broadband growth; weakness in Q2 was compounded by the market continuing to mature further as well as AT&T and Verizon focusing on selling multi-service fiber offerings, often at the expense of their traditional DSL services.

Sales Trends of Key Products

Smartphones

Verizon launched a major marketing campaign for Smartphones including Motorola Droid through buy-one-get-one free promotion

T-Mobile and AT&T have also featured Android phones as their flagship Smartphones following high contribution to sales

Sales of Smartphones have been booming in the US market. Smartphones accounted for 25.3% of total handset sales in 2009 and are expected to comprise 41% of handset sales by 2013.

Verizon Wireless' Smartphone sales were on par with AT&T's in first quarter of 2010 owing to strong sales of the Droid, Droid Eris, and Blackberry Curve promotions. Smartphone sales at AT&T comprised nearly a third of the entire US Smartphone market (32%), followed by Verizon Wireless (30%), T-Mobile (17%) and Sprint (15%) [1]

Figure 14: Smartphones Sales as Percent of Total Wireless Telecom Device Sales in US

Source: Telecommunications Industry Association

Major factor determining the sales of Smartphones is their underlying operating system (OS) which includes Google's Android, Apple's iPhone OS, Symbian, Blackberry OS, etc. The rise in the sales of Smartphones can also be attributed to Google's Android as it steadily overtook the sales of Apple's iPhone OS in the first quarter of 2010.

Devices running Android accounted for 28% of the units sold to US consumers in the first quarter of 2010

BlackBerry devices made by Research In Motion, which use RIM's operating system, took up 36% of the US market

Apple's iPhone accounts for 21% of the market

Also, the huge growth can be attributed to the fact that devices using these software are now available on all major US carrier networks.

VoIP Services

VoIP or Voice over Internet Protocol is a key product category to have witnessed growth in the US telecommunications space with strong subscriber and revenue growth rates. Since the entry of Comcast and other cable companies, VoIP services have been gaining prominence.

Figure 15: Residential VoIP subscribers in US (millions) (2003-2013)

Source: Telecommunications Industry Association

In 2010 the US cable companies would be providing telephone services to more than 20 million subscribers. Non-cable or telecom companies providing VoIP, such as Skype, are making strong inroads into the US VoIP market.

The overall residential VoIP market will rise from 27.5 million subscribers in 2009 to 40.0 million in 2013, growing at a CAGR of 9.8%

The VoIP market has also witnessed the entry of Microsoft, Apple, Google and Yahoo! Mobile. VoIP is poised for exponential growth, underpinned by the widespread adoption of Wi-Fi-enabled handsets

The deployment of 3G networks, of the Clear WiMAX network on which Sprint Nextel and others provide mobile services and the decisions by Verizon Wireless and AT&T Mobility to upgrade to an open access LTE platform for their 4G investments is also expected to propel mobile VoIP into the mainstream of mobile telecommunications

IPTV

IPTV is emerging as a key product of telecom operators. The IPTV services revenues have registered strong growth in the last few years, growing from US$200 million in 2006 to US$2.9 billion in 2009.

Figure 16: IPTV Revenue in US (US$ billion)

Source: Telecommunications Industry Association

With the subscriber number in the US IPTV market projected to grow from 5 million in 2009 to 15.5 million by 2013, revenues from these service are also expected to grow three-fold from approximately US$3 billion in 2009 to over US$10 billion by the end of 2013. This high revenue growth is driving increased carrier participation in the product category. However, big telecom companies such as Verizon, AT&T and SureWest have been facing strong competition from Pay TV which has had a strong foothold in US till now.

Figure 17: Market shares of Cable, Satellite TV and IPTV providers (2005-2010)

Provider type

2005

2006

2007

2008

2009

2010 (e)

Cable

72%

70%

68%

65%

62%

59%

Satellite

28%

30%

31%

32%

33%

33%

Telcos IPTV

-%

-%

2%

3%

5%

8%

The number of cable subscribers has grown steadily, from around 10 million subscribers to approximately 62 million in 2009. This growth has positioned cable as the dominant force in the pay TV market, also ideally positioning it to deploy triple play services. However, their number of subscribers has been slowly declining, from a high of 67 million in 2001Source: BuddeComm based on industry data

Cable's share of the pay TV market has declined from nearly 80% in 2000 to around 62% in 2009 owing to aggressive competition from companies such as Verizon and AT&T and satellite TV providers

While IPTV held less than a 5% share of total television households in 2009, the percentage is projected to approach 13% in 2013

Broadband services

The broadband subscribers in the US have been steadily increasing from 20.4 million in 2003 to 75.6 million in 2009 with a CAGR of 24.4%. The growth however slowed down to 11-12% in the period from 2007-09 due to the recessionary conditions in the market.

Figure 18: Broadband Subscribers in the US (millions)

Source: Telecommunications Industry Association

The broadband subscribers are expected to reach 111.1 million by 2013, and household penetration of broadband is expected to increase from 64.2% in 2009 to 90.7% in 2013. This trend is expected to continue in the market till 2013, largely driven by post recession recovery and growing demand for high-volume data applications across all segments.

Figure 19: Net Broadband Subscribers addition projections by technology 2010-2013 (millions)

Source: Telecommunications Industry Association

Fixed wireless is emerging as a solution to provide broadband in rural areas. In percentage terms, fixed wireless will be surpassed only by FttH (Fiber to the Home) as the fastest growing broadband technology during 2010-2013.

AT&T's total broadband subscribers increased from 15.07 million in 2008 to 16.04 million in Q12010, primarily due to growth in Fiber and Satellite broadband subscribers which increased from 1.06 million in 2008 to 2.22 million in Q12010, whereas it witnessed a decline in DSL subscribers with the number coming down from 14.01 million in 2008 to 13.72 million in Q12010

Verizon showed a similar trend with total broadband subscribers increasing from 8.67 million in 2008 to 9.31 million in Q12010. The growth was attributed to an increase in FiOS subscribers which reached 3.61 million in Q12010 from 2.48 million in 2008, while the DSL subscribers declined from 6.19 million in 2008 to 5.69 million in Q12010.

Verizon has adopted FttH, whilst AT&T has elected to pursue primarily FttN (Fiber to the Node) with FttH for new developments and multiple dwelling units

In addition, the smaller competitor carriers continue to deploy fiber deeper into their networks. Significantly, an increasing number of municipalities are sponsoring FttH networks, and the recent FCC National Broadband Plan envisages an increasingly important role for public FttH networks in the pursuit of the National Broadband Plan goals

By early 2010, the estimated number of homes connected to FttH networks approached twenty million

Prepaid Calling Cards

The prepaid calling card market has been in a constant decline since 2004 as a result of growing competition from alternative technologies including wireless and VoIP coupled with the rise in the number of wireless subscribers with large buckets of minutes and the increase in the number of landline plans that include unlimited long-distance calling. The lack of regulation in the prepaid card market, allowing easy entry for new players, and confusing charges for the users are further contributing to the decline in the prepaid card market.

Figure 20: Prepaid Calling Card Minutes of Use in the US (Billion)

Source: Telecommunications Industry Association

The number of prepaid calling minutes is expected to decline from 40.5 billion in 2009 to 32.8 billion in 2013 as competing technologies are likely to continue to gain market share. Spending for the prepaid calling card market is also expected to continue to decrease, declining from US$2.7 billion in 2009 to US$2.1 billion in 2013 as the ongoing decline in average prices combines with the decrease in the number of minutes.

Figure 21: Prepaid Calling Card Revenue (US$ billion)

Source: Telecommunications Industry Association

Spending on domestic prepaid calling declined by more than 50% from US$1.3 billion in 2004 to US$621 million in 2009. The decline is expected to be less severe through 2013, as the wireless market reaches saturation. Domestic prepaid calling card spending is expected to decline to US$551 million in 2013, a 2.9% CAGR decrease from 2009.

International prepaid calling card spending peaked in 2006 at US$2.2 billion. Since then, some migration to Skype and other VoIP services with lower costs has impacted the calling card market revenues. The decrease is expected to become more significant starting in 2010. International card spending would largely follow domestic calling card pattern, with revenues declining modestly from their peak of US$2.2 billion in 2006 through 2009, and a sharper decline through 2013. The international calling card spending is expected to decrease from US$2.1 billion in 2009 to US$1.6 billion in 2013, a 6.3% CAGR decrease.

New Products/Technologies

Owing to extreme competition in the wireless telecom industry, consumers are witnessing the availability of multiple products based on the upcoming powerful technologies. There are plenty of new technology products being launched as well as being developed for launch in 2011.

Nokia Siemens Networks signed an 8-year agreement worth US$7 billion to deploy, install, operate, and maintain LightSquared network

The LightSquared founding team is announcing up to US$1.75 billion in additional debt and equity financingLightSquared

LightSquared is a new nationwide 4G-LTE [2] open wireless broadband network that will use a unique combination of satellite and terrestrial technology to revolutionize wireless communications.

As America's first wholesale-only wireless broadband network, LightSquared will provide broadband wireless capacity to:

Retailers

Wireline and Wireless communication service providers

Cable operators

Device manufacturers

Web players and many others

LightSquared will deploy its wireless broadband network using LTE, Long Term Evolution based on 4G technology

Its LTE network will be combined with a commercial satellite, to provide coverage of the entire US

This integrated LTE-satellite network is a world's first. The LightSquared network has the capacity to support the explosive demand generated by new consumer devices and mobile applications

By 2015, LightSquared expects to cover at least 92% of people in the US with its wireless broadband network

Through LightSquared's wholesale-only business model, those without their own wireless network or who have limited geographic coverage or spectrum can develop and sell their own products using the LightSquared network - at a competitive price and without retail competition from LightSquared.

Value proposition of LightSquared

By combining a national LTE network with ubiquitous satellite coverage, LightSquared will offer its partners a new wholesale revenue platform, and will also provide end users with a reliable and fast experience, regardless of their location

On the other hand, other providers are limited to offering wireless and mobile broadband services to customers strictly via cell phone towers or limited satellite connections

Figure 22: Timeline for roll out of the LightSquared network

Many of the big global operators and mobile communications companies are supporting LTE in the race for 4G mobile broadband. These include:

Vodafone

Orange

T-Mobile

LG Electronics

Ericsson

AT&T

Siemens

NTT DoMoCo

Nokia4G Technology- LTE

WiMax and LTE are the two principal mobile broadband platforms to drive 4G technology for the future years to come. While WiMax has got a head start of two years over LTE, LTE is shaping up as the early leader in 4G deployments, given the commitments on the part of most major service providers.

In the US, Verizon Wireless has plans to commercially launch its LTE network in 4Q2010, with initial offerings in 25 to 30 markets. AT&T and T-Mobile are targeting deployment of LTE in 2011, but in the meantime both networks have moved to HSPA [3] 7.2, while T-Mobile had already announced plans to roll out HSPA+ in the beginning of 2010.

Executive Comments on Marketing Strategy

"We focus our marketing strategy on offering solutions that are targeted to satisfy the needs of our various customer market segments, such as young adults, seniors, families and small to large businesses; promoting our brand; leveraging our extensive distribution network; and cross-marketing with Verizon's other business units and Vodafone." (Verizon Communications Inc. 10-K 2009)

"We're in the connectivity business. We like to say we connect people to their world. Our objective is to make sure you're connected to your business information needs, to your home entertainment information needs, to your family, to your associates. Also that the machines you possess that transmit data are connected to other machines that are important. We have this really terrific, world-class global network. So we're in the business of connecting people to information and data." - Randall Stephenson, CEO - AT&T, August 2010

"But the way we view our business, we love what we do. We think what we do matters. We have a chance to get mobile devices to a lot of people. So there are four billion people in the world now with a cellular device, which is sort of unheard of, when you think about it, from where we started. The next billion or so people to be connected to the Internet will all be connected by wireless. So I think we have a chance to crack the institutional roadblocks, particularly in education and health care, to get information into people's hands, where they will change the world. So I think, people can learn -- people can learn differently; you can have teaching 24 by 7; people can download stuff. I mean, there's so many different ways that the learning process changes by having a mobile device. - Ivan Seidenberg, CEO - Verizon, October 2009

"We have to pivot and make a shift from the voice business to the data business and eventually to the video business. … we must really position ourselves to be an extremely potent video-centric asset. The issue there is perhaps it is like the dog chasing the bus a little bit. So what I need to do is get ourselves focused around the following idea, that video is going to be the core product in the fixed line business. … I shed myself of the burden of chasing the inflection point in access lines and say I don't care about that anymore." - Ivan Seidenberg, CEO - Verizon, October 2009

"We see ourselves as a company with at least three products now in a bundle culture. So when you evaluate now whether you have a piece of programming, it's in a much different context than if you are a [satellite] company where you only have that product. ... We're not a specialty store now as much as we are a retailer of a range of products that people want." - Sam Howe, CMO - Time Warner Cable, October 2008

"As we recognize the potency of the brand and the need for top-line revenue growth, spending becomes more important, and we are saying that to the street. We definitely are ticking up our spend. It's not just in promotion, but that's where it is arriving most often. And we're also being more selective in our market placement in where we want to amp it up. And the brand-influencer campaign in New York is an expression of that, an incremental spend we definitely wouldn't have done before." - Sam Howe, CMO - Time Warner Cable, October 2008

"Sprint continues to build its business brand around solutions, innovative products, M2M capabilities and mobile broadband for business." - Paget Alves, President-Business Markets Group, Sprint Nextel Corp. August 2010

"We have not had a cohesive or a singular value message out there since we left the 'Get More' campaign. While T-Mobile would highlight its value to customers that would not be its exclusive focus. T-Mobile will also emphasize coverage and service." - Denny Marie Post, Ex CMO - T-Mobile, May 2009

Market Outlook

According to Telecommunications Industry Association, the US telecom industry is estimated to grow at a CAGR of 4.1% between 2009 and 2013, to reach a size of US$608 billion.

Figure 23: Estimated Market size (US$ billion)

Source: Telecommunications Industry Association

The wireless segment is expected to contribute 46% to the industry revenues in 2013 as against 42% witnessed in 2009. The growth in the US telecom industry is expected to be driven by the growth in the wireless segment, estimated to grow at a rate of 6.6% per year for 2009 to 2013. Revenues in the landline segment are expected to grow at a rate of 2.3% per year between 2009 and 2013.

The growth in the wireless segment is expected to be driven by increasing US wireless penetration, growing spending on data, booming smart phones sales and rising ARPU.

Figure 24: US Wireless ARPU (US$)

Source: Telecommunications Industry Association

Wireless penetration is also expected to increase from nearly 90% in 2009 to more than 95% of the population by 2013.

Figure 25: US wireless penetration (% of total population)

Source: Telecommunications Industry Association

Reversing the long-term trend, ARPU growth during the next four years is expected to be the principal driver of overall spending growth owing to post-recession recovery, growing demand for high-volume data applications, booming smart phone sales and rollout of 4G networks.

The US telecommunication industry is expected to become increasingly matured over the next few years. Subscriber numbers will continue to grow, though at a slower pace than the past five years, as the consumers increasingly switch over from land lines, use multiple mobile phones and use phones for additional services.