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Cell Phone Economic and Business Factors

April 20, 2010

Cell Phone Economic and Business Factors

The economic and business factors surrounding the cell phone industry are complicated and fluid. We have already discussed the political and legal issues that cell phone providers and manufacturers must deal with. In this essay we will touch on the only two things a cell phone customer really cares about: the cell phone itself and the service. There are countless cell phone providers around the world and even more cell phone manufacturers. For the purposes of this essay, we will focus on the four largest providers in the United States.

First, let’s discuss the marketplace. As popular as the cell phone is in the United States, the country represents only 6.75% of the cell phones in the world. That is 276 million cell phones out of a total of 4.1 billion! (Author unknown 10, 2010). In fact, we are not even the largest users of cell phones in the world. Both China and India rank well ahead of us.  But the number of cell phones in the U.S. equates to 90% of the total population! And that, by far, is the greatest density of any country. It is important to understand and differentiate the worldwide marketplace as it relates to cell phone manufacturers versus providers. Whereas providers are typically limited to a country, cell phone manufacturers have the entire world as their marketplace. It is equally important to recognize the fact that no provider can succeed without a quality product to sell, nor can any manufacturer succeed without successful, aggressive providers. These two segments of the industry are forever intertwined, and both need the other for its survival. Complicated and often times strained partnerships abound as providers are only as successful as the latest and greatest phone technology and manufacturers fight diligently to get their product to every possible user without alienating existing relationships.

In the world of U.S. cell phone providers there is the big four: AT&T, Verizon Wireless, Sprint Nextel and T-Mobile. There are many others, but these four companies combine for a whopping 84% of the U.S. marketplace (Gruener, 2008).

The four companies break down thusly:

  1. AT&T: 70.1 million subscribers
  2. Verizon Wireless: 65.7 million subscribers
  3. Sprint Nextel: 48.5 million subscribers
  4. T-Mobile: 28.7 million subscribers

Of the nine million new subscribers added last year, AT&T added the most new subscribers with 14.9%, T-Mobile showed great progress adding 14.6% of the new customer base, Verizon added 11.2%, and Sprint Nextel’s growth lagged as they picked up only. Seven percent of the new market. As with most businesses there are a limited numbers of ways that these companies can grow their bottom lines: add new customers, raise rates (hopefully by adding new services), cut expenses and “steal” customers away from the competition. The cell phone provider war you see advertised on TV all day long between Verizon and AT&T is targeted to do just that.

Regarding cell phone manufacturers, there exists a big four as well: Nokia, Samsung, Motorola and LG and all four4 work with the worlds largest wireless carriers, such as Verizon Wireless, Sprint, ATT, Vodafone, China Mobile, and Deutsche Telecom. The history of the Cell phone market has traditionally played hand-in-hand with the wireless carriers (Cappe, 2010).

While it used to be more common to find exclusive deals between providers and manufacturers, that has diminished a great deal over the past decade. The Apple iphone/AT&T exclusive provider service deal is clearly the most famous of those partnerships that still do exist. But customers have shown a great deal of resistance to the partnership and Apple is already contemplating offering their product to other providers. The key issue is over AT&T’s “coverage” of the U.S. “AT&T has acknowledged they are having a few issues in a few cities and they are making plans to address these. We have reviewed these plans and we’re confident they’ll make significant progress towards fixing them” claimed Apple COO, Tim Cook (McLean, 2001). Personally, I believe that the U.S. cell phone user is now sophisticated enough to know what cell phone they want and which provider they would prefer…and do not take kindly to being told otherwise. I think you will find Apple opening up their service to other providers and witness fewer and fewer exclusive deals in the future, as they simply do not seem advantageous anymore, particularly to the manufacturer. In fact, a brief stroll through each providers website proves that they are selling phones from every imaginable manufacturer with the exception of T-Mobile who does not advertise any phones manufactured by LG. Curious. Another interesting point, T-Mobile seems to be the only major provider manufacturing their own phones: The T-Mobile Dash, Tap and Web Connect to name a few.

So how do these companies make money? Well, providers need customers and will spend a great many advertising dollars to get them. They will offer new customers free phones…and why not? A phone cost the provider next to nothing and a cell phone customers paying their monthly bill of $39-$199 “for life” is worth its weight in gold. But don’t feel badly for the manufacturer. With over  four billion existing customers and many millions more, their future is looking good as well. But aside from billions in advertising dollars, the cell phone providers have many additional expenses to be concerned about:

  • The cost of buying recent 3rd generation licenses and future 4th generation
  • The product life cycle – existing phones are at the ‘saturation’ stage
  • The huge cost of developing the networks in the first instance
  • The degree of competition in the market

(Author unknown 11, 2010)

And as demonstrated in the marketplace numbers we first outlined, the cell phone market is not growing as fast as it used to. AT&T has seen their landline business shrink 10% per year and can no longer count on wireless to pick up the slack. Analysts expect AT&T sales to drop by $1 billion this year. Now, that still leaves them $123 billion in sales but this decrease, combined with the potential loss of their exclusive deal with Apple has many at AT&T losing sleep (Crockett, 2009).

And all those towers and switches and couplers cost money. Ivan Seiferberg, Chairman and CEO of Verizon claims, “Here in the U.S., wireless companies invested well over $20 billion last year to make it a reality – more than was invested in semiconductors, airlines, or railroads.  Our partners and suppliers invested billions more to develop the handsets, applications, network components, chips, batteries, operating systems and software to deliver it to customers” (Seidenberg, 2009).

But he is extremely positive about the future of the industry. The expense of developing the network, though costly, was all very necessary for the future of the industry. The result is a “vibrant, $800-billion-dollar global industry — full of new products, new applications and new entrants.  Customer satisfaction is on the rise.  Innovation and competition are thriving.  And a new business model is emerging that will make the next 25 years of wireless growth every bit as dynamic as the first 25 years – an outcome that will be hugely important for our country as well as our industry” (Seidenberg, 2009).

So what is it all really man? Are these providers and manufacturer’s making money? AT&T posted a 25.6 percent increase in fourth-quarter 2009 earnings as its wireless continued to grow. It earned $3.09 billion while the same period a year ago; the company earned $2.4 billion. So the company earns over $12 billion per year. Not too shabby (Reardon ,2009).

Verizon Wireless earned $2.88 billion in the 3rd quarter of 2009, almost as much as AT&T. But both firms are facing large declines in their landline business and hoping that their wireless divisions will bail them out (Reardon ,2009). Sprint Nextel proves that not all providers are profitable as they continue to lose customer share and posted a 3rd quarter 2009 loss of $980 million (AP, 2010). T-Mobile, a subsidiary of Deutsche Telekom in Germany, made a 3rd quarter profit of $5.57 billion. A distant 4th among the big four, but nothing to sneeze at (Smith, 2009).

In regards to the big four manufacturers: Nokia rebounded from a terrible 2008 with the introduction of their new smart phone, shipping an incredible 127 million units out in the 4th quarter 2009 alone and increasing their profits for that quarter by 65% to 948 million euros! (Wauters, 2010). Proving that you’re only as good as your most recent innovation.

Motorola gets mixed reviews. They only lost $51 million last year but that’s compared to a loss of over $4 billion in 2008! “Despite healthy smartphone shipments, Motorola’s Mobile Devices segment saw its overall sales drop 22 percent to $1.8 billion” (Whitney, 2010). Samsung is a multi-billion dollar firm involved in many more things than cell phones. But that portion of their business is still the world’s second largest (after Nokia) and reported an operating profit margin of 8.3%, up from 7.7% in the third quarter and 2% in the year-ago period. Samsung said it shipped 68.8 million units in the quarter, up from 60.2 million in the third quarter and 53 million a year ago (Ramstad, 2010). It is difficult to separate LG’s cell phone business from it is large parent company, but their LG Mobile Communications Company posted a $48 million profit in the 4th quarter 2009 on a record 118 million units shipped (Brambley, 2010).

Most obvious in these figures is that both manufacturers and providers must give the cell phone customer what they want. They must also understand that what they want changes from year to year, even month to month. They must continue to at least manufacture cell phones with 3G technology with all the bells and whistles from texting to downloading to streaming to surfing. In a perfect world, they will be the first to market with the next, great innovation. Providers must continue to learn what is most important to their target market, develop plans and services that people want. They must continue to invest in equipment in order to provide the highest level of service possible. Ask Nextel what happens when you start dropping calls or AT&T what happens when you do not service enough of America. It is a challenge, but it is an $800 billion industry. The stakes are high, but for these providers and manufacturers, the rewards can be great.

Reference

AP. Sprint Nextel Narrows Subscriber Loss in 4th Quarter, Revenues Still Declines.

Simple Thoughts. February 10, 2010. http://blog.taragana.com/index.php/archive/sprint-nextel-narrows-subscriber-loss-in-4th-quarter-revenue-still-declines/. April 14, 2010.

Author unknown 10. List Of Countries By Number Of Mobile Phones In Use. Wikipedia.

April 5, 2010. http://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phones_in_use. April 14, 2010.

Author unknown 11. Profit, Loss and Value Added: The Mobile Phone Industry –

Activity. Bized.2010. http://www.bized.co.uk/educators/16-19/business/marketing/activity/profitloss.htm. April 14, 2010

Brambley, Sarah. LG Electronics Post Highest 4th Quarter Earnings In Its History. LG.

January 28, 2010. http://www.lg.com/uk/press-release/article/lg-electronics-posts-highest-fourth-quarter-earnings-in-its-history.jsp. April 14, 2010.

Cappe, J. World’s Largest Cell Phone Manufactures. Helium. 2010.

http://www.helium.com/items/713932-worlds-largest-cell-phone-manufacturers. April 14, 2010.

Crockett, Rodger O.. AT&T Designs For The Wireless Market. Business Week. July 2,

2009.http://www.businessweek.com/magazine/content/09_28/b4139064361012.htm. April 14, 2010.

Gruener, Wolfgang. Four Largest Cell Phone Carriers Squeezing Smaller Providers Out

Of The Market .TG Daily. May 20, 2008. http://www.tgdaily.com/business-and-law-features/37547-four-largest-cellphone-carriers-squeezing-smaller-providers-out-of-t. April 14, 2010.

McLean, Prince. Apple Defends AT&T, Downplays Talk Of Multi- Carrier Inevitability.

Apple Insider. October 25, 2001. http://www.appleinsider.com/articles/10/01/25/apple_stands_by_att_as_an_iphone_partner.html. April 14, 2010.

Ramstad, Evan. Samsung Swings To A Profit. The Wall Street Journal. January 29, 2010.

http://online.wsj.com/article/SB10001424052748704194504575031921556257614.html. April 14, 2010.

Reardon, Marguerite. Verizon Profit Dips, But Wireless Stays Strong. Cnet News.

October 26, 2009. http://news.cnet.com/8301-30686_3-10382841-266.html. April 14, 2010.

Seidenberg, Ivan. International CITA Wireless 2009. Verizon Wireless. April 1, 2009.

http://newscenter.verizon.com/leadership/speeches/international-ctia-wireless.html. April 14, 2010.

Smith, Patrick. Deutsche Telekom Back To Profit As T-Mobile USA Loses 77,000

Customers. Moco News. November 5, 2009. http://moconews.net/article/419-deutsche-telekom-back-to-profit-as-t-mobile-usa-loses-77000-customers/. April 14, 2010.

Wauters, Robin. Nokia Shipped 127 Million Units In Q4 2009, Profits Soared 65%. Tech

Crunch. January 28, 2010.http://techcrunch.com/2010/01/28/nokia-q4-2009-earnings/. April 14, 2010.

Whitney, Lance. Motorola Ekes Out Profit, But Sales Are Off. Cnet News. January 28,

2010. http://news.cnet.com/8301-1035_3-10443354-94.html. April 14, 2010.

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