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Gunning for the Hockey Stick

Sun, 08/31/2008 - 7:04pm
Evan Koblentz

Wireless data ARPU in the United States continues to grow.
But when will the predicted explosion hit?

In hockey scores and technology earnings reports, raw numbers don’t always tell the entire story. A defenseman can brag about numerous deflections and poke checks during regulation game play, but end up getting burned on the winning goal in overtime; a wireless operator can flaunt its data plan’s average revenue per user (ARPU), but are bumps of a couple of dollars per user really significant?

Verizon Wireless finished Q2 2008 with data ARPU of $12.78, Sprint Nextel with “more than $12” and AT&T with $11.59. In the same quarter a year ago, the Top 3 operators’ data ARPU was $9.84, $10 and $8.77, respectively. (See Figure 1) It’s a boom percentage-wise compared to inflation and to the mixed results of voice ARPU.

Chris Pearson
Pearson: As devices become easier to use, data ARPU will rise.

CONTEXT
Although the percentage gains are impressive in both quarter-over-quarter and year-over-year results, it could still be years before data ARPU catches up to voice; the data gains are relatively modest, but no “hockey stick” trajectory has emerged yet.

However, Chris Pearson, president of 3G Americas, points out that data ARPU is approaching one-fifth of overall ARPU. “That 20% threshold is big,” he said.

To date, the majority of data ARPU growth has come from ordinary messaging and from wireless access services such as air cards. None of the super-cool applications such as mobile TV, music downloads, online games or even Web browsing has gained enough traction to provide any significant ARPU bumps.

In short, data ARPU is respectable and growing, but it’s due to routine business and people just keeping in touch – nothing that will change the fuel or focus of near-term strategies for major operators.

Overall revenue from e-mail, text messaging and multimedia messaging was almost $12.5 billion in 2007 and 51.7% of total data revenue, while revenue from PC wireless access cards was just shy of $5.9 billion, for a 24.4% share. (See Figure 2)

In total, the various messaging and access technologies were an $18.4 billion market last year, filling out 76.1% of data revenue for carriers, according to SNL Kagan. Carriers such as Verizon Wireless and AT&T echoed those statements in their recent Q2 earnings calls, without detailing other data revenue streams such as Web browsing, location services, music downloads, games and video/TV services.

ARPU-wise, SNL Kagan sees steady growth for the next decade. Industry-wide data ARPU likely will exceed $11 by the end of this year, according to analyst John Fletcher. This represents a 25% bump over last year’s average data ARPU.

Fletcher projects data ARPU will reach $20.60 in 2012 and $27.69 in 2017. By then, he noted, 87% of all phones will be smartphones, so the industry-wide numbers will not be held back by limited-feature phones.

3G America’s Pearson agrees, saying the sophistication and ease of use of smartphones will directly influence customer uptake of data services. He insists the ARPU bumps will come as devices make data easier to access.

Brian Clark
Clark: This is more impressive than people realize.

“We are hitting the Grandma factor,” he said, insisting that your grandmother should be able to use it. “That combined with the speed of the networks and lower latency will provide a consistency of growth in data ARPU.”

Meanwhile, M/C Venture Partners’ Brian Clark said it’s also important to compare data ARPU growth curves to other significant technology evolutions such as Google keyword advertising. “I don’t know that there should be an expectation for a hockey stick, but the growth has been substantial in the last three or four years,” Clark said. “You don’t see that kind of growth anywhere. It’s steady at a huge rate. ” Some carriers’ data revenue could reach 25% of overall service revenue by the end of this year, he said.

TOTAL ARPU
Clark explained that overall ARPU is mostly stagnant because of the economy and cheaper voice plans, while data ARPU is increasing, so it’s a logical conclusion that voice ARPU is decreasing. Data is only helping carriers maintain top-line results, he said. For example, in the 8 fiscal quarters from the third quarter of 2006 to the second quarter of 2008, AT&T’s total services ARPU fluctuated only slightly between $49.21 and $50.82, while its data ARPU in the same 8 quarters increased each quarter from $6.32 to $11.59. Voice revenues are the sacrifice. (See Figure 3)

Rock Steady
Figure 1: Data ARPU over 10 quarters
Figure 1: Data ARPU over 10 quarters among 8 carriers showing steady increases.
Source: Company filings and SNL Kagan estimates

“In a way, data is saving their behinds,” Clark said. “My opinion is that it will continue to increase maybe for a couple of years at this rate,” followed by less consistent growth when messaging services on phones become saturated, he added.

Still more realism stems from Jason Guesman, Seven Networks’ senior vice president and general manager for the Americas. Seven provides e-mail services for operators such as Alltel, AT&T, KDDI, NTT DoCoMo, Sprint Nextel and Telefonica.

“It has taken us a long time to get to where data is relevant. A lot longer than what anyone in the CTIA or anyone in the industry would care to admit,” Guesman said.

“At the same time, if you were to poll a group of industry experts, you would get a general consensus that we’re finally there.”

Data ARPU Creators
Figure 2: Data ARPU Creators
Figure 2: Data is for 2007.  (1) E-Mail / Text / SMS / MMS - (2) Graphics/Web Browsing/Search/LBS/M-Commerce/unused flat rate data fees and all other mobile data services using a mobile handset (not PC card) - (3) Unicast-streaming/mobile broadcast/live and all other entertainment video . 
Source: SNL Kagan

For the past decade, the cellular industry struggled to be like the computer industry in usage patterns and revenue growth, Guesman noted. Text messaging was clearly a “killer app” in user adoption, but not as much in revenue compared to modern e-mail and other services because of its minimal data bandwidth usage. On the other hand, e-mail took longer to emerge but is a far more profitable service, Guesman said

At minimum, high-bandwidth messaging growth such as e-mail and multimedia could continue into lower-end devices, which is Seven’s focus in its current and upcoming software releases. All of the pieces are in place for future data-intensive applications to succeed but that will probably be limited to high-end devices and power users, he said.

AT&T ARPU
Figure 3: Data ARPU for AT&T
Figure 3: Data ARPU for AT&T has steadily increased
while total ARPU has remained relatively stable.

CONSISTENT GROWTH PATTERNS
Interestingly, if you compare the data ARPU growth curves of Tier 1 operators with smaller Tier 2 and 3 operators, the curves are very similar in slope, just with smaller amounts.

From the first quarter of 2006 to the second quarter of 2008, the nation’s largest carriers Verizon and AT&T both more than doubled their data ARPU – and so did smaller companies U.S. Cellular and Cellular South.

“I would expect that a rising tide lifts all boats. There is a general kind of effect of when increasing content is available, a general drift to more capable phones at a reasonable cost... basically there are a lot of principles here at play that are relevant to all carriers,” regardless of size or whether the carriers use CDMA or GSM protocols, said Keith Mallinson, founder of industry consultancy WiseHarbor.

The slope is just a general market trend caused by smaller carriers copying whatever works for larger carriers and by small-market customers being exposed to the same national advertising and new data services, he added.

Most experts agree that if current trends continue, then AT&T through its iPhone sales will be the most accurate barometer of what’s coming next in data ARPU drivers. AT&T in its Q2 2008 results did not specify the data revenue from iPhone features such as GPS, music downloads and Web browsing vs. the data revenue from its more common phones. However, industry analysts agree that far more iPhone owners use those advanced data services compared to owners of most other phones.

“You’re going to continue to see people using their wireless device for more and more things, not just for their business life but for their personal life. There is no one simple answer,” said Mark Siegel, AT&T spokesman. “Social networking, broadcast television, games… there’s no one thing that’s making people say, ‘Ah-ha, this is what’s driving it.’ No one force accounts for all of this.”

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