US Wireless Market Q3 2008 Update Nov 2008 Chetan Sharma Consulting

US Wireless Data Market Q3 2008 Update

US Wireless Market – Q3 2008 Update Recession: Nice to meet you. US_Wireless_Data_Revenues_Q308: I don’t know who you are but I won’t mind a bailout package. The US wireless data market shrugged off the economic doldrums in Q3 2008 and grew 7.3% Q/Q and 37.5% from Q307 to reach $8.8B in data servicesrevenues. The total for the year (for first 9 months) stands at $24.5B which is equal to the revenues generated in 2007 (full year). While the flailing economy has started to hit hard on the wireless data ecosystem esp. the infrastructure and handsets segments, consumers haven’t really pulled back on mobile data spending, just yet. But will they? That is a $700B question. It is likely that more people will be willing to downgrade their Internet services, wireline usage, cable premium channels, restaurant eating frequency, energy consumption, vacation trips, and the gas mileage every week than reduce their wireless usage. But what about data services - broadly, they are divided into messaging, web and information access (includes data cards and subscriptions) and downloadables (games, ringtones, etc.). It is highly unlikely that people will change their messaging (which now accounts for approximately 40% of the revenues) habits overnight though we might see more subs going for package deals and family plans to save. We might also see growth in prepaid subscriptions in the US market. In fact, Q3 saw a jump in messaging volumes in the US by 38% and messaging revenues grew 6%. Wireless WAN data card access is very useful for road warriors though some corporations might start limiting the number of employees using such services, we don’t think it will make substantial impact in most cases except for the fact that the layoffs in various sectors will start to ripple into the mobile sector and will start cutting into some of the enterprise mobile data revenues. The downloadables have already been in the declining mode for the last 9 quarters and we might see acceleration of that trend. Next question is - will the increase in the subscriber base nullify the loss in data subscriptions and the answer seems to be - likely yes. But, if the job loss rate increases substantially, more than it has been in Q3 and into Q4, we might, just might, start to see flattening of data revenues in Q109 and gradual decline over the course of the year. Despite the unprecedented bailout from the US Treasury to abort a long recession, we are likely to be in for a longer winter than most anticipate because current efforts don’t even start to address the fundamentals of the financial crisis. The basic industry structure is still flawed. Unless the new administration strikes at the root cause of this mess, wireless data segment won’t be completely immune to the wider economic crisis. We have already started to see infrastructure (operators are slowing down 3G/4G investment) and device segments (replacement cycles are getting longer) getting hit pretty hard. Another factor at play is the growth in 3G and smartphone penetration in the US market, both of which have been responsible for increasing the usage and hence the revenues. At the end of Q308, 3G penetration was approximately 37% and thedata penetration had reached 56%. Smartphone penetration has been inching up as well. In fact, all the service providers and OEMs have been targeting sub-$200 price point, which seems to be a good sweet spot for consumer adoption. The above two factors will also help negate any cancellations or downgrading of data plans. However, we are likely to see price pressure on subscription plans and as a result, voice ARPU will continue its downward trend and data ARPU will become a more dominant factor of the overall APRU mix by the end of 2009. The percentage contribution from data is likely to exceed 25% by the end of 2008 and 30% by the end of 2009. http://www.chetansharma.com 2 © Chetan Sharma Consulting, All Rights Reserved Nov 2008

US Wireless Market – Q3 2008 Update Operators in Europe have already started to feel the pinch starting with Vodafone and Telefonica who experienced decline in revenues (due to the decline in MOU and price pressure) some of which is a function of the heavy prepaid penetration. But, it should be noted that for Vodafone, though overall service revenues declined 1.7%, data revenues grew 30%. As we have been saying for years, data-mindset is needed for strategy, infrastructure design and investment to stay competitive in the changing landscape. Better offer packaging and lower price plans will also help in reducing service churn. Operators will also look to reduce their opex to boost profits. Coming back to the 2008 forecasts, we still think that the US wireless data market is likely to come close to hitting our original estimate of $34B for the year given the seasonality of Q4 which is likely to negate any decline experienced by the industry. So, it might not be until Q109 before we know where the various data sub-segment are trending. If consumer confidence starts to reverse its trend in early 2009, we are likely to see slower growth but the data revenues will continue to grow from the current levels. However, the lack of policies or correction will further downgrade consumer sentiment, then, we might start to see decline in the US wireless data market for the first time probably starting around late Q209. Against this backdrop, the analysis of the Q308 US wireless data market is: • The US Wireless data service revenues grew 7.3% Q/Q to $8.8B in Q208. Compared to Q307, the data service revenues grew 37.5%. • Overall ARPU decreased by $0.04. Average voice ARPU declined by $0.94 while average data ARPU grew by $0.90 or 8% almost negating the drop in voice ARPU. • Sprint led in data ARPU with $13.50 (or 24.11% of the revenues, followed by Verizon at$13.30 (or 25.49% of the revenues - first carrier to cross the 25% threshold), AT&T at $12.29 (or 24.20%), and T-Mobile at $9 (or 18%). • All the top four carriers experienced approximately 8% increase in data revenues compared to the Q208 levels. Verizon with $2.8B in data revenues led AT&T at $2.7B, Sprint at $1.6B and T-Mobile at $850M. Both AT&T and Verizon are on target to be two of the three operators to exceed $10B in data revenues for the year for the first time by (global) operators besides NTT DoCoMo (the two US carriers are already over 75% of the target). China Mobile is the other operator which is going to cross the $10B mark in 2008. • AT&T and Verizon now account for 62% of the market data services revenues. Sprint had a second consecutive quarter of data revenue growth after falling behind its peers for the past couple of years. • The average industry percentage contribution of data to service revenues exceeded 23%. A year ago, the percentage contribution stood at approximately 17.7%. US market is likely to exceed the 25% mark in Q408. • The number of data subscribers has been on the rise with Verizon leading the way. At the end of Q308, Verizon had 74% of its subscribers using some form of data services. The messaging volumes in the US market now average over 105B messages/month or at the frequency of a message/sub every 2 hours. In comparison users in Philippines average routinely send on an average, a message every hour. • In terms of net-adds, Verizon continued to lead in Q308 with 2.1M net-adds (aided by an acquisition), again edging AT&T which had 2M net-adds for the quarter. Sprint continues to lose subscribers at an alarming rate, loosing another 1.3M in Q308. • T-Mobile USA moved to number 9 in the top 10 rankings of global mobile operators by data revenues. For the quarter, Verizon and AT&T improved their rankings to #3 and #4 respectively at the expense of KDDI which dropped to #5. Sprint Nextel maintained its # 6 spot. AT&T and Verizon are in the select group of five global operators who are now generating $2B or more in data revenues/quarter (the other three are NTT DoCoMo, China Mobile, and KDDI). http://www.chetansharma.com 3 © Chetan Sharma Consulting, All Rights Reserved Nov 2008

US Wireless Market – Q3 2008 Update • Non-messaging continues to grab 50-60% of the data revenues for the US carriers. • The flat-rate pricing movement that was started by Willcom in Japan which moved to Europe started to take firm roots in the US market with industry wide flat-rate pricing plans that included data. Sprint has been the most aggressive with its “Simply Everything” plans that include data services. 30% of its $100 plan is assigned to data revenues (for accounting purposes). All the major carriers seem to be offering flat-fee access plans for most of the new smartphones being introduced in the market. Approximately 13% of the consumers have flat-rate data plans. • As expected, the blockbuster acquisition of Alltel by Verizon got approved and the deal will close in the next few weeks making Verizon the top carrier in the US market with close to 85M subs by the end of year. • Q3 also saw the launch of the fabled G-phone as G1 Google phone launched by T-Mobile in the US market and it is slowly making its way into Europe. While G1 is no iPhone, it introduced long-awaited features such as multiple processes, more open APIs, and others. Motorola is said to be planning to launch Android devices in 2009. The smartphone segment has clearly shaken up the market with Apple, Google, RIM, and Nokia being the main competitors. Microsoft keeps misreading the market and is heavily under leveraging its strength and experience. • There are probably 18-20 sub-segments within mobile data services and consolidation looms. Who will be the last man standing post the nuclear winter? While the valuations are still high for rapid consolidation, we think that by Q209, the M&A scene is likely to heat up. • Will Mobile Advertising be the rising star from the crisis or one of its victims? Clearly, there are a number of advertisers and brands that are scaling back on the experimental dollars thus shrinking the mobile ad spend. On the other hand there are some savvy brands who are pulling back from the traditional mediums like print which don’t really work and putting more money into digital including mobile. It will be interesting to see if operators use the opportunity to lay the foundations of a long-term mobile advertising strategy. Stay tuned for some of our thoughts on the subject. • Venture money in the mobile sector experienced a rapid decline. Compared to Q307, venture financing declined by 88%, and the yearly totals are 35% lower than what they were a year ago. (Source: Rutberg) • Nokia eclipsed 100M unit sale in Q308 for the sixth straight quarter. It sold over 111.7M handsets in the quarter, more than the next three players combined. Nokia’s global market share declined to 37%. Samsung surged to 52M handset sale. Apple surpassed RIM in smartphone sales. For the year, the industry looks to again eclipse the 1 billion handset mark for 2008 but the overall handset sales will decline in 2009 (though still easily exceeding 1B). • The 3G penetration in the US went past 35% in Q308, with Verizon leading the pack with over 61% 3G subscriber penetration compared to the 30% 3G subscriber penetration at AT&T. T-Mobile is slowly expanding its 3G coverage. 3G subs have over $23 in data ARPU. The growth in 3G and smartphones is helping offset any downward pressure on the data revenues and overall ARPU. • As we had mentioned back in July, Apple easily surpassed its 10M target in Q308 buoyed by its 100 country expansion plan. The broadband and appstore capabilities are quite attractive to consumers and it shows. VPN and direct access to Exchange is helping in getting many more users into the mix and making IT folks less apprehensive. The clearcut business model of 30/70 split is also attractive. http://www.chetansharma.com 4 © Chetan Sharma Consulting, All Rights Reserved Nov 2008

US Wireless Market – Q3 2008 Update • T-Mobile also launched its own Appstore (and so did Google and RIM, even Microsoft) along the lines of Apple’s initiative with promises of greater control to the application developers. • The growth in smartphone usage is also putting pressure on the networks which are not able to handle the load during peak times in certain cities thus forcing carriers to look for alternate strategies to satisfy the demand for broadband - metered billing, UMA, Femtocells, Hotspot buys, WiMAX, LTE, and others. We deal with the whole topic of Wireless Broadband in great detail in our recently released book “Wireless Broadband - Conflict and Convergence” (Co-authored with one of the leading entrepreneurs in the space - Vern Fotheringham, published by IEEE Press and John Wiley). We will have more to say on the subject in the coming days and months. • After raising $14.5B from friends and family, Clearwire’s net-adds continued to drop in Q308. While the deal got approved, the economic climate is putting pressure on a comprehensive rollout strategy. Sprint did launch WiMAX in the Baltimore market with initial feedback from the sparse usage to be as advertised. • In a sign of convergence battles to come, T-Mobile’s @Home and Sprint’s Femto cell initiatives started to take hold. Cable operators are also aggressively seeking triple-play by providing the wireless component of the service. Don’t be surprised by some acquisitions in 2009. Global update • China and India added approximately 52M subscriptions combined in Q308 with India edging out China. In Sept, India added more than 10M monthly subscriptions for the second time this year and its net-adds total for the first 9 months stands at 82M. By comparison China added 77M and US increased its tally by 11M. • NTT DoCoMo continues to dominate the wireless data revenues rankings with almost $3.9B in data services revenue in Q308, thus exceeding the $10B mark in just 9 months. Almost 41% of its revenue now comes from data services. DoCoMo also crossed 86% in 3G penetration in Q308 and is expected to cross the 90% mark by early 2009. • Most of the major carriers around the world have double digit percentage contribution to their overall ARPU from data services. Many operators are consistently exceeding 30% with DoCoMo and Softbank being over 40%. We will be keeping a close eye on the trends in the wireless data sector in our blog and future research reports. The next US Wireless Data Market update and the Global Wireless Data Market update will be issued in March 2009. We will be doing an end of the year piece with forecasts and predictions for the coming year in Dec 2008. Your feedback is always welcome. Happy Thanksgiving and Happy Holidays. Thanks. Chetan Sharma Disclaimer: Some of the companies mentioned in this note are our clients. http://www.chetansharma.com 5 © Chetan Sharma Consulting, All Rights Reserved Nov 2008

Leading Indicators Indicators Q408 Q109 Messaging Access/Information Downloadables Smartphones 3G Devices Seasonality Voice ARPU Data ARPU Overall ARPU http://www.chetansharma.com 6 © Chetan Sharma Consulting, All Rights Reserved Nov 2008

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US Wireless Market Q3 2008 Update Nov 2008 Chetan Sharma Consulting

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