Industry Analysis of Telecommunications

The telecommunication wireless industry is defined by its ability to operate and maintain switching and transmission facilities to provide direct communication through radio-based cellular networks. Services found in this industry include cellular mobile phone services, paging services, broad and personal communication services, and wireless public safety services. According to (IBIS World database), 52. 2 percent of the products and services are segmented in cellular voice services.

The telecommunication wireless is a 210. 2 billion dollar revenue generating industry, with 43. 7 billion in total profits.Over the past five years, this industry has experienced an annual growth rate of 2.

6 percent and is forecasted to grow at 4. 8 percent during the next five years (IBIS World database). The major players in this industry include the following: Verizon Wireless, AT&T Inc. , Sprint Nextel Corporation, and Deutsche Telekom AG (see Appendix ? for graphical breakdown of percentage market share). During the past five years, this industry has fared well in a weak economic environment.

Their economic prosperity has been helped by the increasing demand for wireless mobile device products and services. Find statistic about households switching from landlines to wireless). In the next five year(s), the industry projects to grow 4. 8 percent from the transition of providing voice services to focusing on the delivery of wireless data services. The Federal Communication Commission (FCC) is the main regulator of industry activities. One of the main controls the FCC holds over the wireless communication carriers is their ability to regulate the amount of spectrum licenses available to the industry.

The two major consumers in the wireless communication market can be segmented into the corporate buyers or the individual consumer.Both sets of buyers tend to be semi-price sensitive. Corporations tend to be semi-price sensitive due to a majority of their products or services not being affected by the industries product. The corporate buyer segment also, tends to have a little greater bargaining power to negotiate prices than the individual consumer because many times the industries products can be carried by other vendors or seen as standardized or undifferentiated.

Individual consumers tend to be more price sensitive than corporations, however, remain semi-price sensitive.Since the downturn in the economy, buyers in this group tend to view purchasing wireless telecommunication devices as a significant cost relative to their earned income. Most carriers require a multi-year service contract for consumers, which cause consumers to shop around for the best prices between carriers. The multi-year contract also help carriers maintain consumers for longer periods and increases the switching cost to consumers, thus weakening purchasing power.

Lastly, four major carriers who receive approximately 86. 9 percent of the annual revenue combined, predominantly control the market.Thus, consumer brand loyalty plays a large role to future value earned for wireless telecommunication carriers allowing consumers to gain some power, due to companies wishing to retain business. The threats of substitutes in this industry are moderate to mild. Currently the major direct substitutes to the wireless industry include Voice over Internet Protocol (VoIP) and wire line communications.

However any form of communication could potentiall be viewed as an indirect substitute to the wireless industry and would include other technologies such as email, skype and social websites.Wire line communications is viewed as older technology and the switching cost from wire line to mobile is inexpensive. While mobile technology is considered superior technology over wire line, it also offers the consumer greater benefits than wire line technology, for example, it allows communication on the go or while traveling. VoIP technology tends to be cheaper than mobile communication plans and more compatible for internet interfacing, such as video conferencing.

VoIP is a developing technology offering consumers a cheaper alternative.When dealing with technological innovations it can be difficult to predict future substitutes to the wireless industry but an innovation in satellite communication could dramtically alter the landscape of the current wireless industry and could be a direct substitue. Suppliers Handset Providers The typical postpaid cellular contract is renewed every two years; at which time consumers are able to upgrade their cellular handset at a discounted price to entice them to sign another two year contract. As the market has quickly adopted smartphones this has become a considerable expense to the cellular providers.

It is estimated that 10% of industry revenues are spent subsidizing discounted handset prices to consumers (IBIS World) and that carriers are subsidizing roughly $400 per iPhone with a two year contract (S&P Report). Handset providers such as Apple, Samsung and HTC continue bringing technological innovation to their products and upgrading their product lines on a regular basis. The handset makers are electronic companies that provide a wide range of products to the marketplace making them less reliant on selling just wireless handsets to reach their revenue goals.As consumers renew their contracts there is strong demand to purchase the newest phone with the highest level of innovation which often comes at a higher subsidy to the provider.

However the wireless industry believes that subsidizing these costs and providing the highest level of handset innovation increases customer loyalty and reduces the level of customer churn. Apple; a handset provider and the maker of the iPhone, through its product innovations has created a near cult like following with its consumers. As new products are introduced; lines form at retail outlets for consumers waiting to purchase the newest product.Sprint estimates that their subsidy cost of the iPhone is 40% higher than with other smartphone models. When the first iPhone was introduced AT&T had exclusive rights to carry the handset. This created a pull among Apple enthusiasts to choose AT&T as their cellular provider since it was the only way to have access to the product.

As the agreement expired AT&T’s level of churn has continued to decrease perhaps illustrating that exclusive arrangements may not be needed with handset makers for wireless providers to sustain growth.Currently, due to the speed of technological innovations the wireless companies are continuing to offer handset upgrades with escalating levels of sophistication to increase consumer satisfaction since the urge is for customers to choose the most innovative handset. . Tower Networks Cellular providers rely on tower providers to make their service available to consumers. The tower providers charge rent to cellular providers to place antennas and other required network equipment on their towers.Typically the tower contracts are 5-10 year agreements.

Currently in the industry there are four main providers of tower services (S&P Survey) although there are also some minor independent companies and some wireless service providers that also own some towers. Tower providers are still growing their footprint as the cellular providers continue to build out their networks to provide more reliable data and voice coverage to consumers. From 2000 to 2011 the number of cell towers has increased from 104,288 to 283,385. GovernmentThe FCC can be viewed as a supplier to the wireless industry by providing spectrum licenses that are required to operate.

Besides purchasing licenses from the FCC, mergers and acquisitions are also a potential source of spectrum for wireless providers. However the FCC and the Federal Trade Commission blocked AT&T’s proposed 2011 purchase of T-Mobile; essentially saying that industry consolidation among the four main participants has peaked. In 2008, during the latest FCC spectrum auction Verizon spent 9. 6 billion and AT&T 6. 6 billion purchasing spectrum licenses (S&P Report or IBIS? . AT&T has been quoted as saying; “Like oxygen, the network’s all around us.

We cant live without it. ” (AT&T 10K) Much of AT&T’s investment is aimed at ways to extend the coverage and reliability of the system. The move to 4G service, while also offering higher data speeds also allows more data to be transmitted on the spectrum. Currently the consumer move to smartphones and tablets and their increasing data usage is pushing wireless providers to find and adopt more efficient technologies to utilize their network and spectrum. RivalryIn 2012 the top four cellular providers accounted for 86. 9% of industry revenues but the clear market leaders are AT&T and Verizon which account for 28.

4% and 36. 6% respectively. Rivalry among the four main competitors is intense. Each of the major providers are providing nearly identical services. Contracts are renewed on two year cycles; at which time there are few switching costs for buyers.

This generates some price competition in the industry by providing incentives and promotions for customers to switch, essentially poaching customers.AT&T and Verizon both have annual churn rates below 2% demonstrating that they are doing a very good job servicing their customers. This rivalry has helped put a lid on cellular prices, since 2000 the pricing structure of cellular contracts has remained flat even though the number of services provided has increased. Although the move of consumers towards smartphones and data usage is still in a growth phase the voice service that providers offer has reached a mature stage. In 2012 market penetration was 101%, meaning there was more than one cell phone for every individual in the United States.

This saturation coupled with high levels of satisfaction and rather consistent pricing between companies makes poaching market share difficult. This has led to Verizon and AT&T competing on their technological innovations; such as the move to 4G service, to gain customers from the competitors and retain current customers. Due to the build out of tower networks and the purchase of spectrum licenses the barriers to exit in this industry are high. Verizon and AT&T are the market leaders while Sprint and T-Mobile are struggling to retain customers and compete against the larger competitors.

The pricing structure between these four competitors is roughly equal. However the companies are competing intensely in advertising, new handset innovations and providing technological innovations to customers. Verizon and AT&T have an intense advertising rivalry, spending 85% of the total advertising dollars in the wireless industry. AT&T spent $500 million in advertising in 2010 which was 2% of revenues versus Verizon’s spending of $450 million or 3% of revenue.Meanwhile Sprint is spending $200 million or 5% of revenues and T-Mobile is spending $150 million or 6% of revenues (www. deadzones.

com/2011/03/at-verizon-control-85-of-total-ad-spend. html). Verizon wireless has built their marketing approach around the “can you hear me now” slogan. This plays off consumers’ frustration with dropped calls and poor service and promotes them as the market leader in service quality. Verizon has also blatantly targeted AT&T in their advertising in comparing their 3G service to AT&T’s.

This led to a court battle between the companies with AT&T claiming the advertisement was misleading since the map was based only on 3G data coverage and not overall service coverage. Eventually AT&T dropped the lawsuit. AT&T’s advertising has tended to not focus on their overall network but tout how they have the largest and fastest 4G network, showing how their product and service innovations provide customers with a better experience. Entry Threats This industry offers high barriers to entry for two main reasons; both have to do with high costs required to enter the industry.With the 4 major suppliers having been involved in the industry for a number of years they have been able to build out their tower network, providing reliable service to their customers which is a key component to customer satisfaction.

At this stage of the industry lifecycle; consumers have high levels of service quality, i. e. the number of dead zones and dropped calls has been dramatically reduced over the last decade. The other barrier to entry is the purchase of spectrum from the FCC, in 2008 Verizon and AT&T spent over 15 billion dollars combined to purchase spectrum rights from the government.This creates advantages to incumbent companies. Because of the network and spectrum requirements there are supply side economies of scale involved in the industry as a potential entrant must build out a large network to compete in more than a regional way.

Providers have also tried to build demand side economies of scale into their pricing structure as well. Most cellular providers offer a family and friends plan which offers voice minutes and text messaging at free or reduced rates to other customers in the network.This approach ties customers to the provider and increases switching costs, suddenly switching networks is not a personal decision but one that may influence family and friends as well. The four major cellular providers also have an established distribution network that includes owned and franchised retail stores and independent resellers. As previously discussed there is restrictive government policy involved that limits entry from potential new competitors.

Difficult to differentiate on price along, reason for R&D investment is to find strategies to compete in the market without being completely focused on price.