RealMoney Silver - Mobile Data Market in Turmoil

Mobile Data Market in Turmoil
By Tero Kuittinen
RealMoney.com Contributor
8/28/2007 12:02 PM EDT

Most of the mobile data revenues of leading operators come from two rather prosaic sources: text-messaging and ringtone downloads. These technologies date back to the 1990s and don't use fancy new 3G technology -- yet they have proved to be nearly universally beloved and popular across Asia, Europe and the Americas.

The challenge mobile operators in most affluent countries face in the near term is the apparent slowdown or outright decline of the growth rates of these two old warhorses.

Fading Champions

According to M:Metrics, the number of mobile subscribers downloading ringtones fell by about 5% in Spain and the U.K. last June; France showed a smaller decline; Germany and Italy had about 2% increases.

These monthly figures have fluctuated recently, but they seem to signal that the European ringtone-download market is teetering on the brink of steep declines.

The pool of subscribers downloading ringtones over a one-month period used to be around 7% in key European markets as recently as the summer of 2006 -- it is now dipping below 5% this summer.

The U.S. market is different -- more than 9% of mobile subscribers still download ringtones in any given month. This is unlikely to last much longer -- the reason for the ringtone download slump in Europe can be tracked to advanced phones that enable users to shape music snippets or sound bites into ringtones on their own.

The sophistication of U.S. mobile handsets is advancing rapidly -- it's only a matter of time before ringtone downloading begins to decline in America as well.

The Texting's on the Wall

How about text-messaging, the other '90s throwback technology that still generates massive revenue? The U.S. market is in a very interesting transition period right now -- leading operators like Verizon (VZ) and T-Mobile have started offering unlimited text-messaging for an additional $10-20 per month.

This bucket-pricing effectively robs text-messaging of its most potent revenue generation power -- overage charges. One of the weirdest moves Sprint (S) has made over the past year -- and there is stiff competition in this category -- is the hiking of the text-message price outside the monthly allotment from 10 cents to 20 cents.

Other U.S. operators have also boosted their text-message pricing in recent months -- weirdly counterintuitive moves when Asian and European operators have been slashing their texting pricing in the last two years.

In the U.S. market, then, we have two interesting trends. Text-messaging outside monthly buckets has become 50%-100% more expensive, while unlimited text-messaging has become extremely cheap -- as little as $10 per month.

It's not hard to see where this is leading: Consumers are likely to flock to plans with unlimited text-messages, and the pool of suckers racking up tens of dollars in overage charges is going to shrink. This is going to cap the mobile-data-revenue growth potential stemming from text-messaging, just as U.S. ringtone growth is likely to stall sometime in 2008. That leaves operators depending heavily on new mobile-data revenue sources.

Bet on Big

I think, ultimately, that the U.S. mobile market is likely to evolve into a Verizon-AT&T (T) battleground.

Strangely enough, T-Mobile has become the quality leader. The recent JD Power study shows that American consumers regard it as the best major mobile operator.

T-Mobile also is a price leader -- it tends to pioneer highly appealing initiatives like the $10 unlimited texting. As a result, T-Mobile has been able to continue growing relatively rapidly, adding more than 850,000 new American subscribers in the 2007 second quarter.

Yet it is going to have a very tough time finding mobile-revenue growth in emerging categories like mobile gaming, video and music downloads. Verizon launched its 3G service years ago, and AT&T will be rolling out HSDPA-quality 3G this winter, likely backed up with a very aggressive marketing campaign.

T-Mobile is going to launch its own 3G service very soon -- perhaps as early as October, rumors indicate. But the early coverage of T-Mobile's high-speed mobile-data service is likely to be a lot narrower than what the biggest two operators offer.

But let's face it, the early uptake of mobile game downloads and video streaming has not been stellar. The number of mobile subscribers downloading games in any given month is stuck somewhere around 3%-4% in both North America and Europe, and this number has been frighteningly stable for the past year.

The only way for mobile operators to extend their solid mobile revenue growth trends is to move to high-value add services like gaming and video streaming -- old stalwarts like text-messaging and ringtones are getting close to being played out.

Texting and ringtone downloads did not demand massive infrastructure investments, elaborate marketing campaigns and expensive phones. But the new mobile-data services do -- and only operators willing to invest massively will remain competitive in the long run.

Verizon and AT&T are positioned well to make the transition -- the smaller rivals, like T-Mobile and Sprint are not. T-Mobile has been hesitant and slow in committing to 3G build-up; Sprint is suffering from serious quality issues and now focuses on a massive mobile WiMAX project instead of trying to turn around its core mobile business.

There are sectors where betting on the underdogs makes sense -- but in the mobile operators business, winner-take-all is likely to be the plot line over the next three to five years.

It's hard to make the call between Verizon and AT&T, as the former has a clearer 3G program, and the latter's string of delays plaguing its mass market 3G service launch is getting a bit troublesome.

That said, it's a fascinating rivalry that warrants close scrutiny over the next couple of quarters.