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During 2006, the U.S. mobile phone market split effectively in two:
started adding subscribers at a pace that left
T-Mobile far behind. The smaller operators are now prepping their Hail Mary passes, Sprint with WiMAX and T-Mobile with Wi-Fi-mobile hybrid service. It's not likely either will reap profit growth from the comeback attempt.
The question is whether those attempts can damage the profitability of the leading operators. At the moment it looks like the rollouts of the new technologies from Sprint and T-Mobile are being delayed, so the answer to the question is likely to be a resounding no. And AT&T and Verizon may be poised to grab more market share than anticipated in 2007 and 2008.
Need for Extreme Measures
The fourth quarter of 2006 was a kind of a culmination of the recent U.S. trend that has separated sheep from goats in cellular service. AT&T (formerly Cingular, part of which was formerly AT&T) racked up 2.4 million new net subscribers during the quarter; Verizon added 2.3 million. Both have more than 60 million subscribers as they wage their titanic struggle for supremacy in the U.S. mobile phone service market.
Sprint and T-Mobile are lagging badly. Sprint lost 300,000 mobile contract customers during the last quarter of 2006, while T-Mobile added 780,000. Sprint has 53 million U.S. cellular service subscribers and T-Mobile has 25 million.
The growth problems of the two smaller operators are reflected in their churn rates. Both Sprint and T-Mobile have recently delivered churn rates north of 2%, while AT&T has managed to push its once-legendary churn below 2% and Verizon has actually delivered stellar, sub-1% levels.
Churn rates are the best-known measure of consumer loyalty, and Americans clearly embarked on a mass migration to the top two operators over the past year. As AT&T and Verizon grab bigger shares of the plain vanilla pie, the smaller operators are scrambling for strategies to gain more tech-savvy consumers. But the current progress of T-Mobile and Sprint is not encouraging.
T-Mobile launched its UMA -- unlimited mobile access -- trials back in 2006, and by now the company's HotSpot@Home is commercially available in Washington state. The first wave of UMA phones typically offer the option of choosing to initiate calls using either a Wi-Fi hotspot or the regular, second-generation GSM mobile telephony, or to switch automatically between the two midcall.
The service's price is appealing. For just $20 a month in addition to their mobile contract charges, subscribers can talk all they want using Wi-Fi access, enabling them to sharply lower their monthly mobile minute usage.
There clearly is plenty of momentum toward UMA phones:
- Texas Instruments (TXN) - Get Report has announced plans to embed support for UMA technology into its OMAP-Vox platform.
- One of the most buzzed-about wireless start-ups around right now is Kineto, the UMA specialist working with companies including T-Mobile and Nokia (NOK) - Get Report on helping UMA phones juggle Wi-Fi hotspots and mobile networks smoothly.
- BT Group's (BT) British Telecom is currently expanding its own UMA program. European operators have been evaluating the technology for quite a long time and are clearly trying to figure out the way to introduce the technology without cannibalizing their mobile revenue.
The momentum toward mobile WiMAX is also unquestionably impressive. Strong support from Intel should guarantee wide mobile WiMAX support in laptops by the end of 2008 or soon after. No fewer than two national mobile WiMAX rollouts are slated for 2008, by Sprint and
, Nokia and
seem to be fairly aggressive in developing mobile WiMAX phones, and Motorola and
are more or less betting the futures of their network units on mobile WiMAX success.
There is little doubt that UMA and mobile WiMAX will become important technologies in the long run. The timing here is what concerns investors, and during the major telecom conferences this winter, the development problems of UMA and mobile WiMAX were major topics of conversation.
Teething Trouble for UMA and WiMAX?
The undeniable long-term potential of UMA and mobile WiMAX tells us very little about how these technologies can help T-Mobile and Sprint over the next two years. It could well be that the early implementation problems, software snags and high device pricing stemming from low production volumes will prevent UMA and mobile WiMAX devices from delivering any meaningful benefits for T-Mobile and Sprint until 2010 or later.
By that stage, AT&T and Verizon could simply co-opt the technologies. If the leading operators can substantially extend the lead of their subscriber bases over those of T-Mobile and Sprint over the next six to eight quarters, the latter two's decision to focus so much energy on new technology development may turn out to be a fatal strategic misjudgment.
By diverting management and capital expenditure resources into UMA and mobile WiMAX development, T-Mobile and Sprint seem to be targeting a rather thin sliver of early adopters just as their grip on the mass market is slipping. The first UMA phones, for example, suffer from the usual problems of models that incorporate substantially new technology. Nokia 6136 has a 1.3 megapixel camera, 128x160 pixel display and 98-gram weight. All major features are a step or two below state of the art.
Because the handset itself isn't appealing, the consumer must have deep conviction about UMA service to buy it. This problem cuts across early UMA devices and is likely to be an issue for mobile WiMAX devices in 2008 and 2009.
The pricing of T-Mobile's UMA service is attractive and could theoretically appeal to a wide spectrum of consumers interested in cutting their monthly bills. But using the service demands setting up a dedicated Wi-Fi hotspot in your home -- a step that isn't yet intuitive and easy enough not to scare off 90% of consumers.
And the first generation of UMA phones apparently suffer from all the usual childhood poxes. The standby time using Wi-Fi mode is less than a day, Wi-Fi connection has to be perfect or voice quality is diminished and switching between the Wi-Fi and GSM modes isn't seamless.
These issues are predictable and to some extent unavoidable. But T-Mobile doesn't really have the luxury of tinkering with the UMA program for a year or two. It remains the most promising differentiator for an operator that hasn't benefited from aggressive pricing as much as it should have.
Despite having some of the most attractive pricing plans in America, T-Mobile is losing customers to pricier rivals. AT&T and Verizon started clearly locking up the most attractive new phone launches in 2006. As their subscriber growth surged, leading phone vendors got jackpot returns from the decision to prioritize the top two operators for launches of most appealing new models.
This cycle is now locked in place. Both T-Mobile and Sprint need a game-changer to shift the dynamics that are now distinctly unfavorable for them in the long run.
It is a distinct disappointment that T-Mobile's UMA service still remains limited to Washington state. The national launch was originally expected at the beginning of 2007. The state of Sprint's WiMAX program is more difficult to gauge. Regional soft launches are targeted for the end of 2007, to be followed by national rollout sometime in 2008. However, several industry sources at recent trade events indicate that the there is trouble in early testing of both network and end-user devices.
This is something that practically always happens with ambitious new network technologies. But neither T-Mobile nor Sprint is likely to ride out the teething trouble without getting dented. Both operators have quite understandably tried to find a way to attack AT&T and Verizon indirectly, by supplementing the traditional mobile telecom standards with Wi-Fi and WiMAX standards.
The unique pricing advantage this gives them could be a major competitive advantage. However, the timing of these initiatives is apparently going to be very challenging. I would argue that both T-Mobile and Sprint are about two years too late. The leading operators have built bigger subscriber bases and have already translated the heft advantage to an inside track among phone vendors that already has landed them practically all the hottest phone debuts in 2006 and as a result has extended their branding power.
AT&T and Verizon found a way to neutralize the key advantages of T-Mobile (pricing) and Sprint (good high-speed mobile data service) in 2006. They may well have locked in virtuous cycles of mass, growth and primary access to quality product. If it takes until 2009 or 2010 for T-Mobile and Sprint to get second-generation UMA and mobile WiMAX products out, what will be left of their competitive position in the mobile market?
I'm not sure investors fully appreciate how tough the situation for T-Mobile and Sprint could get relative to AT&T and Verizon.
Later this week, I'll discuss Clearwire and how this new mobile WiMAX challenger might fit into the picture.
At time of publication, Kuittinen had no positions in any of the stocks mentioned in this column, although holdings can change at any time.
Tero Kuittinen is a senior product specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback;
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