1.0 There Went the Big Spenders

As all are aware, the mobile phone industry has just finished an enormous capital expenditure binge on new technologies. The rational was simple?increasing market saturation and competition was resulting in decreasing subscriber growth and ARPU (average revenue per user). Mobile data services offered new revenues streams and a means for operators to differentiate themselves. The top six mobile phone operators (Verizon, AT&T, Nextel, Cingular, Sprint, and T-Mobile) thus opened their wallets and spent $59 billion between 2000 and 2002 on new (or substantially upgraded) networks (Figure 1).

Figure 1 Network CAPEX, Top Six Operators 1999-2002

Of course, new phones were required as well so vendors began rolling out handsets packed with new features. Current models now include integrated digital cameras, MP3 players, color and/or enlarged screens, keyboards, styli, polyphonic ring tones, voice activation, speaker phones, radios, instant messaging, or Bluetooth connections. Handset expenditures for the top six operators thus reached $10 billion in 2002, up 6% over the previous year (Figure 2). Over $4 billion of this amount was paid by operators in the form of handset subsidies (down 3% from 2001) while subscribers made up the difference through handset purchases.

Figure 2 Handset Expenditure, 2001 & 2002

In the wake of this spending spree, however, many are now calling into question its wisdom. Stock valuations have plummeted, operators are scrambling to reduce expenditures, and vendors are hard pressed to sell their wares. The reasons for pessimism are all too clear.
2.0 Conspicuously Not Consuming

In 2002, the total market added only 12 million new subscribers, the lowest increase since 1997. Quarterly data shows no sign that this trend will reverse. A combined, four-quarter average of net additions (again for the top six operators) reveals a steady trend of falling subscriber growth since 2000 (Figure 3).

Figure 3 Four-Quarter Average Combined Net Additions for Top Six Operators

Decreasing subscriber growth, it must be noted, is not surprising given the increasing penetration of the market. One-half of all Americans now have a mobile phone subscription, which translates into nearly 60% of the population over the age of ten. What is truly disheartening for this industry is the lack of growth in ARPU (which was the whole purpose of the new technologies in the first place). Although an operator may experience a slight increase or decrease in ARPU for any given quarter, the overall trend is unmistakable. ARPUs have remained remarkably flat over the past two years (Figure 4).

Figure 4 Weighted, Four-Quarter Average ARPU of Top Six Operators
3.0 Does Anybody Really Want All This Technology?

Therefore, despite the fact that in the last two years, $40 billion has been spent on new mobile networks and $20 billion in new handsets, subscriber growth is slowing, and incremental revenues from new services are practically non-existent. This begs the obvious question, ?Does anybody really want all this technology?? Have service providers, in conjunction with equipment and handset vendors, spent billions developing and deploying new technologies that the consumer simply does not want? The answer is no.

While our society may have its share of technophobes who always shun the latest gadgets, mobile phone owners clearly do not fall into this category. Mobile phone owners, while not always ?early adopters,? are certainly ?earlier adopters? of technology. They are substantially more likely to own other devices, use home networks, and have Internet access when compared to those consumers without mobile phones (Figure 5).

Figure 5 Percentage Of Mobile Phone Users With…

Furthermore, consumer surveys show that a significant number of those planning to purchase a mobile phone within the next 12 months are also planning to buy another device such as an MP3 player, PDA or digital camera (Figure 6). Consumers in the market for multiple devices are of course a natural target for the multi-feature phones vendors are beginning to roll out. Comparing survey data with current product lines reveals that vendors are not pushing unwanted technologies, but rather responding in proportion to consumer demand.

Figure 6 Likely Mobile Phone Buyers who also Plan to Purchase…

More than 30% of likely mobile phone buyers say they intend to purchase a digital camera, but only one of the 29 phones in Nokia?s U.S. product line (3%) come equipped with a digital camera. Likewise, SonyEricsson?s lineup boasts just two of 13 handsets (15%) with an integrated camera, and Motorola offers only a separate, camera-attachment accessory for its phones.

Roughly 20% of likely mobile phone buyers plan to purchase a PDA, but there are only one or (in the case of Samsung) two PDA/mobile phone hybrids in the major vendor?s product lines. Similarly, 15% plan to purchase an MP3 player, yet there are only a handful of MP3-enabled phones on the market. Handset vendors will not likely capture the full 15%-30% of the market seeking to purchase these devices, but the very existence of this segment justifies the rollout of multi-feature phones.

Figure 7 Interest Level in Select, Remote Services

Mobile phone subscribers also show significant demand for the data services these phones enable. Between 15% and 25% of mobile phone owners report they are interested in being able to remotely monitor their house, receive burglar alarm alerts, access their computers, or control the lighting in their house (Figure 7). This equates to roughly 20-30 million consumers, providing a prime initial market for operators to push new data services. Furthermore, 10%-20% (15-20 million subscribers) are interested in these services even if they each cost $5 a month.
4.0 What?s Really Wrong with the Industry

There is clearly demand among consumers for new handsets and services, and the mobile phone industry has spared no expense in trying to deliver it to them. Yet if this is the case, why is ARPU flat and subscriber growth declining? The answer is that the industry has not presented the technologies to consumers in a meaningful, attractive package. Instead they have offered unwieldy products that provide ill-defined services at an uncertain price. In short, it is no surprise consumers are not buying. Three mistakes have led the industry to this point.

1) An unclear, ill-defined service is being offered. Instead of promoting a concrete and meaningful service most operators are essentially selling ?access? under vague names such as ?T-Zone? or ?Vision.? These terms in no way define what is offered, and when consumers ask ?What is it?? the response is either simply ?the Internet? or a dizzying array of features for e-mail, entertainment, shopping, contact management, photo-messaging, news, weather, travel, etc. Operators have assumed that promoting all of the features will mean greater value in the consumer?s mind, but in reality the opposite is true. An individual feature is understandable, meaningful, and therefore holds value, but dozens of features bundled together becomes a daunting blur, intangible and therefore less attractive.

2) Pricing is unclear and discourages use. Fittingly, a confusing service is usually given a confusing price scheme. Operators charge for ?access? and then sometimes for the ?service? as well. Consumers can grasp this concept, but most operators have not made service costs clear. If the ?service? costs are unknown, ?access? is unappealing because consumers have no idea what they will get if they purchase it. Pricing is sometimes quoted in dollars per kilobytes, with little indication of the average ?size? of each service, or worse yet, no pricing is given at all.

Some mobile data plans also discourage uptake. To simply try the services, consumers are forced to get a subscription with reoccurring fees. The price for first-time usage is therefore the total cost of the subscription contract, which is enough to inhibit many consumers.

3) Handsets are either schizophrenic or boring. Clearly consumers will attach greater value to high-end handsets once the services they enable are more meaningful and the costs better understood. Yet the handsets must also present an attractive platform for services, and in this regard, they have largely failed. Few would actually want to write e-mails using a standard dial pad, regardless of what it costs. Likewise, chatting on a PDA is unappealing and awkward. Vendors are struggling to combine multiple features into a single device, and with few exceptions, the result has been either a traditional phone which is ill-suited for data services or a bizarre, hybrid device most consumers would hesitate to buy.

To rectify these mistakes and revive the sector?s performance, the industry must know how consumers use their phones and, more importantly, how they want to use their phones in the future. It must stop talking about technology and start listening to consumers to understand what features, devices, and services they want and what packaging is desirable. Demand is not an obstacle for the industry. Consumers report interest in a wide array of services and applications ranging from weather forecasts (surprisingly the most popular) to video and music downloads (the least popular). Yet nothing highlights the disconnect between industry and consumers better than the varying levels of interest in these applications. Despite the fact that music and video downloads are the two applications least requested by consumers, these applications receive the most attention and effort by an industry anxious to fill bandwidth. When the services prove unpopular, the industry shrugs and assumes consumer demand is weak. On the contrary, demand is present, and consumers are ready to buy. They are simply waiting for the industry to offer what they desire in a convincing manner.

About the Author: John Barrett is Research Analyst for Parks Associates, a Dallas-based market research firm and consultancy that specializes in emerging residential and SOHO technology solutions. Mr. Barrett can be contacted at 972-490-1113 or barrett@parksassociates.com. For more information about Parks Associates, please visit www.parksassociates.com.

About Parks Associates: Parks Associates is a market research and consulting firm focused on all product and service segments that are ‘digital’ or provide connectivity within the home. The company’s expertise includes home networks, digital entertainment, consumer electronics, broadband and Internet services, and home systems.

Founded in 1986, Parks Associates creates research capital for companies ranging from Fortune 500 to small start-ups through market reports, multiclient studies, consumer research, workshops, and custom-tailored client solutions. Parks Associates also hosts two executive seminars, both part of the Fall Focus series, and co-hosts CONNECTIONS? (in partnership with the Consumer Electronics Association) each year. www.parksassociates.com .