The (Updated) Perfect Storm for Wireless Operators
In October of 2009, I forecasted on a now-defunct blog that our industry was approaching “The Perfect Storm for Wireless Operators.” I now offer an updated blog based on hindsight and the current state of the wireless industry.
In 2009 I wrote:
Today in both Europe and North America, the wireless industry shows its own combination of circumstances which could create a future perfect storm:
- Market saturation – it is estimated that 85-90% of Americans own a cell phone and the number in many European countries are estimated to be at or over 100%,
- Cheaper “all-you-can-eat” rate plans – in the USA, all of the four major carriers offer voice/data plans for $99/month and Metro PCS offers voice plans for as low as $50/month, and
- Increasing OPEX – the two largest expenses for wireless carriers are payroll and rent roll and both are inflating.
It doesn’t take a meteorologist to forecast enormous pressure on cellular operating margins.
That prediction was based on fundamental economics. As an industry approaches market saturation competition increases, prices begin to fall, and companies start to focus on operating expenses to protect their margins.
When I gazed into my crystal ball in 2009, I failed to scry the fourth, and the arguably most severe storm that impacts our industry today – the insatiable demand for wireless data. At that time the iPhone was only two years old, and as a loyal Blackberry user, I just failed to foresee the explosive growth in OTT and other high-bandwidth apps.
With the benefit of hindsight and current market trends, the following is an updated assessment of what I call “the Perfect Storm for Wireless Operators.”
- Market Saturation (aka – wireless penetration rates) – Estimates vary widely, but Wikipedia has concisely compiled info confirming that both the USA and almost all of Europe have far exceeded 100% penetration.
- Increased Price Competition – This is obvious. You see many deals advertised on TV, and everywhere you go. Operators are now trying to prop up their price plans with content – See AT&T/Time Warner merger.
- Increasing Opex – Payroll and rent roll for cell sites remain two of the top Opex line items on operators’ profit and loss statements. I now add a third line item, backhaul. The cost of fiber in a 4G, soon to be 5G world will be a critical line item to watch.
- Demand for data is driving CapEx – Operators have significantly increased their Capex budgets to upgrade and modify their existing cell sites more frequently and rapidly than ever before. They are also now underlaying their existing networks with small cells. Millions of new microsites are needed. These are becoming very common throughout Asian and the USA and are now beginning to develop in Europe as well.
As often occurs when an industry matures, competition due to market saturation creates downward price pressure and increased focus on operating margins. This is typical. However, in the wireless industry, this pressure is compounded by the increased need to deploy capital to meet the demand for bandwidth. Over the next few years, the wireless infrastructure industry needs disruptive innovation.
At Md7, we welcome the challenge.