7 Comments

Summary:

There are claims Internet mobile video is costing the carriers billions every year as they try to keep up with the demand for wireless data. Actually it’s not video; in reality, it’s apps, along with web in general, that are boosting the demand for mobile bandwidth.

trafficjam

Earlier this week, I read a piece on CNN Money, which took a rather simplistic view of the mobile data market. The author argued Internet mobile video was costing the carriers billions every year as they try to keep up with the demand for wireless data. Actually it’s not video; in reality, it’s apps on smartphones and their grown-up siblings — the tablets — along with web in general that are boosting the demand for mobile bandwidth. From the article:

But that’s an expensive task. The U.S. wireless industry is spending $30 billion to $50 billion annually to improve their networks, according to Dan Hays, partner at consultancy PRTM.

Verizon Wireless spent $17 billion alone improving its network in 2009, and AT&T spent about $19 billion over the past year on upgrades. Sprint laid out about half the money for the $14.5 billion it cost to launch its 4G network venture with Clearwire and other partners. T-Mobile said its network improvements have cost less but are in the same ballpark as its competitors.

No one is denying that the wireless data networks are getting crowded and requiring more investments, but one has to look beyond the woe-is-me arguments carriers continue to use for everything. But it’s not a one-way street! Sure, carriers are spending the dollars, but data is bringing in the big bucks too. If it was a voice-and-text world, they would all be beating each other up on low-margin, flat-rate plans, scratching for market share. Data has given them something to cheer about.

Chetan Sharma, an independent analyst and a contributor to our GigaOM Pro research service estimates that U.S. carriers will generate about $165 billion in revenues in 2010. Of the total, nearly $55 billion will come from sales of data services alone.

“The average margins for the US operators are around 37% with VZ and ATT in 40%+ margins overall,” Sharma said. He estimates that the carrier data margins as of 2010 are generally around 40-50 percent. Because their margins are declining, the companies are looking to spend money on network upgrades and use tiered pricing to offset some of those upgrades.

AT& T, which the article claims spent $19 billion upgrading its networks, has been a major beneficiary of the iPhone boom. Without the iPhone, the company labeled as the worst by Consumer Reports would be facing tough times. To paraphrase Johnny Cochrane, if the smartphone is a hit….!

Related content from GigaOM Pro (sub req’d):

  1. As a consumer, it’s EXTREMELY difficult for me to have ANY sympathy for the US Carriers. At one point in time since 1985, I’ve been a customer of almost all of them, and quite frankly they’d all have to get better to “suck”! Some more so than others to be sure. I’m looking forward to the day, in the very near future, when they NO longer have a stranglehold on the consumer, and IT IS COMING…whether they like it or not!

    Share
  2. Sharma’s estimates of wireless operator margins are grossly inflated and misleading.

    The correct way to look at profitability in a capital-intensive business like their is return on invested capital, not on revenues vs. COGS. Former FCC chief economist Gerry Faulhaber is good on this sort of thing, as is Scott Wallsten, the chief economist for the National Broadband Plan.

    To play in the network infrastructure game, you need to invest an awful lot of money, and you need to do it wisely, otherwise you end up like Clearwire.

    Share
    1. I haven’t seen Chetan Sharmas numbertouch 37% seems a bit out of touch. Agree that return on investment is an important metric to consider for the telcos, especially since they’re playing a capex-heavy, long-term game but maintaining reasonable COGS is critical for any business and more importantly, a fiduciary duty. Its the telco industry’s duty to forecast a reasonable range of financial opportunity brought by these new data-driven models and adjust capex accordingly. By only looking at their ROI, we are assuming they are the best at optimizing costs for driving network-enabled value to the end user which may or may not be true.

      Share
      1. Sorry, the above comment was from my Droid Pro, excuse the *touch* in the first sentence, meant to be a *but*.

        Share
      2. Checking on Verizon’s 2009 annual report, they had operating revenues of $107B and net income of $10B, which is a 9% margin.

        The balance sheet is a bit tricky because they separate income from wireless and wireline, but they don’t separate expenses, so you can’t really say what the wireless margin is per se. Apparently Sharma’s trick is to assign all the costs to wireline and the revenues to wireless, which makes VZW look as profitable as a web services company. That’s not very good analysis in my book.

        See for yourself at http://investor.verizon.com/financial/quarterly/pdf/09_annual_report.pdf

        Share
  3. Carriers are primarily infrastructure companies, this is their bread and butter and this is where they need to make sure they are up to date. The main thing they manage to do well is provide connectivity (God knows they have little understanding of consumer applications and new media services, and they will most likely never will)
    Complaining about needing to invest in infrastructure is just plain ridicules.

    Share
  4. [...] Sharma (News – Alert), an eccentric analyst, estimates that U.S. carriers will beget about $165 billion in revenues in 2010. Of a total, scarcely $55 [...]

    Share

Comments have been disabled for this post