Blog Post

The iPhone Will Not Destroy the Wireless Business

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

ref_iphone3g_pairWireless data consumption has been the growth story of the last 18 months, as folks increasingly pick up their iPhones, BlackBerrys and wireless modems in search of YouTube video, email and thousands of apps. But the Wall Street Journal wants you to believe this is a terrible thing for phone companies (or more specifically, their shareholders). In a story today, the WSJ notes how the iPhone (s aapl), which makes it easier for consumers to access data-intensive applications such as video, results in users consuming a lot more bandwidth than they would for texting and email.

A recent analysis by Alcatel-Lucent of North American wireless network use during the midday hour on one day found Web browsing was consuming 32% of data-related airtime but 69% of bandwidth, while email used 30% of data airtime but only 4% of bandwidth.

We’ve known this for a while. And so have carriers, which is why they’re transitioning to next-generation networks, which offer more capacity and the ability to move data at a lower cost per bit. Will that keep the margins of the top two carriers in the high 20 percent range, where they currently sit? It may help them hold onto those margins in the short term, but as we’ve previously noted, the industry has to deal with innovations that are turning wireless and wired broadband providers into dumb pipes. It’s also faced with increasing competition, as more than 90 percent of the U.S. market already pays for a mobile subscription.

Chetan Sharma of Chetan Sharma Consulting noted today that during the first three months of the year — for the first time ever — carriers sold more than $10 billion in wireless data plans in a single quarter. That being said, the growth in wireless revenue is slowing. Sharma expects it to grow 24 percent in 2009, down from 39 percent in 2008. Overall annual revenue per user (ARPU) already decreased by 9 cents during the first quarter; average voice ARPU declined by $1.17 while average data ARPU grew by 26 cents — or 2 percent — which doesn’t negate the drop in voice ARPU.

So slower overall subscription growth means carriers will start seeing real competition, and competition is generally bad for margins. That’s the story of capitalism. The phone companies know this, which is why they’re investing in next-generation networks that will enable more data to travel more cheaply through their pipes, while at the same time offering plans and phones aimed at luring customers away from other carriers. They’ll also increasingly look at new pricing plans structured to optimize their revenue and network usage, as well as try to provide other services, such as application stores and wireless data plans to other businesses, to keep their businesses growing even as margins fall.

So while the iPhone and the consumer wireless data story plays itself out, carriers are already looking to their next horizon.



18 Responses to “The iPhone Will Not Destroy the Wireless Business”

  1. every time i have a business trip overseas i’m always amazed at just how much more we’re paying for wireless bandwidth compared to our european (and god forbid i compare the US against se asia) neighbors!

  2. This guy "gets it"

    Why is it that the major Wall Street reporting outlets get it sooo wrong when reporting on wireless? Have they not been paying attention to wireless growth trends? With the exception of Sprint, all major US carriers have been adding subscribers, increasing overall ARPU (average revenue per user) and profit margins. AT&T and VZW reported gross margins (EBIDTA) in wireless for the first quarter of 40 and 46% respectively on total revenue of approximately $11 B and $13 B respectively. Tell me, especially in this recession, what other industries are generating that kind of profit consistently every quarter? And have products that their customers seem to not be able to do without?

    Great article. Leave it to a techie to set the Wall Street “gurus” straight.

  3. I am afraid that both this article and the one in WSJ are missing the point made by the ALU study. That study claims that an application can consume inordinate amount of radio resources compared to the amount of bandwidth consumed. So it is for email, especially because there is lot of uplink traffic. The point of the study is that one needs to optimize data access protocol. I don’t think the study can be used to support the points made in these two articles.

  4. Well, in terms of the revenue/bandwidth ratio — carriers have reaped a relative fortune over the last couple years in charging extra for SMS. AT&T specifically has enjoyed quite a windfall in iPhone sales and subscriber growth. Too bad, that revenue hasn’t enabled a more rapid evolution (pun intended) of the network.

    Finally, 39% growth in 2008, and 24% in 2009? Many an industry in this economy would love to have such numbers.

  5. The feature you mention was actually built into the app — apple rejected the app specifically because you could directly buy a book. They insisted that
    1) It use the safari brower. 2) It no be integrated.

    Don’t blame amazon. Apple is making sure they still have some kind of leverage for this next digital revolution.

  6. At the rate websites are bulking up, website traffic will have to dominate. If website owners would give a choice for a stripped down website that was fast and easy for power users, it would change the dynamics. When this starts it will move through the web world like the wind.

  7. No surprise here. Web and Vdieo are more bandwidth intensive than voice and e-mail. It will put pressure on carriers to better optimize bandwidth utilization.

    Also, you have to wonder how long carriers are going to be able to continue a business model where they subsize the purchase price and make it back in higher fees. At&T can leverage its iPhone exclusivity to generate premium pricing. This is great for short term profits, but it really is not a viable business model.

  8. As we see in wired internet today, one of those next horizons is non-neutral access for third party applications. If they can get most of their subscribers to be iphone-like users, there is a goldmine waiting for them. Why wouldn’t AT&T ask Facebook to pay $0.50 per user per month for preferential bandwidth? Multiply that by all the popular applications, and you have real money.