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Wireless Data Trends

Chetan Sharma Aug 2006

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ireless industrys growth continues unabated into the

second half of 2006. First six months of this year marked several milestones. GSM subscribers worldwide crossed the two billion mark and the industry is going to gain its quickest billion subscribers and cross three billion subscribers within the next 24 months. China crossed the 400 million subscriber mark while India crossed the 100 million mark and became the 4th largest wireless market within a matter of couple of years of its hockey-stick growth. Carriers worldwide are reaping benefits of such phenomenon some more than others. Chetan Sharma Consulting looked at carriers in over 40 countries and analyzed their ARPU (Average Revenue per User) one of the key industry metric by which carriers are measured in the financial markets. Understanding of ARPU dynamics is critical to all in the mobile ecosystem. While voice ARPU continues to drop, data ARPUs importance keeps on rising. As 3G is becoming pervasive, so are the non-messaging data applications and that is having a direct impact on carriers bottom-line. This paper will take a look at the worldwide wireless data markets, analyze ARPU trends, and look at the leaders.

Chetan Sharma Consulting, 2006

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ARPU represents how much an operator is making from every user every month. Though ARPU doesnt provide the complete picture of the financial health of the operator, it is one of the most consistent metric reported by carriers around the world, the one you can use to compare competitors, gain a sense of trend line, and do some analysis. Following our last years popular Wireless Data ARPU paper, Chetan Sharma Consulting analyzed carrier ARPU numbers from 40 countries - from developed and mature markets such as Japan, Korea, UK, and France to high-growth markets such as China, India, Brazil, and Russia, to some of the developing markets such as Eastern Europe and South Africa. Our specific focus was on data ARPU as it represents the growth part of the equation.

Whos ahead?
During the first half of 2006, wireless data revenues have been on the rise across the board. Japan led the way with approximately $10B in wireless data service revenues for the first half of 2006. US and China followed with approximately $7B and $5.5B respectively. The #1 carrier worldwide in terms of total wireless data revenue for the first six months of 2006 is NTT DoCoMo with over $5.1B in data revenues. It was followed by China Mobile ($3.9B), KDDI ($3.3B), Verizon Wireless ($1.9B), and Cingular Wireless ($1.9B). Sprint Nextel, O2 UK, Vodafone Japan, SK Telecom, and China Unicom filled the rest of the top 10 slots respectively (Figure 1). All the top 10 carriers in the list exceeded $1B in data revenues for the first six months of 2006. Verizon wireless became the first US carrier to break the barrier of $1B/quarter in data revenues. China Mobile and China Unicom benefited from their huge subscriber base of 274M and 135M respectively while DoCoMo and KDDI did well because they are generating over $17 (or 28%) in wireless data ARPU.

Chetan Sharma Consulting, 2006

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Top 10 Carriers by Wireless Data Revenues (1H06)

$6,000 NTT DoCoMo, 51,670

$5,000

$4,000 USD Millions

China Mobile, 273,786 KDDI, 23,616

$3,000 Sprint Nextel, 41,405 O2 UK, 16,814 Cingular Wireless, 57,308 $1,000 Source: Chetan Sharma Consulting
Source: Chetan Sharma Consulting

Verizon Wireless, 54,835 $2,000 SK Telecom, 19,996

Vodafone Japan, 15,250 China Unicom, 135,000

$-2 0 2 4 6 8 10 12 Carrier, Subscribers (000s)

Figure 1. Top 10 carriers by wireless data revenues (1H06)1

Wireless Data ARPU trends of major markets 2001-2005
18.00 16.00 14.00 12.00 10.00 $ 8.00 6.00 4.00 2.00 0.00 2001 Denmark Norway Finland Singapore 2002 France Switzerland 2003 Germany UK Ireland US 2004 Japan 2005 Korea

Figure 2. Wireless data ARPU trends of major markets 2001-20052

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Source: Chetan Sharma Consulting Source: Chetan Sharma Consulting

Chetan Sharma Consulting, 2006

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ARPU Trends
Overall ARPU in most markets is on the decline even in mighty Japan. We will have to look at the EOY 2006 numbers but there are some indications of cooling down of data ARPU growth in mature markets of Japan, Korea, and UK (Figure 2). So, while % data contribution will increase due to declining voice revenues, data ARPU will not make up for the loss. Most of the mature markets face the same dilemma. In fact, comparing EOY 2005 to 2004 numbers, only a handful nations registered positive increase in overall ARPU (Figure 3) with Canada ($3), Korea ($3), Mexico ($1), Taiwan ($1), Brazil ($1), and Chile ($1) showing an increase. The biggest loser was Nigeria dropping almost $23 from Q404. In fact, it has dropped a whopping $70 since 2001, biggest such ARPU drop. Even some of the western markets are feeling the heat; Switzerland and Finland both reported double digit drops ($13 and $12 respectively). Even Japan reported an $8 drop from the 2004 levels. The US average ARPU declined marginally to $53.
Change in Data ARPU 4Q04 to 4Q05
5

(5)

(10)

(15) Source: Chetan Sharma Consulting

(20)

(25)
Ar ge Au ntin st a ra Au lia Be st ria lg iu m Br Ca azil na d Ch a i Ch le Co in lo a m b C ia De z ec nm h a Eg rk Fi yp t nl a Fr nd G a nc er e m an Ho Gre y ng ec Ko e Hu n ng g ar y In Ind do ia ne sia Ire la n Is d ra el Ita Ja ly pa K n M ore al a ay M sia e M xic Ne or o th o cc Ne e o w rlan Ze d s al a Ni nd ge No ria Pa rwa Ph kis y ilip ta n pi n Po es Po land rtu R ga Si u ss l So nga ia ut p o h re Af ric Sp a S a Sw we in it z d e er n la Ta nd i Th wa ai n la Tu n d r Uk key ra in e UK Ve ne US zu el a

Figure 3. Change in Data ARPU from 4Q04 to 4Q053 In terms of data ARPU, it wasnt a surprise that Japan continues to lead the pack. Its ARPU has been hovering over $17 which is over 28% of its overall ARPU. As shown in figure 4, Japan still leads in the data ARPU thought the gap is closing with each passing quarter. In fact, carriers from Philippines have a much higher % data ARPU than anybody else with over 45% of the carrier revenues coming from data services (though the data ARPU is around $3). The US for the first time
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Source: Chetan Sharma Consulting, Government Data

Chetan Sharma Consulting, 2006

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crossed the 10% and $5 barrier and is making good incremental gains every quarter. While most of the major western markets have experienced decline in ARPU, US ARPU has held somewhat steady around $53-55. Voice ARPU is declining and data ARPU is barely making up to keep the ARPU at $53. The US market clearly has very high potential for data applications and we can expect the data ARPU to show signs of growth quarter-over-quarter for next few years. This is due to several factors but the primary one being that carriers are waking up as data ARPU is starting to account for over 10% of their revenues and starting to promote data services, starting to organize internally to respond to the opportunity. There is more awareness in the market, better phones, advent of 3G and enhanced services are all leading to rise in the data revenues. In 2005, data revenues topped $8.6B up from $4.6B in 20044. In 2006, the US data revenues numbers are expected to exceed $15B5. In Japan and Korea, consumer messaging revenue only accounts for 30% of the data revenues, rest is from multimedia applications, browser traffic, and other infotainment applications. It is almost the reverse in Europe with 70-80% (on average) of the data revenue coming from messaging. There are some exceptions like Vodafone Spain, Telefonica Moviles Espana, and Eurotel, who have over 40% of their data revenues coming from non-messaging applications. For North America, the data revenue from non-messaging applications (excluding transport) is around 20%.

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Source: CTIA Source: Chetan Sharma Consulting

Chetan Sharma Consulting, 2006

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Philippines (45%, $2.70) 30% Indonesia Japan

Data as a % of total revenues (average across carriers in the country)

UK 20% China Venezuela Singapore Norway South Korea New Zealand Italy Belgium Finland Spain Austria Ireland

Malaysia Germany Ukraine Czech HongKong

Switzerland

10%

Israel India Thailand Sweden Brazil

US Canada Asia Europe Americas

$5

$10 Average Wireless Data ARPU (USD) for carriers in a country

$15

Figure 4. Average wireless data ARPU by country (2005)6 In terms of data ARPU change, US leading in terms of absolute dollar amount. The average US data ARPU was up by $2.1 from a year ago, followed by Canada, Hong Kong, Korea, and New Zealand who all experienced modest gains. Carrier Data ARPU report Figure 5. shows the matrix of wireless data as a percentage of total revenues vs. wireless data ARPU in USD for some of the major carriers worldwide7. Since last year, the gap between the top two leaders NTT DoCoMo and KDDI has closed and several other carriers are doing rather well in engaging customers with content and data services. 3 Italy recorded the highest % data ARPU for carriers with data
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Source: Chetan Sharma Consulting, Analyst reports, Government data The data revenues include revenues from content as well network usage.

Chetan Sharma Consulting, 2006

Source: Chetan Sharma Consulting, 2006

Netherlands France Turkey Demark Russia Mexico Greece Poland Portugal

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ARPU $5 or higher. 3UK and 3 Australia, O2 UK, and SK Telecom are all doing well primarily due to their 3G data services. In general, carriers can be roughly categorized as follows: A) Leaders These are carriers who have been performing above the ($15, 15%) coordinate in the 9 box chart (figure 5) where $15 represents the data ARPU and 15% indicates that the data % contribution to overall ARPU. NTT DoCoMo is by far the leader by earning close to $1B/month from data services. Their stated goal is to derive 80% of their revenues from data services by 20108. However, NTT DoCoMos position at the top of the wireless data world has been challenged recently by several carriers esp. by its archrival KDDI which surged past DoCoMo for two straight quarters. Their data coordinates respectively stand at ($17.3, 28.9%) and ($16.5, 28%). The trend in this category is of continued % value increase with low $ increase. B) Influentials In this category, carriers are generally have data contributing over 20% to their overall ARPU. Most of the European operators are in this category. Some of the prominent Asian carriers like KTF, Singtel, SK Telecom are in this category as well, especially KTF and SK Telecom are amongst the four elite carriers in the world (along with KDDI and DoCoMo) who eat, drink, live this stuff (i.e. data services). The trend in this category is increase in % value and slight increase in $ value. Some carriers are experiencing decline in $ value as well. C) Upcomers This category is dominated by North American operators like Verizon, Cingular, Sprint Nextel, Rogers, and T-Mobile who have recently graduated into the ($5, 10%) club. US wireless data market is growing at an impressive rate. Top 4 US carriers (Cingular, Verizon, Sprint Nextel, and T-Mobile) accounted for over $6.3B in wireless data revenues for the first half of 2006. Overall, wireless data service revenues exceeded $7B and the figures are likely to exceed $15B for the year 2006. Sprint retains its leadership position of highest wireless data ARPU in terms of absolute dollar amount at $7.25 but lost its number one spot in the % data ARPU to Verizon which now leads the US carriers at almost 13%. Average data ARPU is now $6.3 or 12%. This category represents the highest acceleration in data revenues both in terms of % and $ value. D) Low ARPU - Even though China reported approximately $5.5B in data revenues, and the % contribution is over 20%, data ARPU is around $2, confirming what we already know its a volume game. For India data
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Source: NTT DoCoMo.

Chetan Sharma Consulting, 2006

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ARPU is just over $1.2. It was approximately same for Brazil and Russia. Carriers in this category are primarily from China, India, and other developing nations where the overall ARPU ranges from $9-$12. Though the data % contribution for these carriers will improve along with the data revenues due to millions of net-adds for next several months, the absolute ARPU amount will stay relatively small compared to other prominent carriers. The trend in this category is that of declining $ value as % value increases.

3 Italy

A
O2 UK 30% SK Telecom KDDI NTT DoCoMo

B
China Mobile O2 Germany KTF China Unicom 20%

SingTel

3 Australia

3 UK

Vodafone Japan

Vodafone UK Vodafone Germany

D
Data as a % of total revenues T-Mobile Germany

Orange UK T-Mobile UK Vodafone Italy Vodafone Spain Orange France

10%

Hutch

Asia Europe Americas

$10 $15 Wireless Data ARPU(USD) $20

Chetan Sharma Consulting, 2006

Source: Chetan Sharma Consulting, 2006

Verizon Cingular Orange Spain Sprint Bharti T-Mobile US Reliance Rogers

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Figure 5. Wireless Data ARPU for major operators worldwide9 The gap between the Japanese operators and the rest is closing fairly rapidly. Since our last research on the subject, several other operators such as 3 in Australia, Italy, and UK and SK Telecom in Korea narrowing the gap. The big four US carriers Cingular, Verizon, Sprint Nextel, and T-Mobile are gaining ground as well as 3G takes a foothold in the US this year. As reported in our 3G Hitting the Mass Market paper, US market is priming for 3G growth by early 200710. As of mid-2006, we are already over 7 million 3G subscribers in the US11. As noted earlier the Chinese and Indian operators have good % data contribution but the absolute dollar amount is low as the price pressure continues. It is interesting to note that while the tariffs in these markets are lowest in the world, operators are reporting over 40% EBITDA12 margins which is comparable to its western counterparts. This clearly points to the uniqueness of various markets and differences in cost structures and operations.

Conclusions
ARPU is not the best indicator of carriers health. Average Margin Per User (AMPU) or Average Profit Per User (APPU) per month or over the life of the subscriber are better measures of carriers strategy and execution, however, since such details are not public knowledge, ARPU trending over time provides a good glimpse into how things are progressing with a carrier or within a given market. The good news is that wireless data usage is on the rise. However, to translate usage into revenues, one still has to be innovative, offer differentiated solutions, and put strong emphasis on consumer user experience, education, and marketing the services (not the technology), and provide good customer care. It is also clear that higher wireless data ARPU is directly correlated to creative business models that empower the entire ecosystem, device customization that enhances user experience and brand loyalty, and applications and services that benefit the customers.

Source: Chetan Sharma Consulting, Analyst reports, Government data As discussed in our 3G Hitting the Mass Market paper, we continue to believe that 3G will hit the inflection point in the US in early 2007 leading to accelerated growth in the next 2-3 years. 11 Cingular has been behind schedule in its deployment of UMTS/HSDPA handsets into the market 12 Source: Sunil Mittal, CEO Bharti, July 4th 2006
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Chetan Sharma Consulting, 2006

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About Chetan Sharma Consulting

Chetan Sharma Consulting is a consulting and advisory firm helping companies in the mobile and voice communications sector. Our expertise is in developing innovation-driven product, marketing, and IP strategy. We've helped companies like NTT DoCoMo, KTF, Sprint Nextel, Reuters, Disney, Qualcomm, Infospace, Reliance, BEA, HP, Merrill Lynch, Cincinnati Bell, Bain, SAP, Vulcan, American Express, and many others. What can we do for you?

About Author
Chetan is a recognized industry expert in strategy and implementation of wireless data and pervasive computing solutions. He has a strong background in developing and launching technologies, products, and solutions for the wireless Industry, including extensive experience in managing and delivering all phases of the product development cycle. He has worked with major wireless carriers around the globe, from multinational players such as NTT DoCoMo to regional carriers such as Cincinnati Bell Wireless, from enterprise giants such as SAP to household consumer brands such as Disney. Chetan is the author of best-seller: Wireless Internet Enterprise Applications (John Wiley & Sons, 2000) and co-author of VoiceXML: Strategies and Techniques for Effective Voice Application Development (John Wiley & Sons, 2002). His most recent book titled Wireless data services: Technologies, Business models, and Global markets was published by Cambridge University Press, UK (Jan 2004) and is a collaboration with Dr. Yasuhisa Nakamura, SVP, NTT DoCoMo. Chetan has patents in wireless communications, is regularly invited to speak at conferences worldwide, is an active member in industry bodies and committees, is interviewed frequently by leading international media publications. He frequently addresses several telecommunications industry trade delegations to the US such as executive teams from Japan, Korea, and Finland. He served on the US advisory committee of Korea-Pacific US States Joint Conference on wireless and multimedia. Chetan has published several articles and industry reports on topics ranging from wireless multimedia to WLAN to UMTS. He has also been involved as a wireless technology expert witness in intellectual property litigation cases including Intellectual Property Infringement (Section 337 investigations) case in front of US International Trade Commission. Chetan is advisor to CEOs and CTOs of some of the leading wireless technology companies on product strategy and IP development. He serves on the advisory board of SignalLake (early stage telecom venture fund), Travelingwave (speech recognition), Nexage (mobile video), Compubahn (system integrator), and Intvo (mobile gaming). In addition, Chetan also advises some of the largest financial institutions on wireless technology and companies in the sector. Chetan is regularly invited by various US government agencies to speak on wireless data and security related matters. He is co-chair of wireless technology committee of Integration Consortium - IC. Chetan has MSEE from Kansas State University and BE from Indian Institute of Technology, Roorkee.

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