Penalty Pricing

Report
WIRELESS
TELECOMMUNICATION
CARRIERS
Tillman Elser,
Isabelle
Nunberg,
Nikkita Mehta,
Julie
Greenberg
AGENDA
 The Industry
•
•
•
•
General Background
Consumers
Main Players
Competition
 Pricing Strategies
•
•
•
•
•
Bundling and Versioning
Three Part Tariff
Network Externalities
Tacit Collusion
Penalty Pricing
• Discounts
• Cell phone pricing
Recommendations
• Investments
THE INDUSTRY
•
•
•
•
-
General Background
Consumers
Main Players
Competition
PRIMARY PRODUCTS
 Wireless voice
communication
 Text Messaging
services (SMS)
 Advanced PCS
(personal
communication
services)
 Other data services
 Other wireless
services
INDUSTRY SNAPSHOT
Lower pricing ->
competitive
advantage over wired
services
Consumers embracing
newer/more expensive
technology
Retail presence
decreasing in
importance
IBISWorld
PRIMARY CONSUMERS
 Corporate clients (15%)
 Stable market characterized by long term contracts and predictable
patterns of usage
 Most concerned with reliability (voice) and speed (data)
 Big target for 4G technology
 Small/Medium Businesses (30%)
 Laptop data plans and fixed mobile services attractive to this market
 General consumer/residential clients (55%)
 Most price sensitive
 Demand growing fastest in this group
DIFFERENTIATION AMONG CONSUMERS
Heterogeneous
preferences for cell
phone usage
 High use
 Low use
 Focus on Data
 Focus on Voice
 Focus on Text
vs
WHY PRICING BEYOND MINUTES IS
IMPORTANT.
EXPENSES BREAKDOWN
 24.8% - Cost of
service
 14.5% - Depreciation
 12.5% - Equipment
Purchases
 8.4% - Wages
 5.9% - Advertising
 6.7% - Rent/Utilities
fees
 6.5% - Profit
 ~20% other expenses
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
NETWORK TECHNOLOGY
 1G
 Analog, usage stopped in 2008
 2G
 Basic voice and data functionality
 Popularity declining as newer standards develop
 14.4Kb/s
 2.5G
 Stepping Stone from 2G to 3G
 50-150Kb/s speed
 Wireless Application Protocol (WAP) mobile Internet as well as
MMS
 Most advanced iteration of 2.5G is the EDGE network (AT&T/TMobile)
 200-1000Kb/s
NETWORK TECHNOLOGY (CONT.)
 3G
 Current standard among smartphones
 Beginning to assume market dominance from 2G and
2.5G
 Speeds of 300-600Kb/s
 3.5G
 Middle ground between 3G and 4G
 Speeds up to 14.4Mb/s
 AT&T/T-Mobile
 4G
 Epitomizes shift from voice to data among
telecommunications carriers
 Conflict between WiMax (Sprint) and LTE (Verizon)
standards
 Speeds up to 100Mb/s for mobile devices (1Gb/s for
stationary devices)
MARKET CONCENTRATION
Trends of M&A
Method to gain subscribers and
coverage
Saturated market: harder to build new
customer base
Economies of scale
Higher margins and available capital
enable firms to invest in their networks
and services
MARKET CONCENTRATION
 Top 4 Firms Market Shares:
 Verizon Wireless: 33.4%
 AT&T Inc.: 31.2%
 Sprint Nextel Corporation: 16.2%
 Deutsche Telekom AG (T-Mobile): 11.0%
 CR4 = 91.8
 HHI = 2472.44
VERIZON WIRELESS
 33.4% of market (market leader)
 Part of Verizon Communications– VW contributes
almost 2/3 of revenue
 Originally merger of three companies
 Acquired Alltel in 2009 to give VW largest market
share in industry
 Now transitioning to 4G LTE
 Revenue growth of 11.7% annually over past 5 years
 In 2011, expected to generate $66.1 billion in
revenue and net income of over $4.4 billion
AT&T INC.
 31.2% of market
 Largest market share until Verizon-Alltel merger
 Started as joint venture called Cingular Wireless
 In 2006, AT&T acquired both companies and became
AT&T Inc.
 AT&T wireless contributes to ½ of company revenue
 Plans to acquire T-Mobile within next 12 months
 Problem of congestion on data networks
 Revenue growth of 10.3% annually over past 5 years
 In 2011, expected to generate $61 billion in revenue
and net income of $16.5 billion
SPRINT NEXTEL CORPORATION
 16.2% of market
 Sprint and Nextel merged in 2005
 Only major company losing subscribers
 Backs WiMax instead of LTE for 4G network
 Annual revenue decline of 4.1% and has failed
to turn a profit since 2006
T-MOBILE
 11% of market
 Brand of Deutsche Telekom AG in US
 First wireless carrier to offer Android phones
 Large carrier of WiFi with T-Mobile Hot Spots
 Plans for AT&T to acquire T-Mobile
 In 2011, will generate $28.2 billion in revenue and
net income of $1.8 billion
COMPETITION
 HIGHEST in whole
telecommunications sector
 WHY?
 Churn rate of 1.5% to 3.5% per
month
 Types:
 Price
 Service offerings & quality of
service
 Product innovation
 Network dependability and call
quality
 Marketing strategies
 Geographic coverage
COMPETITION:
PRICING
 Firms all of fer similar products,
coverage, and services  price
competition is vital
 Try to undercut competition
 Discounts, network externalities, etc.
 Partly enabled by recent M&A activity by
improving firms’ economies of scale
COMPETITION:
SERVICE OFFERINGS & QUALIT Y OF
SERVICES
 Service becomes important weapon in the industry as
customers increasingly value reliability and attention
 High investment in upgraded technologies and networks
 Customer service becomes vital in gaining customer loyalty
and reducing churn rates
 Expansion of service offerings: “one-stop” bundles
 Telecommunications Act of 1996
COMPETITION:
PRODUCT INNOVATION
 New technologies incredibly useful in increasing usage,
margins, and customer base
 Short life cycles for products and applications
 New technology includes:




E-mail
GPS mapping
TV feeds
E-commerce . . .
 3G  4G
COMPETITION:
MARKETING STRATEGIES
 Promotional tactics
 Rebates, discounts, etc
 Advertising
 Supply side: Combative advertising
 Mature market; goal is to shift consumer demand toward advertising firm
but not expanding consumer demand
 Demand side
 Persuasive: alters consumers tastes based on service providers’ attributes,
strengthens barriers to entry especially in industry with economies of scale
 Complementary: appeals to “social prestige” with new phones, appeals to
attributes complementary to use (coverage, overage, etc.)
COMPETITION:
GEOGRAPHIC COVERAGE
 Ultimate goal: maximum US nationwide coverage
 Enables furthering economies of scale and higher efficiency
 Over 277 million Americans (approx. 91%) can choose
between three or more providers while 250 million of those
Americans (approx. 82%) can choose between only top four
EXTERNAL COMPETITION
 Mobile virtual network
operators (MVNOs)
 Companies that purchase airtime
from a major wireless network then
resell it with their own logo
 Increasing as communications
and media leaders have
recognized potential growth
 Mobile strategies developed by
Comcast and Time Warner
Cable
 Google looked into bidding in
700MHz auction in 2008
BARRIERS TO ENTRY
Barriers to entry are
high and increasing
primarily due to…
Regulating
spectrum scarcity
High costs
Market saturation
BARRIER:
SPECTRUM SCARCIT Y REGULATIONS
 Spectrum scarcity refers to a finite number of companies
being able to operate cellular/PCS services with a designated
geographic location and frequency
 Distributed through licenses within a specified area
 Closed to new entrants until next auction
 Cost at time of auction is high; over $19 billion was spent in 2008
700 MHz auction
BARRIER:
HIGH COSTS
 High initial costs
 Base stations, towers, and other necessary infrastructure reaches the
billions
 Costs of R&D and other investments
 Dependency on product innovation and up-to-date technologies
 Marketing strategies
BARRIER:
MARKET SATURATION
 Existing firms already
established their strong
positions
 Cost advantages due to
economies of scale
 Ability to spread expenses over
large customer base
 “one-stop” bundles
differentiate from pure
wireless providers and reduce
churn rates
 Slowing growth in customer
base
PRICING STRATEGIES
•
•
•
•
•
•
•
-
Bundling and Versioning
Three Part Tariff
Network Externalities
Tacit Collusion
Penalty Pricing
Discounts
cell phones
BUNDLING AND VERSIONING
 Feature bundling on cell phones -> facilitates feature bundling
on contracts
 Customers pushed onto smart phones
 Increases access to additional features
 Versioning
 Family plan vs Individual plan
 Extensive bundling seen in cell phone plans
 Considerable variance between companies
 Common themes: Avoid pure bundling, target heterogeneous
preferences
AT&T
 Focus on mixed
bundling
 Most profitable
bundles listed more
prominently
 In some cases, no
price dif ference
between bundled
and non bundled
services
 Customer ‘opts-in’
to services
VERIZON
 Pure and mixed
bundling
 Similar services
grouped together
 Customer forced to
‘opt-out’ of some
services
 Fewer options than
AT&T, but still many
additional services
offered
 Minutes and text
packages offered as
initial service
bundles
 Can also add text
package after
choosing minutes
T-MOBILE
 Lower utilization of
mixed bundling,
focus on pure
bundles
 Customer required
to opt-in to several
free services
 Huge number of
bundles ->
confusion pricing
SPRINT
 Focus on pure
bundling
 Search obfuscation
used more
prominently
(‘premium data addon)
 Fewest additional
service options
THREE-PART TARIFFS
Monthly fee and per minute fee
Now, mostly three-part tariffs: monthly fee
with included minutes but high overage fee
Customers choose three-part tariff over twopart tariff because of flat-rate bias
Most customers underestimate usage (use
only half of minutes allowable on average)
Those that do exceed allowance, exceed by
40% on average
CONFUSION PRICING
 Many versions so consumer surplus extracted from
those less willing to search for correct plan
 Customers underestimate uncertainty about usage
(overconfidence) by 81% and underestimate volatility
of usage (projection bias) by 57%
 When first signing up, average customer
underestimates usage by 40%
 Companies gain an average of $60 per customer
 Slow to correct mistake and switch plan
 AT&T “rollover” plan targets sophisticated consumers
who understand that usage changes monthly
PLANS AND ADD-ONS
30
25
20
Plans
Add-Ons
15
10
5
0
AT&T
Verizon T-Mobile
Sprint
NETWORK EXTERNALITIES
 Companies create network
externalities as an incentive to gain
new customers
 Free texting within Verizon network
 Free minutes within all networks
 Only significant after critical mass
reached
 Customers benefit from others on
the same network
 The greater the size of the network,
the greater the benefit to user
TACIT COLLUSION
 How does it work?
 Industry is an oligopoly
 Top four firms dominate almost the entire
market
 Homogenous products
 Same phone (e.g. iPhone from AT&T or
Verizon?), data services (text, e -mail, etc)
 Agreement on price is easier to come by
and cheating is easier to catch
 Nondurable goods
 Less incentive to cheat because it is a one -time
sale product rather than a product from which
sellers could gain a series of sales
TACIT COLLUSION:
PRE-ANNOUNCED RATE CHANGES
Service providers typically preannounce rate changes they
plan on implementing
Advanced notice gives
competing firms time to
respond
Can test the market and
competitors
TACIT COLLUSION:
INFREQUENT HIGH CHANGES IN RATES
 Rate changes in the industry have
been high and infrequent, yet
coordinated across all four firms
 FOCUS: Text Messages
 Supply is almost unlimited so in a
competitive market prices should
decrease not increase over time
 Since 2005 price per text has doubled. IBISworld
 Service providers do not claim that these
increases were driven by higher costs so other
methods must be at work.
 Doubling of prices pushes prices from inelastic
portion of demand curve to elastic portion to
capture unrealized revenue
PENALT Y PRICING: THE “T YPICAL”
CONSUMER
Unattentive
Overconfident
Underestimates
• Barriers of Adoption
• Unpredictability of
use
• Profit Margin due to
over and under
usage.
Minutes
SMS/MMS
Verizon
.40-.45
Verizon
.20/.25
T-Mobile
.45
T-Mobile
.20
Sprint
.40-.45
Sprint
.20/.25
AT&T
.40-.45
AT&T
.20/.30
THE FEES:
Sources:
VerizonWireless
.com
ATT.com
Sprint.com
T-mobile.com
 About 16.5 million people
exceed their cell phone minutes
every month in the US
(according to cellknight.com)
 In 2005, Minute-Watch.com
show that if the average family
took their cell phone overage
charges and invested them in a
standard index mutual fund
(yielding 10.65%) for 22 years,
they would have over $19,500 enough to send a child to many
state colleges for two years.
AN IDEA…
NUMBERS
WISE
DISCOUNTING
Penetrative
Competitive
Permanent
VERIZON VS. AT&T IN ITHACA
 Adver tized
coverage
 All claim
GREAT
reception.
 What drives
consumers to
pick one over
the other?
Sprint(above) Verizon(below)
T-Mobile(above) AT&T(below)
Peak and OffPeak Pricing
 Incentive to reduce
the quantity of
users on the
network at high
times and spread
them out over other
times which saves
them infrastructure
costs and prevents
overloads
 Started out as
different rates for
different times
 Evolved to the free
nights and weekends
AT&T Data
network
Too high
usage
Network
Crash
Eliminate
Unlimited
plans as a
new option
• Fast growing
• Sole control of the
iPhone market and
large option of data
phones
• Not prepared for
such high usage
• Grandfathering the
previous plans
CELL PHONE MANUFACTURER MARKET
CELL PHONES AS A PRICING STRATEGY
Bundling
Tying
 Contract
 Specific plans/add-ons
Inter-temporal price
discrimination
Network
Externalities
Subsidized
INVESTMENT AND
RECOMMENDATIONS
INVESTMENT
 Venture Capitalist




High barriers to entry
Competitive advantage of established firms
 enter market as a (Mobile Virtual Network Operator)
Focus on attractive data packages
 Stock Market Analyst
 Voice and SMS capabilities and prices maturing
 Future success dependent on 4G deployment
 Verizon: Invest
RECOMMENDATIONS
 Race to 4G
 Carrier with the most comprehensive 4G network secures a
substantial competitive advantage
 Utilize Network Externalities  Data usage
 Data usage within network free (non unlimited plans )
 iPhone live?
 Subsidize
 Consumers more willing to accept expensive plans when high tech
smart phones more accessible
 Reach for the Cloud(s)
 Improvements in networks’ data capabilities  Cloud computing
 Huge potential market, especially among corporate clients
 Further use of network externality
QUESTIONS/INFOGRAPH
IC
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