1. Tillman Elser, Isabelle Nunberg, Nikkita Mehta, Julie Greenberg WIRELESS TELECOMMUNICATION CARRIERS

2. 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 AGENDA

3. THE INDUSTRY - General Background - Consumers - Main Players - Competition

4. Wireless voice communication Text Messaging services (SMS) Advanced PCS (personal communication services) Other data services Other wireless services PRIMARY PRODUCTS

5. Lower pricing -> competitive advantage over wired services Consumers embracing newer/more expensive technology Retail presence decreasing in importance INDUSTRY SNAPSHOT IBISWorld

6. 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 PRIMARY CONSUMERS

7. Heterogeneous preferences for cell phone usage High use Low use Focus on Data Focus on Voice Focus on Text vs DIFFERENTIATION AMONG CONSUMERS

8. WHY PRICING BEYOND MINUTES IS IMPORTANT.

9. 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 EXPENSES BREAKDOWN

10. 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/T- Mobile) 200-1000Kb/s NETWORK TECHNOLOGY

11. 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) NETWORK TECHNOLOGY (CONT.)

12. 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

13. 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

14. 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 VERIZON WIRELESS

15. 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 AT&T INC.

16. 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 SPRINT NEXTEL CORPORATION

17. 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 T-MOBILE

18. 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

19. Firms all offer 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: PRICING

20. 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: SERVICE OFFERINGS & QUALITY OF SERVICES

21. 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: PRODUCT INNOVATION

22. 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: MARKETING STRATEGIES

23. 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 COMPETITION: GEOGRAPHIC COVERAGE

24. 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 EXTERNAL COMPETITION

25. BARRIERS TO ENTRY Barriers to entry are high and increasing primarily due to… Regulating spectrum scarcity High costs Market saturation

26. 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: SPECTRUM SCARCITY REGULATIONS

27. 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: HIGH COSTS

28. 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 BARRIER: MARKET SATURATION

29. - Bundling and Versioning - Three Part Tariff - Network Externalities - Tacit Collusion - Penalty Pricing - Discounts - cell phones PRICING STRATEGIES

30. 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 BUNDLING AND VERSIONING

31. Focus on mixed bundling Most profitable bundles listed more prominently In some cases, no price difference between bundled and non bundled services Customer opts-in to services AT&T

32. 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 VERIZON

33. Lower utilization of mixed bundling, focus on pure bundles Customer required to opt-in to several free services Huge number of bundles -> confusion pricing T-MOBILE

34. Focus on pure bundling Search obfuscation used more prominently (premium data add- on) Fewest additional service options SPRINT

35. 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 two- part 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 THREE-PART TARIFFS

36. 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 CONFUSION PRICING

37. PLANS AND ADD-ONS

38. 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 NETWORK EXTERNALITIES

39. 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

40. Service providers typically pre- announce rate changes they plan on implementing Advanced notice gives competing firms time to respond Can test the market and competitors TACIT COLLUSION: PRE-ANNOUNCED RATE CHANGES

41. 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 TACIT COLLUSION: INFREQUENT HIGH CHANGES IN RATES

42. Underestimates Overconfident Unattentive PENALTY PRICING: THE TYPICAL CONSUMER Barriers of Adoption Unpredictability of use Profit Margin due to over and under usage.

43. Minutes Verizon.40-.45 T-Mobile.45 Sprint.40-.45 AT&T.40-.45 SMS/MMS Verizon.20/.25 T-Mobile.20 Sprint.20/.25 AT&T.20/.30 Sources: VerizonWireless.com ATT.com Sprint.com T-mobile.com THE FEES:

44. 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

45. Penetrative Competitive Permanent DISCOUNTING

46. Advertized coverage All claim GREAT reception. What drives consumers to pick one over the other? VERIZON VS. AT&T IN ITHACA Sprint(above) Verizon(below) T-Mobile(above) AT&T(below)

47. Peak and Off- Peak 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 Fast growing AT&T Data network Sole control of the iPhone market and large option of data phones Too high usage Not prepared for such high usage Network Crash Grandfathering the previous plans Eliminate Unlimited plans as a new option

48. CELL PHONE MANUFACTURER MARKET

49. Bundling Tying Contract Specific plans/add-ons Inter-temporal price discrimination Network Externalities Subsidized CELL PHONES AS A PRICING STRATEGY

51. INVESTMENT AND RECOMMENDATIONS

52. 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 INVESTMENT

53. 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 RECOMMENDATIONS

54. http://www.as hworthcreative.com/blog/wp- content/uploa ds/2011/02/c ellphone_usag e.jpg QUESTIONS/INFOGRAPH IC