With telecom penetration rates at over 85 per cent, a rapidly growng 3G subscriber base and the second largest broadband market in the world, the US telecom market ranks amongst the most competitive and developed markets in the world.

Growth in this sector, like in most other countries, has been driven primarily by the wireless space. Despite the shaky US economy, the wireless subscriber base grew, albeit in single digits, at 7.2 per cent in 2008; meanwhile, the wireline subscriber base declined.

With the US market for wireless services saturating, mobile subscriber growth has been slowing down and in fact, reached its lowest in three years in the quarter ended March 2009, according to Telecom Industry Analytics (TIA). However, ARPUs have increased for wireless operators, driven by the ability of newer wireless handsets and networks to support video, music and other applications. This is evident from the fact that the US wireless data market grew by 32 per cent from March 2008 to reach $10 billion in mobile data service revenues in March 2009.

On the broadband front, the country is the second largest market in the world after China. It is also the only country where cable operators have a higher share of the broadband market than the incumbent telecom operators. In order to meet the competition from cable operators and generate additional revenue, telecom majors like Verizon and AT&T have been offering IPTV services since 2006.

According to the TIA, the US telecom industry is likely to grow at an average annual rate of 7.2 per cent during the period 2008-11, reaching $1.3 trillion in 2011 in revenues vis-? -vis an average rate of 10 per cent and $3.6 trillion in revenues for the rest of the world. Moreover, TIA expects wireless service revenues to hit $200 billion by 2011, exceeding landline revenues considerably, with 84 per cent of the overall service revenue growth expected to come from data services.

Key trends
Wireline
 Reflecting a trend throughout the telecom industry, US retail consumers have increasingly been cutting the cord of traditional wireline services and substituting them with mobile voice services. Fixed line penetration has been on the decline in the US since 2000 and there is complete reliance on wireless phones in close to 20 per cent of US homes today, up from about 8 per cent in 2005. In fact, the economic crisis and rising unemployment have led to an acceleration of this trend in 2008.

As a result, switched access line erosion, which was estimated at 9 per cent in 2008 by debt ratings agency Fitch, is likely to grow to 10-11 per cent for the industry this year. Revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) for wireline services are also likely to witness a low single-digit negative growth rate in 2009.

According to industry experts, wireless substitution is likely to represent a bigger threat to incumbent local exchange carrier switched access lines in 2009 vis-? -vis line losses to cable multi-service operators.

However, even as mobile dominates the future plans of telecom operators, wireline revenues still account for over 50 per cent of the revenue for behemoths like AT&T. Companies like Qwest, CenturyTel or Fairpoint rely totally on wireline revenue.

Hence, aggressive marketing and retention campaigns are likely to be a key focus area for operators in 2009 as they compete for a share of the fixed connection pie that will experience flat growth or even a slight contraction in 2009.

Wireless
 With a wireless subscriber base of over 274 million as of March 2009, 3G penetration at over 40 per cent and rising, and revenues of $148.1 billion as of December 2008, the wireless segment has clearly weathered the downward spiral in the economy better than the wireline segment. While handsets and data card subscriptions were hit the hardest (due to a 25-year high unemployment level of 8.9 per cent), overall spending on mobile data continued to grow.

Competition in this space remains strong among the four national players (AT&T, Verizon Wireless, T-Mobile and Sprint Nextel) and various regional operators, particularly in data services.

During the year, there was an increase in the prepaid subscriber base which reduced the overall revenues for some operators. For T-Mobile, prepaid subscribers accounted for approximately 60 per cent of the net additions during the quarter ended March 2009, up from 25 per cent in the March 2008 quarter. Similarly, MetroPCS and LEAP Wireless have seen their mobile subscriber bases jump as a result of their cost-effective prepaid plans. According to industry experts, 50-60 per cent of these subscribers are not likely to revert to postpaid services, thereby permanently reducing the ARPU base for these customers and also lowering the revenue for operators who have witnessed a higher post-paid to prepaid shift in their subscriber base.

While voice ARPUs are reducing, data revenues are witnessing strong growth driven primarily by increased 3G penetration and smartphone adoption as well as greater awareness of mobile data services and applications among consumers. This trend is expected to accelerate with the industry’s push towards greater smartphone penetration in 2009 since smartphone users have a much higher ARPU compared to traditional wireless customers and will lead to stronger long-term revenue growth.

Industry experts expect data ARPU to become a more prominent constituent of the ARPU mix by the end of this year, constituting over 30 per cent of service revenues, up from 26 per cent in March 2009. Data revenues will also be driven by the flat-rate pricing plans that were initiated by Willcom in Japan and introduced by all key US operators in March 2008. These plans have been very successful with approximately 17 per cent of consumers adopting them. This trend is expected to accelerate in the future.

Meanwhile, the trend of dominant telecom operators signing exclusive agreements with phone makers to attract customers with a attractive handset has come under fire. The popularity of the Apple iPhone has made this trend a bone of contention amongst smaller competitors like Cellular South as AT&T has been the sole US provider selling the device since 2007.

According to these companies, exclusivity agreements prevent other carriers from acquiring these devices, hurting competition for wireless customers in the long run. Consumers should be free to choose the plan and phone that best fits their needs. These exclusivity agreements are now being reviewed by the Federal Communications Commission.

On the 3G front, Verizon Wireless and Sprint Nextel dominate with the CDMA 2000 technology. Verizon Wireless currently accounts for over 60 per cent of the 3G subscriber base followed by Sprint Nextel.

However, the launch of HSDPA enhancements by AT&T Mobility has begun to significantly close that gap. The next battle on the horizon is in 4G technology, with Sprint Nextel already having started Wi-Max deployments across 85 per cent of the largest US markets, while Verizon Wireless and AT&T Mobility jockey for the pole position on long term evolution (LTE) deployments. In addition, capex spending will stay strong in 2009 given the activity around 3G/4G deployments and trials.

Key operators
 AT&T, Sprint, Verizon and T-Mobile dominate the US mobile market with a combined market share of over 90 per cent.

AT&T
Incumbent operator AT&T is one of the largest communication companies in the world in terms of revenue. Its wireless division, with over 78.2 million subscribers as of March 2009, is clearly the growth engine for the company.

In line with the industry trend, the company has been witnessing a decline in its landline business, which, however, has been offset by the aggressive cost-cutting measures (reduced capital spending, job cuts, etc.) adopted by the company and continued wireless growth. Strong additions in its high speed internet and uVerse TV service have also offset the decline in landline voice service.

On the wireless front, the company, which is the sole service provider for the iPhone in the US, has benefited from a very smart device portfolio strategy. It has twice as many smartphone users as any other US mobile service provider and is reaping the gains from the higher-than-average spending by iPhone customers on data services.

However, the company is extremely dependent on Apple for its wireless growth and has two years left of its contract for exclusivity rights to be the sole US wireless provider of the iPhone. In case Apple does not renew the contract, the company’s wireless business could be in jeopardy. Moreover, competition in the wireless space is only likely to intensify as cheaper, prepaid service providers lure users looking to reduce their phone bills.

Verizon
A strong player in the US telecom market, Verizon is one of the two major carriers in the country to use CDMA technology. In January 2009, the company completed the acquisition of Alltel Corporation from Atlantis Holdings in a deal valued at $28.1 billion to become the largest mobile operator in the US with a subscriber base of 86.6 million.

On the wireline side, the company provides services to 35 million access lines. However, wireline revenues are declining, as businesses and individuals continue to shed traditional phone lines. Hence, Verizon recently sold its rural wireline assets in 14 states to Frontier Communications in a deal worth about $8.6 billion.

Meanwhile, the company’s nearly $23 billion investment in laying fibre-to-thehome for its FiOS network has paid off, resulting in a 13.7 per cent increase in ARPUs. Despite the poor economy, the uptake of its FiOS service rose during 2008.

The company’s overall revenues grew by 4.2 per cent, from $93.47 billion in December 2007 to $97.35 billion in December 2008. While wireline revenues declined by 1.9 per cent, from $49.13 billion in December 2007 to $48.21 billion in December 2008, revenues from wireless services witnessed a growth of 12.4 per cent from $43.9 billion to $49.3 billion during the same period. Data services witnessed a year-onyear growth of 44.2 per cent in 2008.

Going forward, while wireless growth is expected to slow down in the US, Verizon is hoping to improve margins by capitalising on its Alltel assets. In addition, growth in wireless data is likely to remain strong with enterprise, broadband and video representing huge opportunities.

Also, the penetration of smartphones, which are used mainly by high-ARPU business subscribers, is still low and growing rapidly. Verizon is well positioned to capitalise on this trend. The company may make a deal with Apple to market the iPhone on its wireless network once Apple’s exclusivity deal with AT&T ends in 2010.

On the technology front, Verizon is in the process of migrating from 3G technology (EVDO Rev A) to 4G LTE. It plans to start offering 4G in 2010 in 25 markets and will compete with AT&T for a leadership position in LTE.

Sprint Nextel
Sprint Nextel, the other operator in the US to offer CDMA-based services, is the third largest mobile operator in the country with a subscriber base of 49.1 million as of March 2009. It accounts for about 18 per cent of the market.

The company launched Mobile WiMax services in Baltimore in September 2008 and merged its Wi-Max network with Clearwire in December 2008. The company retains a majority share, with an investment of $3.2 billion by other companies such as Intel, Time Warner Cable and Google. The new entity, Clearwire Corporation, which controls most of the 2.5 GHz licences available in the US, launched services in Portland, Oregon, in January 2009.

Sprint has been struggling with a declining subscriber base and dwindling revenues over the past few years. It was only in the last quarter that the rate of decline reduced marginally due to an improvement in its quality of services. The subscriber losses are mainly a result of the US economic recession and Sprint’s competitive power diminishing within the industry.

In an attempt to lower its subscriber turnover, Sprint launched the Palm (PALM) Pre smartphone towards the end of last year. However, with Apple launching its next-generation iPhone, it remains to be seen whether the PALM Pre will be able to increase its market share.

Broadband market
With over 83 million subscribers as of March 2009 and counting, growth in this space is likely to be strong in 2009. Cable is the dominant broadband technology in the US, accounting for over 50 per cent of the total broadband subscriptions. DSL, the other key broadband technology in the US, accounts for 40 per cent of the total broadband connections. However, the country trails behind its European and Asian counterparts like South Korea as far as broadband speeds are concerned. To address this issue, major operators have shifted their focus to fibre, which can generate higher ARPUs. In fact, one of the largest deployments in the US, Verizon’s FiOS network, offers super 35-50 Mbps data rates.

Meanwhile, with 3G penetration increasing rapidly and Wi-Max gaining traction, mobile broadband, currently limited to road warriors, is witnessing growth. The evolution, led by Europe where HSPA now accounts for 12 per cent of the total broadband connections compared to 5 per cent in North America, is gaining traction in the US rapidly. According to research firm Berg Insight, there are 4 million mobile broadband subscribers in North America, with estimated service revenues of $2.9 billion.

CDMA operators such as Verizon Wireless and Sprint Nextel currently account for the bulk of the mobile broadband customers in the US. AT&T’s mobile broadband business has also shown great market traction following the introduction of its first HSPA-compatible data card service in October 2007, making its service comparable to Verizon’s and Sprint’s.

However, while operators like AT&T Mobility and Verizon Wireless have begun offering mobile broadband netbooks, the US is an outlier with unusually high prices for mobile broadband compared to countries in Europe. In fact, according to one research, mobile broadband is three times more expensive in the US vis-? -vis the UK. The US market clearly needs to be in line with global mobile broadband pricing for the service to witness growth.

Another area of concern is broadband penetration in rural areas which, at a little over 30 per cent, is clearly lagging behind. Earlier this year, the government allocated a $7.2 billion broadband stimulus package which will be disbursed in three rounds over the next several years to develop infrastructure in underserved areas with low broadband penetration. While this is a small step in the right direction, the issue of low broadband penetration requires a giant leap on the government’s part.

Despite the flailing economy, the US telecom sector has continued to grow, albeit at a slower pace, driven primarily by the wireless and broadband segments. Going forward, as competition in the wireless space increases, operators will struggle with reduced margins and will need to adopt aggressive strategies to acquire and retain subscribers. Clearly, an uphill task.