Wireless Telephone Service Providers Rachel Yan Bennet Heidenreich Lindsey Ludwig Lucas Hartman

Quick Question… That’s Why!

Why? Strongly influenced by technological progress Rapid growth over the past 5 years Information good Highly concentrated Interest pricing patterns Tacit collusion pattern Recent news about mergers and acquisitions

Industry Structure

Products and Services Source: IBIS world

Wireless Technology 1G 2G/2.5G 3G/3.5G 4G Voice Data Text messaging Mobile internet 4G Speed Coverage

Major Market Segments Revenue Distribution of Consumer Segments Source: IBIS world

Industry Life Cycle The industry is Growing Increasing demand Technological advancement

Industry Growth

Telecom Industry Organization Telecommunication product and equipment manufacturers Telecommunication service providers Customers Regulators

Regulation Medium Level Federal Communications Commission (FCC) Functions: Promote competition Ensure customers are given sufficient information about charges Improve quality of services Encourage rapid deployment of new technologies

Competition Industry Concentration: HIGH Product Differentiation: HHI: 2657 C4: 91.2 percent Product Differentiation: Price Coverage and Reliability Exclusive Contracts Substitution: Satellite operators Mobile Virtual Network Operators (MVNO) Source: IBIS world Concentration: mention high level of M&A activity to increase customer base (industry approaches maturity) - Customer Base is key competitiveness: Economies of scale, higher margins, lower prices  stronger network infrastructure Difficult Product Differentiation (Price and Coverage)

Stronger Infrastructure Competition Importance of a large Customer Base Competition Factors Customer Base Technology Innovation Coverage Menu Barriers to entry High and increasing Spectrum Infrastructure Customer Base Economies of Scale Higher Margin Lower Price Stronger Infrastructure Customers Base: Graph on the right Technology: 4G LTE, E/mail, Broadband access, GPS etc. Infrastructure: Base Stations, Towers (example: Sprint 5 billion for 4G for 125 million people coverage) Menu: Customers prefer one bill rather than 10

Major companies Verizon AT&T Sprint T-Mobile

Company Overview Recent Developments Revenue 2012: $ 75,868 m (+8.1%) Operating Income: $21,768 m (+17.5%) Market Share: 36% Subscribers: 111.3 m Cellco Partnership (Verizon) Largest mobile telecommunications provider in the US Acquisition rumors Recent Developments Leap Wirless is expected to be a target 95% of subscriptions are post-paid 2012 Sales significantly driven through equipment sale 2012: Construction of 4G LTE network – full coverage by end of 2013

Company Overview Recent Developments Revenue 2012: $66,763 m (+5.6%) Operating Income: 16,594 m (+6.3%) Market Share: 31.5% Subscribers: 105.2 m Second Largest digital Voice and Data Network in the US Key Markets are California, Illinois and Texas Formed in 2000 from joint venture of regional branch of SBC Communications and BellSouth Recent Developments 2012: Acquisition of NextWave Wireless ($600m) – Expand Internet 2011: Lost exclusive rights of iPhone 2011: Failed Acquisition of T-Mobile

Company Overview Recent Developments Revenue 2012: $29,107 m (+6.3%) Operating Income: 4,147 m (-2.8%) Market Share: 14.1% Subscribers: >55m Third Largest digital Voice and Data Network in the US High debt Recent Developments 2013: created advertisement network with Telefonica (ES) to access more than 370 m customer 2012: 70 % acquisition by Japan’s Softbank Acquisition of Clearwire (4G)

Company Overview Recent Developments Revenue 2012: 19,875 m (+7.5%) Operating Income: -9,770 m Market Share: 9.6% Subscribers: 24.8m Subsidiary of Germany-based Deutsche Telekom Focuses on metropolitan markets Relative small network coverage Operates largest carrier-owned Wi-Fi network through T-Mobile hotspots Offers low rates Recent Developments 2012: Agreed to acquire Metro PCS April 12th 2013: Begin LTE operations with investment of $4 bn.

Pricing Strategies

Outline Importance and Pricing Goal 2nd Degree Pricing 3rd Degree Pricing Verizon and AT&T Sprint and T-Mobile Advertising Wars Survey Data Analysis

The Importance of Pricing Industry Layout High infrastructure cost Homogeneous good High concentration and competition Use pricing strategies to differentiate and extract consumer surplus

Goal: lock In Customer with Contracts Homogeneous product/service Elastic demand Churn rate: 1.5% to 3% per month Pricing strategy: Contracts to lock in consumer What is their acquisition rate? Using contracts to lock in the consumer and reduce churn rate and elasticity of demand Seen an increase in churn rate L

Prepaid Strategies No contracts, pay before use Battle churn rate and declining average revenue per user (ARPU) since 2006 Attempt to win consumers in untapped markets and fight for market share Virgin Mobile iPhone Commercial Virgin mobile – recall the case that we read Now all wireless providers are adopting this strategy L

Second Degree Price Discrimination Do not know consumer’s willingness to pay Force them to self select Tiered and Multi Tariff Pricing Sprint Second degree price discrimination attempts to get you to self select

Third Degree Price Discrimination Easily segmented markets Geographic: Zip Code Investigation Demographics: AT&T Senior Plan AT&T

Verizon Wireless Three Categories Refuse to layout pricing categories Share Everything Plans Prepaid Plans Business Plans Refuse to layout pricing categories Mandatory phone selection first Price discrimination based on information Do not know consumer’s reservation price, have then self select Trying to target everyone, battle more market share… tying to figure out more about the consumer before exposing the price

Tacit Collusion: Verizon / AT&T Why? Oligopoly Demand made more inelastic with contracts Homogeneous goods Spontaneous cooperation, not illegal Evidence? AT&T same price as Verizon Verizon Wireless-AT&T 'Price War' May Boost Revenues- these two companies announced on Jan 15, 2010 that they would be cutting monthly prices on unlimited packages by $30 Lin

Price Matching Anti Competitive Shift in Nash Equilibrium Anti competitive – no incentive to undercut competitor Lin

Goldilocks Principle Reference pricing Giving three choices to maximize consumer surplus and profits Three choices enables those on the cusp to select the middle option as opposed to the lowest option .089 .067 AT&T

Smaller Competitors: Sprint & T-Mobile Competitive pricing as a result of inferior network coverage Pricing strategies differ from larger competitors: Verizon and AT&T Verizon Lin T-Mobile

Unlimited Pricing Compared Across Competitors Note: we were looking at unlimited individual plans Observations: AT&T and Verizon are the same T mobile is the lowest Why is Sprint’s so high? Offering unlimited GB

Sprint Differentiate by offering the most options Gain consumers who do not want to choose between AT&T and Verizon’s three plans

T-Mobile Strategy: simplicity and low cost to consumer Targeting price sensitive consumer

Advertising Wars In 2011 Verizon spent $1.64 billion on advertising, AT&T spent $1.9 billion Saturated market, competition for market share Prisoners dilemma Which one do you like better?? http://www.youtube.com/watch?v=CaQ5AZgwEfE Lin http://www.youtube.com/watch?v=sdofUBR3SJc http://www.youtube.com/watch?v=JGS90HEbP5U T-Mobile Commercial AT&T Commercial

Advertising Wars Lin

Cornell Survey

Which Cellphone Carrier Do You Use?

Do you know how many minutes per month your plan offers?

Are You on a Family Plan?

Are You on a Family Plan? # of responses

Do you know how many minutes per month your plan offers? # of responses

Do you know how many minutes per month you are consuming? # of responses

Know Plan vs. Not Know Plan Yes: How many minutes per month does your plan offer? 32 responses 18 “unlimited” Mean of 665.167 No: How many minutes per month do you think you plan offers? 52 responses 20 “unlimited” Mean of 1151.923

Know Consumption vs. Not Know Consumption Yes: How many minutes per month does your plan offer? 14 responses Mean of 208.0769 No: How many minutes per month do you think you plan offers? 73 responses Mean of 310.4286

Recommendation

Analysis and Recommendation Industry Outlook Growth Increase of subscribers of 3.3%* Increase of mobile devices Growth of Revenue: 4.5%* Substitute landlines M&A activity Technology advances rapidly 4G (especially Long Term Evolution (LTE)) *IBIS world

Stock Price Development Revenue

Recommendation Factors of success Alliances within the industry (Tacit Collusion) Building infrastructure Acquisitions Ability to quickly adopt to new technology High Profile Service, Reliability, network coverage, service pricing Exclusive product sales contracts

Analysis and Recommendation General: 2nd Degree price discrimination Confusion pricing Verizon and AT&T: Continue tacit collusion Possibly increase price  Technology/Coverage Leverage differentiation Focus on exclusive contracts T-Mobile and Sprint/Nextel Possible tacit collusion Focus on segment M&A activity/Alliances Adopt to technology Increase customer base Undercut Verizon and AT&T Capture increase in mobile devices and other growth

The End