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

2. Quick Question…
That’s Why!

3. 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

4. Industry Structure

5. Products and Services
Source: IBIS world

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

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

8. Industry Life Cycle The industry is Growing Increasing demand
Technological advancement

9. Industry Growth

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

11. 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

12. 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)

13. 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

14. Major companies
Verizon
AT&T
Sprint
T-Mobile

15. Company Overview Recent Developments
Revenue 2012:
$ 75,868 m (+8.1%)
Operating Income: $21,768 m (+17.5%)
Market Share: 36%
Subscribers: 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

16. Company Overview Recent Developments
Revenue 2012:
$66,763 m (+5.6%)
Operating Income: 16,594 m (+6.3%)
Market Share: 31.5%
Subscribers: 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

17. 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)

18. 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.

19. Pricing Strategies

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

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

22. 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

23. 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

24. 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

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

26. 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

27. 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

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

29. 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

30. 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

31. 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

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

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

34. 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??
Lin
T-Mobile Commercial
AT&T Commercial

35. Advertising Wars
Lin

36. Cornell Survey

37. Which Cellphone Carrier Do You Use?

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

39. Are You on a Family Plan?

40. Are You on a Family Plan?
# of responses

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

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

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

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

45. Recommendation

46. 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

47. Stock Price Development
Revenue

48. 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

49. 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

50. The End