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Wireless Telephone Service Providers

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

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Wireless Telephone Service Providers

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  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 • Speed • Coverage • 4G

  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 • 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

  13. Competition Importance of a large Customer Base • Competition Factors • Customer Base • Technology • Innovation • Coverage • Menu • Barriers to entry • High and increasing • Spectrum • Infrastructure

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

  15. Company Overview Cellco Partnership (Verizon) Largest mobile telecommunications provider in the US Acquisition rumors Revenue 2012: $ 75,868 m (+8.1%) Operating Income: $21,768 m (+17.5%) Market Share: 36% Subscribers: 111.3 m Recent Developments • 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 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 Revenue 2012: $66,763 m (+5.6%) Operating Income: 16,594 m (+6.3%) Market Share: 31.5% Subscribers: 105.2 m 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 Third Largest digital Voice and Data Network in the US High debt Revenue 2012: $29,107 m (+6.3%) Operating Income: 4,147 m (-2.8%) Market Share: 14.1% Subscribers: >55m 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 Subsidiary of Germany-based Deutsche TelekomFocuses on metropolitan markets Relative small network coverage Operates largest carrier-owned Wi-Fi network through T-Mobile hotspots Offers low rates Revenue 2012: 19,875 m (+7.5%) Operating Income: -9,770 m Market Share: 9.6% Subscribers: 24.8m 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

  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

  24. Second Degree Price Discrimination • Do not know consumer’s willingness to pay • Force them to self select • Tiered and Multi Tariff Pricing Sprint

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

  26. Verizon Wireless • Three Categories • Share Everything Plans • Prepaid Plans • Business Plans • Refuse to layout pricing categories • Mandatory phone selection first • Price discrimination based on information

  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

  28. Price Matching • Anti Competitive • Shift in Nash Equilibrium

  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 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 T-Mobile

  31. Unlimited Pricing Compared Across Competitors

  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 • T-Mobile Commercial • AT&T Commercial

  35. Advertising Wars

  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 665.167 No: How many minutes per month do you think you plan offers? • 52 responses • 20 “unlimited” • Mean of 1151.923

  44. 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

  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 Stock Price 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

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