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There are three big trends impacting carriers over the past several years, highlighted by data from Chetan Sharma’s recent report. They all point to significant shifts in business models for carriers:

1. Data usage is growing exponentially

2. Voice ARPUs are decreasing faster than Data ARPUs are increasing and will meet in late 2011.

 

3. But data revenues are growing only linearly

The carrier profit margin question

This presents a big challenge for carriers. In order to support the exponential growth in data, carriers must invest billions in network upgrades to enable 4G and LTE. With data demand expanding faster than average revenue per user (ARPU), upgrading networks is difficult to justify to shareholders since the network upgrade cost cannot be offset by simply increasing the penetration of data plans into an existing customer base. Nor can the carriers tap a new customer base: the US has 91% mobile penetration.

Most carriers are running at small margins with significant debt already – they simply can’t afford the additional investment without more gold at the end of the rainbow. For example, Verizon is generates a 2% net margin on a $80B market cap company with $62B in debt.

Growth alternatives

To respond to this situation, carriers have several options. Below are the three most likely in my opinion.

1. Increase the percentage of subscribers using data plans: As 50% of AT&T subs have a data connected device, the headroom here is questionable

2. Upsell additional services to users: Adding music or video subscriptions to a monthly bill is a great margin boosters, but app stores like Apple and Nokia are cutting the carriers out (Android pays the carriers a revenue share on the search query revenue from google.com). Some carriers are turning to data recovery.

3. Increase the average monthly bill: The most likely option, this price increase is witnessed in another utility business with similar disruption: the cable industry. The average American cable bill has increased 5% annually for the past decade as advertising revenues have decreased, network ownership costs have increased and penetration is maxed out.

Impact to mobile adoption

These large industry forces are important. They will drive the need for data compression technologies on carrier networks, tiered pricing for customers and potentially government assistance/regulation. We need fast wireless networks to grow the economy.

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