One method of increasing ARPA has been the implementation of second-degree price discrimination, which will be discussed later. Figure 6. Behavior of Mobile Users (% of total users) As the total number of connections rises more slowly, the main source of demand will e for data speed and capacity. U. S. Mobile Cost Considerations The cost drivers in the wireless industry are predominantly in infrastructure responding to increases in usage of wireless data. In 2011, wireless providers spent $25. Billion on capital investments. 12 $246 billion has been invested in capital expenditures in the past decade with the goal of matching demand and increasing coverage area. 13 These expenditures come primarily from upgrading networks from 36 to G and increasing the number of cell sites in order to increase coverage as shown in Figure 7. 14 Figure 7. Number of Mobile Cell Sites 1985-2012 (Thousands) Additionally, new drivers of cost, such as shortages of spectrum are becoming wireless signals are sent in a specific market area.
Increasing adoption of mobile devices is leading to spectrum overlap, prompting the industry to spend billions purchasing spectrum rights or licensing new spectrum from the FCC. 16 We feel that as spectrum becomes scarcer, the cost of securing it will increase proportionally. With these large fixed costs, scale economies are very important since the marginal cost of each user would be very low. In response to increasing infrastructure costs, mobile carries in the U. S. Have begun scaling back subsidies on handsets. 17 Analysts estimate that these subsidies cost wireless carriers nearly $400 for each phone sold. 8 As a result of these cost saving measures, Rapper’s have begun increasing again after falling for years. Projections of future ARPA can be found in Figure 9. 19 Figure 9. United States Wireless Monthly ARPA ($) It is unknown how the increased charges for plans and upgrades will affect consumer demand, but given the increasing dependence on mobile devices, there are likely low bevels of price elasticity. Structural Barriers to Entry There are two main structural barriers to entry into the United States telecoms industry.
The first barrier to entry is the process of satisfying regulatory requirements regarding the frequency spectrum at which a company broadcasts their signal necessary for network access. We see this barrier to entry in the current example of Dish Network and Google’s plans of entering into the wireless telecommunication industry. As we see in Resistless. Coma’s article “PICA 2012: Dish remains sold on wireless; partnership likely’20, Dish Network is currently awaiting overspent regulators’ approval of their spectrum plans which has taken longer than anticipated which greatly affects a market entrant’s strategy and success in their execution.
The severity of this barrier to entry is evidenced by the fact that Dish’s Chairman “Urgent pleaded with government regulators to quicken their pace in ruling on the company’s spectrum plans”. 21 This hints at the eagerness of Dish to securely get over this barrier in their process of market entry. There is currently no evidence to suggest that regulatory requirements are proposed to be relaxed, but that is not to ay that as technology improves, new regulation or the ease at which a company will be approved for operation will change.
The second barrier to entry is the high capital required to set up and maintain an effective network infrastructure as discussed at length previously. Despite this large capital requirement necessary for entry, it is not impossible for an entrant to gain access to the market. In Resistless. Coma’s “Report: Google and Dish considering cellular network”22, we can see Google employing a strategic partnership with Dish Network in order to gain market access.
This is potentially a powerful alliance in that Dish network can capitalize on their existing wireless infrastructure while Google offers strong brand recognition, a large source of capital, and a very difficulties in dealing with the well-established oligopoly amidst declining consumer growth. Price Discrimination The current incumbents have strengthened their positions through clever second- degree price discrimination as can be seen in Figure 10, created by consumer advocacy site Publishing. 23 Figure 10. US Mobile carrier price chart.
The wide variety of plans offered seems clearly intended to encourage high-value customers to self-select into higher fee plans. This method of price discrimination is clearly the carriers’ best option to maximize profits given a very heterogeneous consumer population with many different preferences – assuming that the carriers are unable to distinguish individual preference sets and price accordingly (as in first- degree discrimination). As the wireless carriers are offering consumers a contract to provide service, theoretically they could simply charge by the minute.
However, in order to smooth their earnings, the carriers incentives customers to self-select into eying for chunks of minutes and texts every month, whether they use them all or not. Further, by charging high per-minute or per-text fees for exceeding the ‘limits’ of the selected plan, the carriers ensure that their customers select the largest plan for which they are willing to pay. Since 2010 many cellular carriers have created more variety in data plans, segmenting as finely as they do for voice in the example above.
Todd Hiking points out that this follows the logic of price discrimination, arguing: “Unlimited data plans made sense at the beginning of the smart phone era. Consumers did not know how much they would use data and value it. Putting a cap on the charge made them more comfortable trying a data-intensive smart phone. However, consumers are well attuned to the value of wireless data today. “24 Given the degree of success that the carriers have had with price discrimination across large bundles of minutes and texts in wide price bands, it can be assumed that they will find success with a similar strategy for data in the future.
The costs of providing unlimited data – which customers obviously would have a preference for – reverse as a powerful and likely effective barrier to entry moving forward, protecting the carriers. Further, as the existing national carriers hold agreements with the manufacturers of desirable handsets, it is likely that these could be leveraged to intercept an entry attempt. After all, it is these smartness driving the demand for data. 25 Nature of Competitive and Strategic Interaction firms, but the Court model is more appropriate than the Bertrand model of competition.
The first hint that this is the case is the proliferation of different price points, even across exactly identical packages of services, where in the Bertrand del this would result in the firms selling at higher prices losing all their customers. Second, while the assumptions of the model do not technically hold – for instance the products are not strictly homogeneous – firms certainly have market power, the number of firms may well be De facto fixed, and the carriers certainly strategically seek to maximize their profitability given the strategy of the other carriers.
As we can see in the Publishing price chart above, the carriers charge different prices for some identical packages and the same for others, signaling their choice of nonuser segment, and capitalizing on their perceived quality. For instance, the chart shows that in 2010 all four carriers charged an equivalent rate for their most basic plan, setting the floor at $39. 99. T-Mobile and Sprint charge less for premium plans – such as any plan that offers data service – differentiating their services on cost whereas Verizon and AT&T use service and devices to Justify higher price points.
While Apple’s ISO trails Google’s Android in platform share, the Android brand is diluted across numerous brands of device manufacturers, as shown in Figure 1 1 from consumer research firm Nielsen:26 Figure 11. The national carriers largely depend on device availability and network effects to compete both amongst themselves and with regional players, not to mention as a deterrent for potential entrants. They utilize their reach (and the clout with manufacturers that comes from such large volume) to ensure that their customers can always get the latest device, at a subsidized rate.
This allows the national carriers to both attract and retain a wide base that serves as their single greatest competitive advantage and marketing asset over regional networks and potential challengers. Since size is a major asset – increasing the benefits a network can offer to consumers, power with suppliers, and pricing advantage relative to its rivals – one might expect to see further consolidation in the industry. However, the U. S. Market’s dual network standard (GSM/CDMA) created a situation in which such a merger is unlikely to meet with regulatory approval.
The existing players are well positioned to outcome any potential entrants, but cannot feasibly merge with each other. In this climate, it would be incredibly hard for a new entrant or an existing national carrier to win significant arrest share from any of the existing leaders. Industry Outlook Each of the major incumbents has carved a piece of the market for themselves, playing to their relative strengths as stated previously. Amidst the declining consumer growth rates, and dramatic growth in infrastructure investment, this is ultimately an unattractive industry that offers very little room for future growth.
Despite this negative outlook, Google is exploring market entry through a partnership with Dish Network (as discussed above), presumably leveraging the strong Android brand in the mobile space to encourage uptake. Despite this advantage for entry however, Google would still have to contend with issues faced by the existing national carriers such as customer subsidies (Google does not manufacture handsets), infrastructure expenses and the risk of over-diversification in an area outside of their competitive advantage.
Google benefits from a tough entrant’ position, however, holding a strong cash position and extensive brand recognition in mobile. 29 In the face of a possible entrant, the best strategy for the big four firms would be to continue to play each of their dominant strategies of a price floor for low end plans ND a self-selecting second-degree discriminatory pricing scheme as mentioned above.
This strategy would put pressure on the Google-Dish network, which does not have any specific advantage in infrastructure spending, and would have to overcome the network effects encouraging membership in the large existing national carriers. If a Google networks customers can also be assumed to have fewer desirable phone options (I. E. It is unlikely that Google could offer the phone) this would be an additional hurdle for the new entrant in an already demanding industry. 30