How are US operators adapting to a maturing market?

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The US mobile market is potentially on the brink of significant upheaval, with the Trump administration expected to be more open to mergers across the telecoms and media sectors. At the same time, US telecoms operators are well ahead of their European peers in terms of deployment of next generation networks, and therefore provide interesting case studies for 5G and NFV/SDN deployment strategies. Within this context, what customer growth strategies are the three leading telcos in the US using and how prepared they are to adapt to further disruption from agile OTT players?

T-Mobile

T-Mobile's aggressive 'price-led challenger' strategy has been hugely successful in the US market. With its "Un-carrier" strategy, which dropped lengthy data contracts and high fees for data use outside bundles (see our report, Disruptive Strategy: 'Uncarrier' T-Mobile vs. AT&T, VZW, and Free.fr), the operator grew its subscriber market share from 13% at the end of 2012 to 17% at the end of 2016.

T-Mobile US is now the largest market and main driver of revenue growth for its German parent company Deutsche Telekom. To attract customers to its network, T-Mobile has been investing heavily in its LTE infrastructure, which it reports is now the second largest by population coverage in the country after Verizon's. Since the beginning of 2017, it has also extended its low-cost 'Un-carrier' strategy to the IoT, bundling hardware with unlimited data contracts, or lower cost annual subscriptions for devices with lower data requirements.

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Source: T-Mobile

While this is attractive for the lower value customers T-Mobile has poached from its rivals, over the long-term its low-cost, no-frills strategy could leave it in a difficult competitive position. The much-touted potential merger with fourth-placed Sprint would allow it to claim a larger share of the mobile market, but it won't open access to any significant new customer segments. However, depending on the structure of the agreement, Softbank, which owns Sprint, could help the merged entity compete more effectively in an increasingly software oriented market.

AT&T

Between the three operators, AT&T's acquisition of DirecTV and proposed acquisition of Time Warner are clearly aimed at developing its content offering. With this play the telco will be hoping to gain an advantage over its rivals in the triple-/quad-play sectors and reduce subscriber losses through "cord-cutting". Content ownership can also help telcos defend against the new threat from OTT content providers like Netflix and Amazon, who are increasingly investing in their own high quality content and programming.

Among the three operators, AT&T has the most clearly outlined transformation strategy, ranging across many areas of its business, from employee skills and culture to NFV and IoT. This comprehensive plan requires a highly proactive approach from AT&T in developing skills in areas beyond the scope of a traditional telecoms operator, crucial for surviving in an industry in flux.

  • NFV: AT&T has created an open source framework for the implementation of NFV/SDN that means it will be less "tied in" to vendor ecosystems than in traditional network infrastructure models. High vendor interest and Orange signing up to test the platform for its own network transformation both validate AT&T's strategy.
  • IoT: AT&T is playing an active role across horizontal layers of the IoT ecosystem, including connectivity, platforms and end-user applications. It has also established partnerships in three key verticals: connected cars, smart homes and smart cities. This is an advanced strategy compared with other telcos globally, making it an attractive partner or provider for new players and customers in the IoT space.
  • 5G: The acquisition of Fiber Tower and proposed acquisition of Straight Path Communications are aimed at gaining access to relatively high-frequency spectrum licences and defending AT&T's position in the 5G market.
  • M&A: The proposed Time Warner acquisition builds on AT&T's acquisition of DirecTV to integrate media content into its bundles and allow for cross-sector content delivery, for example in connected cars.
  • Culture: In our recent report Five telcos change culture: Lessons from neuroscience, we examine AT&T's skills development and culture change programmes, as well as those of several other major telcos. We conclude that AT&T's holistic, though potentially more time-consuming, approach of reskilling its employees is most likely to result in a successful transition to a telco-cloud model.

Verizon

Verizon's acquisition of AOL and pending acquisition of Yahoo! position its overall strategy as a search for new customers and more advanced data analytics capabilities. Its wider transformation plans are not as clearly outlined as AT&T's and focus more on the deployment of 5G. Verizon is hoping that 5G will provide a valid wireless alternative to high-speed fixed broadband, where it has a limited reach. But 5G still lacks standards and, in STL's opinion, it is unlikely that consumers will pay significantly higher prices for the next iteration of mobile data connectivity - factors which could negatively affect the success of Verizon's strategy.

  • NFV: Verizon is developing an open framework for deploying NFV. It is encouraging greater input from vendors on the framework for its SDN/NFV architecture than AT&T's open source platform, which will allow them to provide entire pieces of their solutions to Verizon. As a result, Verizon is more dependent on vendor timelines and its network may be less flexible to its needs than AT&T's.
  • 5G: Verizon is relying on 5G to compete with its rivals' stronger position in the triple- and quad-play markets, driving an acquisitive streak in this area. It acquired XO Communications in early 2017, announced an agreement to buy 1.05 billion dollars' worth of fibre cables from Corning between 2018 and 2020 - aimed supporting its LTE network and speeding up deployment of 5G - and it is considering topping AT&T's bid for Straight Path Communications. It is also launching a 5G pilot programme in 11 cities across the US in 2017.
  • IoT: Verizon is active across several areas in IoT, including telematics and wearables, but its platforms are less specialised than AT&T's and it has fewer partnerships in key verticals.
  • M&A: Verizon's acquisition of AOL and proposed acquisition of Yahoo! demonstrate its aim to build new capabilities and reach new customers beyond the traditional telecoms sector. Verizon has already expanded on these capabilities to launch data analytics platform Exponent, which it announced it will licence to other operators globally as a white label solution.

So what?

AT&T's proactive and clearly articulated transformation plan, as well as its positioning in the IoT market make it stand out as the most prepared for change among the US operators. Verizon's concerted efforts towards virtualising network functions, expanding IoT capabilities in key verticals and search for new customers domestically and abroad demonstrate its acceptance that telcos must evolve beyond just connectivity to secure ongoing revenue growth, in line with our conclusions on viable strategies beyond 2017. Without a clear position in the market right now, though, Verizon is being squeezed between AT&T's premium multiplay and IoT services and T-Mobile's disruptive low-cost strategy.

While T-Mobile's silence on NFV and transformation (which doesn't necessarily mean it is doing nothing in these areas) puts it at a disadvantage over the long-term, its challenger strategy is putting pressure on AT&T and Verizon to match its offers, ultimately bringing down the overall value of the telecoms market. This may push all telcos in the market to rethink how they define the value connectivity to customers.

In our recent report Sense check: Can data growth save telco revenues?, we look at Finland as an interesting example of such a shift, where operators are pricing data connectivity based on download speeds rather than data allowances. This could be a useful strategy in the US, but it won't be valid until LTE networks are ubiquitous and dense enough to handle unlimited high-speed mobile data traffic - a far more challenging feat across such a large and dispersed population.