The Real Storm Is Yet to Come, Can Wireless Turn the Tide?

Have we hit the bottom of the downturn? Are we finally seeing light at the end of the tunnel? With $800 billion in stimulus money being pumped into the U.S. economy, and the S&P 500 up 9.4 percent in April, its biggest monthly rally since March 2000, there seem to be some initial positive signals. Despite the worst wireless growth rates ever over the last few quarters and huge average revenue per user (ARPU) and margin pressures, wireless carriers predict that mobile will thrive, that they will each take share from their competitors, and that continued investment in technology and innovation will spur future growth. On the other hand, it could be a false spring, as the substantial problems of our economy have not been fixed yet—wireless carriers may be delusional to think that price reductions and moderate cost adjustments will do the trick. There is still a long way to go before the stimulus package will have an impact on the economy, and the full effects of increasing unemployment and declining consumption eventually will be felt by the wireless industry.

The bad news: The worst is still ahead. A “W-shaped” economic recovery is likely, with a slight recovery by end of 2009 as the stimulus money makes its way through the system. This will be the eye of the storm. Beware of another slump at the end of 2010, as structural issues in the banking system will not be resolved quickly, inflation may start to kick in and much-anticipated positive job effects might not be there. This is when the wireless industry will be hit hardest. The size of the pie is shrinking, with subscriber growth falling at an accelerating rate and churn spiraling given economic pressures directly linked to higher unemployment rate. In a deep crisis, consumers talk less and minutes of use (MOUs) will be affected by lower spending power. Operators typically compensate with lower prices, which lower ARPUs, and eventually shrink margins. Mobile internet growth will slacken given the discretionary nature of that spending. Prepaid will thrive, as subscribers trade down from post-paid plans to less expensive prepaid plans. Leap and Metro will clearly benefit from this trend. The Goliaths with the stronger customer base will do relatively well, requiring Sprint and T-Mobile to make decisive moves in order to become aggressively competitive and to avoid becoming Goldilocks in a bifurcating market where the middle is squeezed. A zero-revenue-growth scenario, with margins being diluted, is not off the table for 2010, and if no actions are taken early, massive restructuring will be required. Regardless of whether growth is slow or nonexistent, the industry will need to get its act together to improve its overall prospects.

The good news: The contagion of the crisis can be limited, and there are clear opportunities. Wireless will be a shining light in the U.S. economy, unlike finance, retail, manufacturing or transport. The eye of the storm will be the moment for operators to gather strength before the next slump occurs. Smart moves will allow some to benefit during the period of the crisis, and there is a fundamental upside to the sector. Bold structural moves, relentless focus on growth and innovation in software and applications, and commitment to excellence in execution will help batten down the hatches. There are several potential winning approaches: the pursuit of “smart acquisitions”, such as Leap-Metro merger or the acquisition of Sprint; the introduction of low-cost brands, perhaps finally “no-frills”; the better use of mobile media clout, by Google, Apple, or perhaps the new kids on the storefront block; or enlightened capital expenditure (CAPEX) and network sharing. The shift in investment dollars from next-generation LTE infrastructure to mobile internet innovation with shorter monetization cycles will expand Moore’s law for carriers, and will boost consumer mobile content and entertainment.  Prepaid repositioning, a stickiness boost through “wow” stores and another round of radical dieting will be other winning ingredients. The cost-reduction announcements so far have been a realization of pre-crisis realities—the real weight-loss programs are yet to come. Smart moves will make the industry healthier and stronger, and get us ready for the end game of convergence and consolidation. The zero-growth scenario can be avoided. Wireless has the potential to turn the tide.

Scenario planning will help wireless carriers get ready to take more bold action so they are prepared for the real storm that is approaching. To win in the next two to three years, a clear response strategy to worsening conditions needs to be part of an intelligent game plan.