Mobile (wireless) data consumption has expanded rapidly over the past few years, and is expected to continue growing. Mobile data traffic in the U.S. grew 62% in 2012 and is estimated to grow nine-fold by 2017, at a compound annual growth rate of 56%.1
Some of that anticipated growth may come from additional users and more connected devices, but most of it is predicted to come from an increase in traffic per connected device as users demand more and more wireless data. Internet video seems to be the main driver of this demand growth: By 2017, mobile video traffic in the U.S. is expected to account for 66% of all U.S. mobile data traffic, after growing at a compound annual growth rate of 63% per year.2
In contrast, service revenue growth for wireless data carriers has not kept pace. Wireless revenue growth in recent years has been driven primarily by smartphone adoption and the resulting addition of new data plans. As smartphone penetration in the U.S. has increased, revenue growth has slowed each year since 2010 (see chart below, right). Essentially, when consumers first connect a smartphone and sign up for a data plan, they tend to overbuy data service. As a result, when usage increases or consumers add devices to existing data plans, revenues for wireless carriers increase less dramatically than when selling data plans to first-time adopters.
Industry competition in wireless data plans has worked mainly in favor of consumers. Although the two largest carriers have tried to establish usage-based pricing as a way to increase average revenue per account (ARPA), their competitors have responded to consumer demand by continuing to offer lower-cost unlimited plans. Additionally, carriers have offered discounts to encourage quicker customer upgrades to fourth-generation (4G) devices, sacrificing opportunities to establish premium pricing in an attempt to gain market share.
Even if usage-based wireless data plans become more common, Wi-Fi substitution may shrink or eliminate ARPA gains. Because fixed (wired) broadband typically has lower marginal usage costs, wireline providers tend to offer unlimited data plans. Consumers on usage-based wireless plans can reduce usage charges by switching their devices to fixed-access Wi-Fi at home or work, and retail businesses and cable providers are increasingly encouraging customer loyalty by offering out-of-home Wi-Fi hotspots.
Wireless carriers will likely try to lower costs and increase data pricing if they can, but it may be some time before the market dynamics of the vast wireless data boom become established.
Some of the wireless carriers are just starting to explore other ways of creating incremental revenue from the expanding demand for wireless data. Mobile payment services and cloud storage are two possible sources of additional fees, but it may prove challenging for carriers to enter these businesses.
Potential new device subscription fees may come from home security systems, the “connected car,” and wearable computing, but meaningful growth in those areas will likely require forging partnerships with other businesses, following advances in technology that are yet to come. Incremental revenue from these initiatives will likely be lower than that of the initial wave of smartphone uptake.
Looking beyond the carriers, the tremendous and growing demand for wireless data is likely to benefit businesses supporting the key infrastructure behind data transmission. For example, the companies building and maintaining cell towers are leveraged to all forms of capacity growth. Increased usage requires better capacity, which requires better coverage and a denser cell-site network. Technology upgrades allowing higher wireless broadband speeds will entail capital spending on towers. Because the wireless carriers now compete on data network performance in addition to voice coverage, tower operators can be important partners to all the wireless service providers at once.
Other factors may continue to benefit the tower business going forward. The regulatory environment seems to favor maintaining a market with more major players, suggesting that the competition for data network quality will persist. Contracts for tower operators give a high level of visibility into future revenues, and escalator or inflation clauses help companies to grow revenues and expand margins. High barriers to entry limit the number of tower competitors in any given market, supporting higher incremental margins for existing companies.
With these dynamics firmly in place, tower operators are likely to outpace the wireless carriers in profiting from the current data boom.