Relative vs Absolute

People tend to misjudge when to think in relative terms and when to think in absolute terms.

Tough times ahead for US Wireless Carriers?

~93% of US population has a cellphone. The US wireless market is getting saturated (in terms of new subscribers). To continue the revenue growth, the Wireless Carriers (WC) have seen in the last few years, the WC will have to find new ways since what was a growth driver-new subscribers- in the past is no longer there. Let's look at a few other reasons and understand why I think that the WC may have tough times ahead of them.

1. Decline in Voice Revenue: WC make most of their money from voice calls. The revenue from voice (per user) has declined in the last few quarters and will continue to decline in the coming years. The product is mature and there are not many ways to differentiate it. There is increased pricing pressure from low-cost carriers like Metro PCS and MVNOs (Mobile Virtual Network Operators) like Tracfone. A customer can easily get an unlimited voice minutes (and SMS, and some amount of data) service plan from these low cost carriers for $50 or less with no contract. For similar rate plans, the major WC usually charge double that amount with a two year contract. Furthermore, in the coming years, the threat of VoIP will continue to increase, depending on the regulation. Skype on iPhone is one of the top 5 downloaded iPhone applications even though one can not receive Skype calls unless the Skype application is running.

2. Increase in Data Usage: WC are updating their networks to 3rd Generation (3G) which has enabled customers to get average data speeds of 300kbps to 500kbps. And, with availability and capabilities of devices like iPhone the data usage has increased tremendously-400% in last one year. The data usage will continue to increase as more and more people get smartphones like iPhone. There will be more applications, more videos, and more social networking on mobile devices. Furthermore, new form factors like netbooks, on WC networks, use huge amounts of data. There is no end to how much bandwidth users need. The problem is that the revenue increase from data usage is not proportional to increase in data usage. Data is now around 25% of ARPU (Average Revenue per User). 3 years ago, it was around 15% of ARPU.

3. Margins and CapEx: The network cost of generating $1 in data revenue is ~4 times cost of generating $1 in revenue from voice. As data usage continues to increase and voice revenue (per user) continues to decline, the WC's margins will shrink. At the same time, to cope with increased data usage, the carriers will have to continue to invest CapEx in upgrading their networks with 3.5G and 4G networks. This is a tough position to be in. To reduce CapEx requirements, WC are offloading data traffic on WiFi networks which are much cheaper to install and to maintain. You may recall that AT&T bought Wayport, a WiFi service provider, last year and is now present at Starbucks coffee shops. Furthermore, since the market is saturated, it would cost more money to acquire new customers and to keep the existing customers, affecting the margins.

4. New Opportunities: We are only at the beginning of what wireless will enable in future. There are eReaders like Kindle, location based services like loopt, and machine to machine communication like telematics, etc., which are working today. There will be many more new services. However, these new services generate little revenue for WC. The services will have new players in the middle of WC and customers who would want to make money as well. So, the revenue and the margins would be split among more parties just like search revenues (or margins) on mobile phones are split with search companies. For example, in case of iPhone, consumers have a direct billing relationship with Apple for application and digital content downloads and AT&T does not get any revenue when you download a song or an application on your iPhone.

5. Bundling: To create a competitive position and to increase customers' switching cost, WC will bundle wireless services with other services they offer. Especially, AT&T and Verizon which have wireline operations to offer video (cable) and broadband services. Bundling also enables these carriers to reduce back-end costs and offer integrated wireless-wireline services. Remember, long distance companies like MCI, Sprint, etc. They disappeared because the bell companies started to bundle local and long distance after telecom act of 1996. In response to WC bundling, the cable companies will offer bundles and reduce prices which WC will have to match hence reducing margins.

6. The New Consumer: Although we avoided a depression with the recent financial market meltdown, the economic growth and hence the wage growth will be slow in the coming years. Consumers are getting more cost conscious and saving more. These days, having a cellphone is necessary but spending a lot of money using it is not. The consumers may be unwilling to try new applications which are expensive. To keep the customers, WC will have to offer higher handset subsidies and consumers may switch to cheaper service plans reducing WC margins.

The WC may try to grow with international expansion or with consolidation in the US. They may start providing new services like cloud computing. Furthermore, if one major WC makes a big strategic error, like Sprint & Nextel integration a few years ago, then other WC may continue their growth at the expense of the erroneous WC.

No one knows the future. However, based on how things are today, it is likely that the WC will see declining margins in the coming years. And, the consumers will see more wireless innovation and better prices.

Like vs Necessary

People tend to do what they like rather than what is necessary.

Latest Stats from the Wireless World

I attended Mobilize 2009 yesterday. It was an interesting conference and many of the big names in the wireless industry were present.

The main trends highlighted at the conference were:

1. Mobile broadband and Smart Phones represent a big opportunity
2. Wireless carriers are updating their networks to handle the mobile data demand which was jump-started with iPhone
3. More Android phones will be launched in the coming months
4. The Mobile Application market will continue to grow
   
5. Companies are trying to figure out how to make Mobile Advertising work
   

Following are a few stats which were mentioned during the presentations:

• There will be 1 Billion mobile broadband subscribers by 2013
• 100k websites are created every 24 hours
• There are 5 Billion websites today
• There are 1.6B Internet users today and 98% primarily access it via the PC
• There are 1.3B fixed/wireline phone lines in the world
• 210B emails are sent every 24 hours
• 1B searches are done on Google every day
• 1B pictures are added to Facebook every month
• Collectively people spend 5B minutes on Facebook every day
• Currently, Facebook has 250M users and 120M visit Facebook every day
• 65M people who use Facebook mobile spend double the time on the Facebook PC site compared to users who do not use Facebook mobile
  
• The biggest cost of Mobile Application Development is QA (Quality Assurance)
• 4,000 Mobile Applications today use users location information
• In surveys, 70% of people say that they do not like location based advertisement. However, many respond to the ad when presented with it
• In the US, within last one year, number of people who access the Internet from their phone has increased 104% to 22M
• 50% of Mobile data traffic is generated by Social Networking sites
• 800M people will be on online social networks by 2012
• ATT has 38 data centers is planning to offer Cloud Computing
• Mobile data usage has increased 400% in last one year and 50% of the increased usage is coming from video
• Qualcomm's FloTV will cover 200M PoPs by YE2009.
• In Japan and Korea, wireless/mobile TV penetration is 40%. The main reason is that the service is free
• US will have 280M wireless subscribers by YE2009
• Wireless carriers in the US will generate $160B in service revenue in 2009; of which $45B will be from data i.e. 40% YoY increase
• US wireless subscribers will use 2.3 Trillion voice minutes in 2009
• US wireless subscribers will send/receive 1.7 Trillion text messages

Please verify the stats before using them.

What are Complex Systems?

Complex Systems consist of diverse, interdependent, connected, adapting entities. For example, financial markets have diverse banks which are connected and interdependent and they adapt to risk and to each other.

Complex Systems (CX) are:

1. Unpredictable
2. Produce large events (wars)
3. Robust (how ecosystems withstand loss of species)
4. Produce bottom-up emergent phenomenon (how a city operates)
5. Produce Novelty/Innovation

CX are not Normal i.e. they don't follow the Normal Distribution bell curve. However, they do follow the Power Law. CX exist between order and chaos.

It is important to understand CX because the world is becoming more and more complex. It is :

1. More diverse because of more people and species
2. More interdependent because of trade
3. More Connected because of transportation and the Internet
4. More Adapt because of frequent changes in technologies

There is a difference in Complex and Complicated. Complicated Systems don't adapt.

Emergence happens when the Macro is different than Micro. For example, a single water molecule is not wet. When many water molecules get together the wetness phenomenon emerges.

Phase transitions or Tipping Points occur when the behavior changes only after a critical threshold.

A good example of adaptability is Sea Squirts who in the larval state are mobile after they find a rock to live on they eat their brain because they don't need it anymore.


Adapted from lectures by Scott Page.

OPEN Brand

I just finished reading OPEN brand which is a book on branding in the age of the Internet. The book offers a lot of common sense using uncommon words. OPEN is an acronym for On-demand, Personal, Engaging, and Networked. The other meaning of OPEN is that companies should open their brands to customers and make them part of the brands.

The basic idea of the book is that companies should listen to the customers and use the web and the mobile phones to engage the customers with the brand i.e. focus on Pull Marketing. The companies will have to change how they market to customers now that the customers are connected to each other and can make their voices heard on the web.

For a more detailed summary of the book see http://www.amazon.com/review/R131RGK09KXHZ3/ref=cm_cr_rdp_perm

Outliers

The book Outliers by Malcom Gladwell proves with various interesting stories that people become successful by working hard and by being at the right place at the right time. One can increase ones chances of being at the right place at the right time by never stop trying. Your family, society, culture, the time and place of your birth, etc. are all part of being at the right place at the right time.

Warren Buffett and the Business of Life

I just finished listening to an audio book - The Snowball: Warren Buffett and the Business of Life. It is a biography of Warren Buffet who is one of my heroes. The audio book is 37 hour long and is very addictive. I could not stop listening to the audio book until it was finished.

Buffett is an extraordinary human being. One learns a lot from his biography. However, since I usually don't listen to audio books, I don't remember most of what I heard:-) after being in awe for 37 hours. Following are a few random things I remember:

1. Buffett never acquired a company with a hostile takeover.

2. One should always have "margin of safety" when making investments. What that means is that one should not make investments where there is a risk of losing money if things don't go according to the plan.

3. It is not a good idea to be on company boards where one doesn't have any influence on the CEO.

4. Praise the individual and criticize the category. Buffett followed Dale Carnegie principles for human relations.

5. Charlie Munger played a critical role in changing how Buffett thought about investments.

6. Time is the friend of the wonderful business, the enemy of the mediocre.

7. Allies are essential.

8. Commitments are so sacred that by nature they should be rare.

9. Grandstanding rarely gets anything done.

10. One should think independently.

11. Work for people you admire and do business with people you like.

12. Protect your reputation at any cost.

13. The best way to solve a problem is to invert. For example, if you want to buy something think about why the other party is selling.

14. Society plays a big role in one's success. If Bill Gates were born in Bangladesh, he would not have been successful. Buffett calls being born in the right society which gives you opportunities to succeed as winning the ovary lottery.

15. 2008 was not the first time when the government help bail out private banks. The fed intervened to bail out LTCM in 1998.

16. Be fearful when others are greedy, be greedy when others are fearful.

17. History does not tell you the future.

18. Doing a job just because it looks good on your resume is like saving sex for old age. Do a job that you like.

19. When you are buying a stock, you are buying a piece of the business.

20. The most important factor that made Buffett successful is Focus. And, Bill Gates has the same opinion about the importance of Focus.

21. Stay within your circle of competence when making decisions.

22. Invest in business which have Sustainable Competitive Advantage or a "moat" around them.

This is in no way the complete list. Just a teaser to encourage you to read the book:-)