US Wireless Data Market Q1 2010 Update

1. US Wireless Data MarketQ1 2010 Update

2. US Wireless Market – Q1 2010 Update Executive Summary The US wireless data market grew 5% Q/Q and 22% Y/Y to exceed $12.5B in mobile data service revenues in Q1 2010 - on track so far to our initial estimate of $54B for the year. In a significant milestone that went largely unnoticed, Verizon Wireless edged past NTT DoCoMo - the decade old leader in mobile data revenues to become the biggest mobile data operator by data revenues. Helped by its 93M subscriber base and high ARPU, the Verizon juggernaut is steamrolling. Rest of the 3 top US operators also occupy leading positions amongst the top 10 global mobile data operators. The US subscription penetration was approximately 94% at the end of Q1 2010. If we take out the demographics of 5 yrs and younger, the mobile penetration is now past 100%. While the traditional net-adds have been slowing, the “connected device” segment is picking up so much so that both AT&T and Verizon added more connected devices than postpaid subs in Q1 2010. Given the slow postpaid growth in, operators are fiercely competing in prepaid, enterprise, connected devices, and M2M segments. Data traffic continued to increase across all networks. US has become ground zero for mobile broadband consumption and data traffic management evolution. While it lags Japan and Korea in 3G penetration by a distance, due to higher penetration of smartphones and datacards, the consumption is much higher than its Asian counterparts. Given that it is also becoming the largest deployment base for HSPA+, LTE and WiMAX, most of the cutting edge research in terms of data management and experimentation with policy, regulations, strategy, and business models is taking place in the networks of the US operators and keenly watched by players across the global ecosystem. We are starting to see the inevitable changes in broadband pricing starting with T-Mobile and MetroPCS. Over the course of this year, we are likely to see newer pricing models that tie usage to pricing and add multiple devices to a single data bucket. The fabled iPad landed in the market and it is a winner. Apple’s latest gizmo has created a new user experience category of casual and couch computing that will foster growth in the connected device space. Kids of the now generation are growing with connected electronics that is fundamentally altering the behaviors and expectations of interaction, communication, consumption, and monetization.

3. US Wireless Market – Q1 2010 Update Privacy brouhaha has been brewing for some time and the polity class is getting interested in stepping in. If people are really serious about tackling privacy, OEMs and carriers should build a physical/soft privacy button on the device with 3-5 levels (just like for the ringer volume) that allows users to open/close privacy across all applications and services with the touch of a button. All apps and services should adhere to the principle via APIs. The other mistake companies make about privacy is by treating everyone the same. Privacy is about the perception of control and transparency. If it is given back to the consumer, they are likely to engage more and have a more positive impact on revenue streams that are likely to flow. In an another global milestone, Softbank became the first major operator to have more service revenues from data services than voice services. In Q1 2010, 55% of its service revenues were attributed to data services. (While Smart and Globe have been reporting 50%+ revenues from data services for a long time, the total revenues are not at scale with the leading global operators. Incidentally, for the first time in many years, the data revenue % slipped below 50% for the both operators in Q1). Based on current projections, US is likely to cross the 50% data revenue threshold in late 2012 or early 2013. All this has setup an absolutely fascinating period in the communication/computing industry. Convergence is everywhere and is leading to fundamental reset of the value chains and ecosystems. We are going to be discussing the ins and outs of how the industry is going to evolve in the next decade in our Sept 8th event – Mobile Future Forward which is bringing leading industry thought-leaders, inventors, and doers to brainstorm, discuss, and debate what’s next. Hope you can join the discussion.

4. US Wireless Market – Q1 2010 Update What to expect in the coming months? The pace of product introduction is accelerating with each quarter. Devices of all shapes and sizes are coming into the market. Players are having to re-evaluate their businesses and long-term strategies. Several new impressive handsets got introduced during the course of 1H of 2010. iPad finally launched and even the next generation iPhone walked into a bar. Microsoft announced its comeback with the W7 launch though the time it is taking to launch is making partners nervous. The change in UI was refreshing though the inability for the OEMs to differentiate is not winning friends. HP acquired Palm in attempt to become relevant again in the mobile device space. Some other players missed out in buying an attractive IP portfolio. It has been an action packed 2010 thus far and we can expect more of the same for the remainder of the year. 2010 has also been active on the regulatory front as the national broadband plan was unveiled in March (our thoughts on the plan). The Comcast ruling delivered a blow to the FCC and any directives or policies will hardly have any impact on the ecosystem in the short-term. With the looming spectrum shortage, regulatory bodies can have a significant impact on the competitiveness of a nation. Many countries in South America have imposed unnecessary spectrum caps. Others are behind in sorting out their spectrum allocations. The industry and regulators need to work hand-in-hand to make progress beyond speeches and paperwork. To start planning for 4G, 5G, and beyond, US should think about rolling a 50 year broadband plan. While more spectrum is always helpful, will we have all the spectrum we need in 2050? or do we need to invent new technologies and business models that use spectrum more wisely? This topic will keep the industry occupied for some time to come. (Former FCC Chairman, Kevin Martin headlined our Mobile Breakfast Series event in March and discussed the Spectrum Crises. Our June 10th event is bringing CEOs of some of the most innovative mobile startups to discuss the ecosystem) 2010 is also the year of network rollouts. T-Mobile has been rolling out HSPA+ at an impressive rate, Clearwire has been expanding the network so fast that it has become the biggest construction company in the US, Verizon is betting big on LTE and AT&T has been adding backhaul, upgrading to HSPA+ and planning for LTE all at once. Even the smaller carriers like MetroPCS are looking for competitive advantage with quicker LTE launch and beat others by carrying the first LTE smartphone. (We will be releasing the next edition of our “State of the “Mobile” Broadband Nation” paper later this year) As we had mentioned last year, the mobile data traffic kept on growing disproportional to the revenues. A series of solutions have come into the market from players big and small. We will be releasing the second edition of our in-depth research paper on data growth - "Managing Growth and Profits in the Yottabyte Era" later this month. We will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

5. US Wireless Market – Q1 2010 Update Against this backdrop, the analysis of the Q1 2010 US wireless data market is: Service Revenues (Slides 7, 16) • The US Wireless data service revenues grew 5% Q/Q to $12.5B in Q110. Compared to Q109, the mobile data service revenues grew 22%. • Verizon and AT&T accounted for 60% of the increase in data revenues in Q4 2009. • T-Mobile’s 3G drive is starting to pay off. While the net-adds were still in the red, it experienced the highest % growth amongst its peers in mobile data service revenues for the quarter. • In a significant milestone, Verizon Wireless edged past NTT DoCoMo, the mobile data revenue leader since the late nineties. By the end of the year, China Mobile and AT&T are also likely to cross their Japanese counterpart in quarterly mobile data service revenues. • AT&T and Verizon now account for 69% of the market data services revenues and 62% of the subscription base. ARPU (Slides 8-11) • Overall ARPU decreased by $0.17. Average voice ARPU declined by $0.84 while the average data ARPU grew by $0.67 or 4.6% Q/Q. • As expected, the average industry percentage contribution of data to overall ARPU crossed the 30% mark in Q110 and is likely to get past 35% by end of the year. • Verizon led in (blended) data ARPU with $17.06 followed by AT&T and Sprint. In terms of % contribution, all the top three operators exceeded the 30% mark. T-Mobile ended the quarter with 23.70% of its revenue coming from data services. Subscribers (Slides 12-14) • In Q409, the net-adds had increased from past several quarters, however, in Q110, the net-adds declined again. • The texting see-saw between US and Philippines continued in Q110. US average was around 615 messages/user/mo just behind Philippines. • In a sign of the times, for the first time, AT&T and Verizon reported more net-adds from connected devices than postpaid subs. • T-Mobile and Sprint improved their net-add declines from last quarter though it was primarily from the prepaid segment. T-Mobile’s 21% and Sprint’s 23% subscriber base is now prepaid. The national prepaid penetration is touching 20%.

6. US Wireless Market – Q1 2010 Update Applications and Services • Non-messaging services continues to grab 60-65% of the data revenues for the US carriers. • There is a significant shift taking place in terms of app revenues. In 2010, there will be more revenues generated (globally) from off-deck than on-deck for the first time and while the on-deck revenues are in billions, the decline trend looks irreversible. In the US, this shift will occur next year. (We released our mobile apps economy research paper last quarter) • The usage and data consumption trends are enabling carriers to accelerate their 3.5G/4G plans and develop long-term business and technical strategies. • The news reports of resuscitation of the media industry by iPad were premature. Handsets • Nokia sold 108M units in Q1 2010 including 21.5M smartphones. Samsung again had a solid quarter with over 64M devices sold increasing its market share to 22%. LG Electronics at 9%, Sony Ericsson at 3.6% rounded up the top 4. For the first time, Motorola didn’t figure in the top 5 device makers. Android, Apple, and RIM made gains as well. • The constant drumbeat of new devices continued with Droid, Nexus One, HD2, EVO, and iPad. Open • The battle for “Open” is breaking out in the street with latest episode being Apple vs. Adobe. We tend to forget that open is a means to an end, not an end in of itself. We are experiencing a fascinating period of transition in the mobile industry and some of the biggest brands in computing and communications are right in the middle of it. Data Traffic (Slide 15) • As we noted in our last update, the data traffic is now significantly more than the voice traffic. The good news is that there are several solutions that available and are being invented that will help manage the data growth. The question is how fast will the operators deploy some of these solutions. • We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Aug 2010. The next Global Wireless Data Market update will be issued in Sept 2010. • Your feedback is always welcome. • Should you have any questions about navigating or understanding the economic and competitive icebergs, please feel free to drop us a line. • Thanks. • Chetan Sharma • Disclaimer: Some of the companies mentioned in this note are our clients.

7. US Wireless Data Service Revenues

8. US Wireless Carriers: Data ARPU Trends

9. US Wireless Carriers: Data ARPU Trends

10. US Wireless Carriers: Data ARPU Trends

11. US Wireless Carriers: ARPU Trends

12. US Wireless Carriers: Net Adds Share

13. US Market: Carrier Market share (Q110)

14. US Market: Carrier Market share

15. MobileNetwork Traffic Growth

16. Top Carriers by Wireless Data Revenues * - Estimated

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18. June 10th Sponsors: Motricity, OpenMarket Openwave, WDSGlobal Startup Nation Paul Palmieri, CEO, Millennial Media Sailesh Chutani, CEO, MobisanteMike McSherry, CEO, Swype Olga Kharif, Senior Writer, BusinessweekPaul Griff, CEO, Root Wireless Scott Kveton, CEO, Urbanairship Derek Spratt, CEO, Mobidia Kevin Foreman, CEO, Pointinside John Lauer, CEO, Zipwhip Jeff Giard, Director, Clearwire Bill Bryant, MD, DFJ Peter Wilson, x-Google, x-Microsoft www.mobilebreakfastseries.com

19. Announcing Sept 8th, 2010 Seattle An Event to Explore the Future of Mobile. Inspire, Educate, and Collaborate.

20. Confirmed Speakers Glenn Lurie, President, AT&T, Subba Rao, CEO, TataDoCoMo, WimsSweldons, President, Alcatel-Lucent, Takayuki Hoshuyama, COO, D2 Communications, Mike Sievert, Chief Commercial Officer, Clearwire, Stephen David, Former CIO, Proctor & Gamble, Louis Gump, VP Mobile, CNN, Paul Palmieri, Founder and CEO, Millennial Media, Dr. Sailesh Chutani, CEO, Mobisante, Neville Ray, SVP, T-Mobile, Abhi Ingle, VP, AT&T Wireless, Ken Denman, CEO, Openwave, Amir Mashkoori, CEO, Kovio, Dr. Genevieve Bell, Intel Fellow, User Experience, Intel, Dr. Greg Brandenberg, CEO, Columbia Basin Health Association, Hank Skorny, SVP, Real Networks, Jon Stross, VP & GM - Babycenter, Johnson & Johnson, Dr. Suzanne Sysko, Chief Medical Officer, WellDoc, Dr. Boris Nikolic, Sr. Program Officer, Bill & Melinda Gates Foundation, Krishna Vedati, SVP & GM - Mobile, AT&T Interactive, Christopher Dean, Chief Strategy Officer, Skype, Russ McGuire, VP, Sprint Nextel, Rob Glaser, Chairman, Real Networks, Jack Kennedy, EVP, News Corp, David Weiden, General Partner, Khosla Ventures …. others to be confirmed Generous Sponsors for sponsorship and speaker opportunities please visit www.mobilefutureforward.com Subscribe to announcements subscribe@mobilefutureforward.com

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