IP Communications is a newsletter from investment firm New York Global Securities. I don’t remember how I got on their mailing list, but recently the content has been outstanding. Email firstname.lastname@example.org to be added.
This week’s issue delves into commoditization of the cellular voice market. Analyst Keith Dalrymple notes that ARPU (average revenue per user) at Cingular and Verizon has been in decline for the last 4 quarters. Cingular and Verizon reported ARPU declines of 1.5% and 1.9% respectively for 2005, and Cingular has reported a further 2.4% decline in the first quarter of 2006.
Overall ARPU declines mask the issue, which is that data revenues are masking a much larger ARPU decline in voice. Year over year voice ARPU declined 5.5% and 6.4% at Cingular and Verizon, respectively. It is not until you plot revenue against usage, however, that the full story emerges. Minutes are up 11% over the same period at Cingular, which means that revenue per minute is down a staggering 17%. Keith believes that this an industry wide phenomenon, and that cellular voice is in "the full grip of commoditization". As I observed some time ago, voice minutes are price elastic. Drop the price, usage increases. If your underlying cost basis remains constant, however, this will eventually become a problem.
The cellular industry has been able to somewhat insulate itself against the voice commoditization phenomenon by driving the uptake of data. However, data is on the way to becoming a commodity on cellular too. All you can eat plans do not yet exist in Canada, but south of the border you can buy an all you can eat CDMA or GSM plan for $70 to $80 per month. Unlike their brethren in the landline business, however, cellular operators are at least making an attempt to deliver new services, with ringtones and other kinds of new services appearing. The challenge will be convert consumers of their commodity services to consumer of their new high value-add services.