I have begun to see significant growth in 3G device adoption over the past 18 months. Based on my analysis, there were more than 306 million subscribers globally using 3G devices as of end-1Q/08 — both Wideband Code Division Multiple Access (WCDMA) and Evolution-Data Optimized (EVDO). However, in spite of the recent growth in 3G device adoption, my estimation that there is still significant upside potential, as 3G still accounts for only around 9% of the total global mobile subscriber base of 3.3 billion.
At present, there are 293 3G network operators globally, which include 211 based on High-Speed Packet Access (HSPA), 26 based on WCDMA, and 82 based on EV-DO. I believe that most of the remaining WCDMA networks will upgrade to HSPA within the next 12 months owing to the relatively low cost of upgrading to higher speed wireless technology — and the potential revenue upside from an enhanced user experience for wireless broadband.
In my view, much of the incremental growth in 3G is being driven by WCDMA, which accounted for roughly 68% of the total 3G device base as of end-1Q/08. Again, my estimation that mobile operators are adding around 22 million new WCDMA device users, per-quarter, globally versus an average of eight million per quarter for EVDO. Going forward, somehow, I expect this gap to widen as WCDMA growth accelerates.
Although 3G accounts for only around 9% of all mobile devices, non-voice applications have continued to become an important source of revenue for wireless carriers (mainly in the form of SMS and ring tone and other downloads). In the developed markets in Asia, Europe, and North America, non-voice revenue accounts for 20%–35% of the total average revenue per user (ARPU).
In Japan, the most developed 3G market in the world, 76% of all mobile subscribers use 3G devices, and non-voice revenue represents more than 30% of total ARPU. In order to encourage greater data usage, DoCoMo first introduced unlimited data packages for its subscribers in June 2004. With more than 45% of Japan’s 3G subscribers on unlimited data plans, average data usage has increased to 19 MB/month in 2007 from 0.96 MB/month per month in 2003. However, I believe that these unlimited data plans seem to have capped some of the potential upside for data revenue growth. DoCoMo reported that 75% of its subscribers had data ARPU of about JPY4,000 per month (US$38) and remaining 25% had data ARPU of around JPY1,200 (US$12) in 4Q/07 (ref. DoCoMo report).
I believe that many of the key factors that have contributed to the migration of 3G in Japan will also help accelerate 3G adoption in other developed markets throughout the world.
In Asia Pacific, I saw that there were 122 million 3G subscribers in the region as of end-March 2008. However, a majority of 3G subscribers in this region are still concentrated in Japan (64% of all 3G subscribers). The second-largest 3G subscriber base outside Japan is Korea, with more than 26 million subscribers, and the third-largest is Australia, with around 7.4 million subscribers.
Even though 3G has only started to gain traction in the Asia-Pacific region, data and value-added services are already an important source of revenue for many carriers in the region, with many of them reporting non-voice ARPU of above 20% of total ARPU — including some developing markets such as China and Malaysia.
Going forward, I believe that wireless data will remain a major source of revenue for carrier in the region. In fact, wireless broadband could become the major, means to access the Internet in developing markets where the fixed line infrastructure is not robust. Thus, I believe that carriers have been considering WiMax and HSPA/LTE to provide wireless broadband in the region.
In Europe, my estimation that there were more than 80 million 3G subscribers in Europe as of end-March 2008, with 3G penetration in excess of 20%. Unlike in the US and Asia-Pacific regions, all 3G networks in Europe are based on WCDMA technology. My analysis that SMS is still the largest component of non-voice revenue, accounting for 14% of total ARPU in FY07. However, as 3G brings a more robust user experience, I estimate that data revenue will increase from 8% of total ARPU to 12% of total ARPU by 2010, while SMS will fall to 11% of total ARPU. Overall data ARPU will increase to 24% of total ARPU by 2010, up from 21% in 2007.
As demonstrated by the estimated incremental ARPU from data (up only 3% from 2007 to 2010), again, I believes that the upside from wireless data for European telecom carriers remains limited. In fact, the potential upside from data might not justify a significant boost in capex and opex to roll out the services.
In United States, my review estimate that the US had more than 60 million subscribers using 3G devices as of end-March 2008, including 11 million subscribers with WCDMA devices and over 50 million subscribers with EV-DO devices. This represents about 23% of the total number of mobile subscribers. The growth in 3G has helped wireless data to become an increasingly critical component of wireless carriers’ service revenue. For instance, wireless data accounted for approximately 23% of retail ARPU, or US$11.94 per user per month, for Verizon Wireless in 1Q/08. Among 3G subscribers that use mobile data applications, that monthly data ARPU is nearly twice the average data ARPU for 2G subscribers. I also believe that the introduction of unlimited data plans in the US by all the major carriers will also help to stimulate wireless data usage.
3G development in Asia Pacific
At the end-March 2008, I saw that there were 122 million 3G subscribers in nine key markets of the Asia-Pacific region. This represents around 36.5% of all mobile subscribers in countries/territories in these markets.
Wireless operators in Asia-Pacific region have launched 3G services in 12 countries/territories, which include Australia, Brunei, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Sri Lanka, and Taiwan. I expect Thailand and India to issue 3G licenses over the next 6-12 months.
Most 3G subscribers in region are concentrated in Japan (around 64% of all 3G subscribers). DoCoMo had 44 million WCDMA subscribers (or 82% of the company’s subscriber base) in Japan as of end-March 2008. The second largest WCDMA operator was SoftBank Japan, with around 14 million 3G subscribers (75% of its subscriber base). WCDMA subscribers accounted for 57% of all mobile phone subscribers in Japan. If I include KDDI’s 20 million EVDO subscribers, the total number of 3G subscribers in Japan rises to 78 million, or about 76% of all mobile subscribers.
Excluding Japan, I think there were around 45 million 3G subscribers in the Asia-Pacific region as of March 2008. The second largest 3G subscriber base outside Japan is Korea, with 26.4 million subscribers, and the third largest is Australia with 7.4 million subscribers.
Data is becoming a key driver of wireless revenue growth
3G is likely to play a vital role in meeting the demand for data services, going forward. For the four largest wireless carriers in US, revenue from mobile data services topped $6.2 billion in 4Q/07 and $22.0 billion in 2007, up from $4.2 billion in 4Q/06 and $14 billion in 2006, respectively. For both AT&T and Verizon, data revenue accounted for around 55% of the year-on-year increase in revenue in 2007, and has been instrumental in stabilizing and even growing monthly ARPU.
This trend in data revenue growth will continue in the US due to the following:
(a) increasing adoption of mobile data services by mobile subscribers,
(b) enhanced coverage of 3G networks, and
(c) rising proportion of the subscriber base using more feature-rich handsets, PDAs, and laptop PC wireless data cards.
I think that Apple’s iPhone (which is just a 2G device at this point), has the potential for rapid adoption of data services beyond just SMS, when the device has a simple interface for data applications. M:Metrics reports that iPhone users are 6x more likely than the broader base to use a browser for news, 10x more likely to do a web search, 6x–20x more likely to view various types of video content, and 100x more likely to access a social networking site.
Around 57% of subscribers were data users in 2007
I estimate that 57% of the subscriber base of the big-four wireless carriers comprises data users, up from 47% in 2007 and 40% in 2006. In addition, data revenue per user has been rising with increasing penetration, which suggests higher data uptake, going forward.
Higher data speeds from HSPA to enhance user-experience and encourage usage
Somehow, HSPA is likely to drive Internet browsing in particular and mobile data in general in 2008. Although 3G handset penetration remains relatively low in US, I think the natural replacement cycle to improve penetration levels. In my view, higher 3G adoption will likely help data revenue growth, particularly for GSM carriers such as AT&T and T-Mobile, where current penetration levels are around 20% and almost 0%, respectively. I expect, AT&T to migrate its handset portfolio, as much as possible, to 3G by the end of 2008.
Also, there are several 3G ‘touch screen’ devices to be introduced in 2008, including a Nokia model code-named ‘Tube’, a 9,000 series from RIM, and the Samsung Instinct, which I believe could be the next catalyst for data growth. AT&T noted recently that 3G devices drive 20% more ARPU than 2G devices, while integrated devices (i.e., QWERTY) drive nearly double the ARPU of traditional subscribers.
Next question: what next?
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