February, 2016

Industry Analysis Furious Five

Brooke Allen

Jonathan Ashworth

Christopher Howard

Darian Johnson

Christopher Puszkar

Executive Summary & Introduction

This report concerns the competitive structure of the U.S. wireless telecommunications

industry. Generally, the industry is comprised of firms offering radio-based cellular networks to

aid in the transfer of information and communication amongst individuals and corporate

customers. This industry is concerned with the production of paging and cellular phone services,

as well as wireless internet and video features. The aim of this report is to better understand the

competitive forces surrounding the wireless telecommunications industry, and to highlight the

competitive strategies of the major firms in the market. Tools used include an extensive analysis

of the traditional Porter’s Five Forces, which offer a summary of the internal competitive nature

of an industry. Meanwhile, the external factors will be analyzed at depth using PESTEL factors

which influence the wireless telecommunications industry. Finally, the report will examine the

specific strategies of the major firms within the industry, and summarize the overall

attractiveness of the industry, as well as the Key Success Factors (KSFs) concerning wireless

telecommunications.

This report finds that the US wireless telecommunications industry is a highly

competitive one. The four major players are found to be Verizon, AT&T, T-Mobile, and Sprint.

These competitors are affected by political, legal, and technological factors that constrain and

challenge their competitive decisions from outside the industry. Meanwhile, a Five Forces

analysis of the internal market shows there exists the influence of internal suppliers and intense

rivalry amongst the competing firms to decide the competitive strategies of each player. Finally,

the three KSFs are found to be customer satisfaction, technological innovation, and cost

minimization.

In summary, the wireless telecommunications industry has high potential for future

growth, and remains an attractive industry. Despite this, the entry costs are high enough to

dissuade most firms from joining in competition. Finally, competing firms are constantly

challenged to innovate their product offering in order to differentiate themselves from their rivals

in a volatile and always-evolving industry.

1) The Industry's Dominant Economic Features

The wireless telecommunications industry is substantial, innovative, and extremely

competitive. In order for firms to maximize profits and continue to raise revenues year after year

they must increase their subscriber base and retain existing customers. The industry does face a

few driving economic factors that mold the dynamic of telecommunications. These main factors

include: rivals and their size and technological change.

The wireless telecommunications industry is heavily impacted on rivals and their size.

The four main competitors are Verizon, AT&T, Sprint, and T-Mobile. Of these, Verizon leads

the industry with approximately 38% of market share. Meanwhile, AT&T is a close competitor

with 33% of the market. This leaves the other 29% divided between Sprint at 13% and T-Mobile

with 16% according to IBISWorld. The industry is split between two similar sized companies

competing against each other while still competing within the entire industry.

Additionally, the other large economic factor in the industry is technological change. If

one company adapts a new broadband capability first, it leverages itself over other companies

and has potential to transfer business away from competitors. The difference between 3G and 4G

technology can dampen or strengthen the industry profitability among the other big 3 companies.

Technology life cycles are short-lived, thus companies must continually develop technologies for

the customer as the phones themselves are not differential. The phone is just one piece of the

demand, but the service of communication is what drives consumers to pay.

Furthermore, the wireless telecommunications industry’s overall purpose is to provide

subscribers with the ability to communicate internationally as well locally through calling,

messaging, and internet connectivity. Consumers want to talk to others and surf the web on their

devices, bottom-line. Along with wireless technology, there is also the segment wireline

telecommunications (landlines) provided by these competitors but as innovation progresses,

wireline is not the focus of selling service. In our analysis we will be focusing on the latter of

these segments.

2) Porter's Five Forces

2.1 Threat of New Entrants

The threat of new entrants in the wireless telecommunications industry is a relatively

weak force, due to the high barriers of entry. The big competitors in this industry benefit from

large capital investment, economies of scale, and diversification that, combined, create stark

barriers to entry for smaller firms. Potential future entrants include Google, Apple, and

Microsoft as they move to expand their products towards connecting users in a similar way to the

wireless telecom sector(Google 10-k, Apple 10-k, Microsoft 10-k).

Capital Requirements: It comes as no surprise that the biggest barrier of entry is the

access to the finances needed for significant capital acquisitions to absorb the costs of expanding

networks and services that become obsolete seemingly overnight. Transmission systems need to

be replaced as frequently as every two years; for small operators, the financial challenges of

keeping up with rapid technological change and depreciation can be monumental (Rajasekar

241). This may cause operators to continue to stay in wireless telecommunications despite

earning low or negative returns due to perceived barriers to exit. This may result in extensive

competitive pressures as excess concentration lowers the overall market profitability.

Economies of Scale: Wireless telecommunications incumbents have established well-

entrenched positions, making market entry difficult. Due to high fixed costs with low marginal

costs and low marginal revenue, the top companies heavily rely on economies of scale to drive

prices down (Marketline). These demand conditions require a new entrant firm to be secure in

other industries or post-entry prices will lead to an economic loss due to low profit margins.

Diversification: Firms already established in the industry also have strategically

diversified products to protect them against downturns in any single market, something that new

competitors wouldn’t have unless, again, they were previously vested in other industries.

Because of this, it is increasingly difficult for new companies to compete with the existing

quality and prices, which may dissuade potential new competitors.

2.2 Competitive Rivalry

Competitive rivalry can be defined as the efforts that existing competitors make in order

to sustain and improve their market share, revenue, profitability, and image. High rivalry tends to

limit profitability as price discounting, introduction of new products, service improvements, and

advertising make margins smaller. Strong competitors in the wireless telecommunication sector,

like Verizon, AT&T, T-Mobile, and Sprint, have created an intense competitive rivalry in the

industry; classifying it as a strong force.

Size & Power of Competitors: In the wireless telecommunications industry, as in any

other, the number of competitors is important as they all share the same segment of potential

buyers. 97.6% of the market is controlled by the top four companies, Verizon, AT&T, T-Mobile,

and Sprint; with over 70% belonging to Verizon and AT&T (IBISWorld). The market share of

the industry players gives an important indication of their power and hence their ability to

pressure rival companies.

Consolidation Partnerships: Wireless telecommunications operators have moved to

cellular tower consolidation partnerships with competitors to eliminate redundant costs, expand

coverage and improve profitability. The industry has shown consistent signs of consolidation in

recent years, with 2014 marking the first year that capital investment and the number of cell sites

has decreased (CTIA). However, the Federal Communications Commission (FCC) has indicated

that industry consolidation has reached its limits for AT&T and Verizon, the industry’s largest

players, and any new consolidations are subject to regulations. For example the approval of

Verizon’s deal to purchase wireless spectrum licenses from cable companies was contingent

upon Verizon exchanging spectrum licenses with T-Mobile (U.S. Department of Justice).

Lateral Competition: In addition the convergence between wireless telecommunications,

technology, media and the consumer electronics market, is causing lateral competition. As

competition extends into converging markets it creates opportunities for growth and competitive

threats in this wider market. Companies like Google, Apple, and Microsoft are blurring the lines

between these markets in an attempt to take advantage of arising opportunities. As leading

companies in their respective industries, they possess the necessary finances and diversification

to be potentially successful in wireless telecommunications and possibly drive existing

competitors out through innovation.

2.3 Bargaining Power of Buyers (And Who They Are)

Buyers of wireless telecommunications products and services include both individual and

commercial segments. The increasing amount of choice due to low differentiation is creating a

growth in the bargaining power of buyers; with the potential to move from a moderate to a strong

force. The most influential factors in buyer decision making are price sensitivity, perceived

quality of service, and availability of market information (Rajasekar 245). All of this, as well as

low customer loyalty ratings and negligible switching costs for buyers, means that they can

switch between competitors they view as superior at any time. As the industry continues to

mature, buyers ultimately acquire more information to further strengthen their buyer power.

The reason that this force might not be considered strong, at this moment, is due to the

oligopolistic nature of the wireless telecom industry (Marketline). With a low level of established

incumbent players and a high number of buyers, the buyer power of a single customer is

diminished. It would take many buyers reaching the same conclusion from their available market

information to create a noticeable impact. However, this has caused problems for wireless

telecom companies in the past. For example, Sprint is largely considered by buyers to lack

adequate wireless coverage compared to its competitors; which can be further examined in their

low growth rate and high churn rate (Appendix Table II). This becomes a double edged sword, as

any information regarding advancements in wireless coverage by Sprint will take time to reach a

wide base of potential buyers.

2.4 Bargaining Power of Suppliers (And Who They Are)

One of the primary forces affecting an industry and its competitive climate is the

influence of suppliers within the industry supply chain. Any industry requires raw materials,

labor, and other intermediate supplies that are used by firms in the production and offering of a

final good (Investopedia). The same is certainly true for the US wireless telecommunications

industry. For example, a phone sold by Verizon requires components such as semiconductors,

fiber-optic cables, and circuit boards. These subcomponents in turn are produced from copper,

aluminum, and other raw materials. In addition, network owners negotiate contracts with the

carrier firms, and influence the reliability of the network sold to the market. Therefore, firms are

dependent on each step in the supply chain to produce and sell its products in the mass market.

The factors that determine supplier influence are as follows:

Size and Concentration of Suppliers: In general, the higher the size of a given supplier,

the more influence it will have over an industry. A larger supplier can afford to raise prices, and

capture some of the profit from the major players in the industry (QuickMBA). Concentration

here refers to the ratio of suppliers to buyers. In the US, the four major firms have a limited

choice of providers for intermediate goods, such as broadcast towers and network providers so

the higher concentration of suppliers contributes to their large influence in the industry.

Switching Costs: Switching Costs refer to the ability of a firm (such as Verizon), to

replace one supplier with an alternative. Marketline reports that many carriers rely upon virtual

network operators (Marketline). These are large suppliers that offer wireless telecom services

and network services to providers, usually through long term contracts. Switching costs are then

very high, since firms cannot easily exit such a contract.

Product Quality: As the threshold for product quality increases, the number of available

suppliers diminishes. The US wireless telecommunications industry is a highly competitive one,

where the ability to offer extensive, reliable network coverage is key to firm success. All four

major players offer similar services, such as widespread coverage, 4G LTE internet speed, and

unlimited talk and text. Given the similar product and service offerings, the quality of those

offerings must be high in order for any particular firm to avoid losing a competitive edge. In the

wireless telecommunications industry, network reliability is a critical strategic factor for the

success of a firm. Further, there are relatively few suppliers providing strong, reliable networks.

Since the network quality is of utmost importance, the choice of supplier is minimal, and the

bargaining power of any one supplier is higher.

2.5 Substitute Goods

In determining the competitive level of an industry, it is vital to consider the potential

threat of substitute goods. In the case of the wireless telecommunications industry, the primary

competing good is internet-based communication services. Services such as Skype calling are

available for free, however the quality and scope of such options is limited compared to the

reliability of telephone communications. For instance, the availability of Wi-Fi hotspots

determines the breadth of coverage for an internet communications source. Further, many of the

service providers now offer service bundles that include internet connections via data plans. The

emergence of these internet service providers has nulled the effect of substitute internet

communications methods. Thus, the effect of substitute goods on the wireless

telecommunications industry is low relative to the other forces operating in the market.

2.6 Complement Goods

As a potential sixth factor, we consider the effect of complement goods on the wireless

telecommunications industry. In his article on telecommunications, John Haring identifies

personal computers and tablets as possible complements to the capabilities of wireless

telecommunications equipment (Haring). Companies such as Google and Apple sell computers

and phones that rely upon the reliability of network providers. Meanwhile, these communications

providers are able to differentiate themselves in the market by offering bundles of data plan and

devices sold by cellphone companies. Therefore, the influence of complementary goods and

industries is not trivial to the wireless telecommunications companies in their strategic behaviors.

Summary of Forces and Attractiveness

What follows is a brief description of the impact of each of Porter’s Five Forces on the

wireless telecommunications industry.

1. Threat of Potential New Entrants: Low

The big competitors in this industry benefit from large capital investment, economies of

scale, and diversification that, combined, diminish the threat of potential new entrants.

2. Competitive Rivalry in the Industry: High

The low level of service differentiation escalates rivalry with the top players competing

intensely via quality measures, brand awareness, functionality, and value pricing.

3. Bargaining Power of Buyers: Moderate

The increasing amount of choice due to low differentiation is creating a growth in the

bargaining power of buyers. However, due to the oligopolistic nature of this industry, the

buyer power of a single customer is lower than expected.

4. Bargaining Power of Suppliers: High

For the telecommunications industry, internal suppliers hold significant influence on the

strategic decisions of each major player in the market.

5. Threat of Substitute Products: Low

For the foreseeable future, the threat of substitute products or services is relatively low in

the telecommunications industry.

6. Influence of Complementary products: Moderate

Complementary goods, such as smartphones, are important benefactors of the advances

to communications technology. However, it must be said that their influence is less direct

to the strategic decisions of service providers competing in the industry, as compared to

the other prevalent forces.

3) Drivers of Change in the Broad Environment & Impact

Trends in the United States as well as world market are changing rapidly. According to

PESTEL analysis, the specific drivers of changes in the industry are technological, legal, and

political trends. While environmental, economic, and sociocultural trends are still factors, they

will not have as severe an impact on the industry. These changes will continue to drastically

shape the way the telecommunications industry looks and continue to do business.

The trend that looks to have the most impact on the telecommunication industry is

technological. The driving technological trend for telecommunications is the decrease in demand

of traditional wireline services such as landline phones and other voice-only services. This is a

result of the rising popularity of new technology like broadband enabled wireless devices and

other data intensive products (Blau). The wireless segment is expected to be the most lucrative in

2015, with total revenues equal to 60.7% of the market's overall value (Marketline). Following

the 2008 financial crisis, consumers were left with less discretionary spending and chose to

eliminate landlines in favor of wireless connections (Blau). From 2008 to 2014, households with

only wireless services increased dramatically from 20.2% to 47%. As a result, annualized

revenue growth is expected to be 3.2% over the next five years (Blau). These technological

changes have forced companies in the industry to rapidly change their focus of which services

and products to provide as well as changing the way these companies compete with one another.

Carriers within the industry have “long competed on price, but S&P Capital IQ sees a shift

toward competing on speed” (Zino). Telecom companies are already looking towards the

implementation of 5G technology by 2020, even though 4G only recently became nationwide in

the past few years (Blau).These technological drivers are motivating companies in the industry to

compete for the position of leading technological innovator. The pressure to innovate with

services such as 5G is one such example of technological pressure in the market.

While rapidly changing technological trends remain the main drivers of change in the

telecommunication industry, legal forces also heavily shape the industry, as telecommunications

is continuously one of the most regulated industries. This includes the recent emphasis on “net

neutrality” legal regulations. Most notably, as S&P Capital states, the FCC “will not allow paid

prioritization having certain online traffic (i.e., no "fast lanes")” (Zino). Simply put, internet

providers cannot play favorites; giving certain customers who pay a fee for faster connectivity,

while slowing the traffic of those customers that do not pay. Telecom carriers argue in opposition

that they have invested a substantial amount of capital to provide better and faster service to

customers. They point to companies like Google and YouTube that are generating returns

without investing in the infrastructure that underlies their operations (Blau). These new rules

have increased the level of outside competition by giving companies like Google a potentially

unfair competitive advantage against the telecom industry.

In addition to the already enacted regulations driving change in the telecommunications

industry, the evolving political landscape has a high likelihood of further increasing regulation.

For example, the FCC began probing into the level of competition among the wireless sector

beginning in 2009, which could lead to a broader investigation of the telecommunications

industry as a whole (Blau). Additionally, the FCC is looking into additional antitrust laws as it

receives an increasing amount of merger and acquisition requests. This is a result of the fact that

generally, the most efficient way to cut costs is to merge with another company. In 2009, while

Verizon won approval to purchase Alltell, AT&T dropped its bid for T-Mobile in 2011 on

account of the Justice Department suing to block the deal and the FCC showing its intentions to

fight the merger (AT&T 10-k). In April of 2013 the Justice Department’s top antitrust enforcer

stated he supported limiting wireless companies airwaves, showing support for limits that will

allow small carriers to compete in the highly concentrated market (Blau). If these political forces

succeed in implementing upcoming regulations for the traditional telecommunications

companies and are not enforced to possible competitors like Google or Cable companies, this

could place the major players at a competitive disadvantage.

4) Companies in the Strongest & Weakest Positions

In the wireless telecommunications industry, there are many competing firms. The top

three would be Verizon, AT&T, and T-Mobile, respectively. The power and position of these

firms within the wireless telecommunications industry is determined by several factors. Of

which, the most important are bandwidth (speed and reliability), price (for services and devices),

customer service and satisfaction, and differentiation of products and services. See Tables I and

III in the Appendix for the following analysis of the leading firms’ competitive strategies.

Verizon is the largest firm of the industry that emphasizes network reliability to its

customers, and its dominant bandwidth across the U.S. reflects this. Verizon’s recent increase in

nation-wide reliable service was achieved in part by the adoption of CDMA (code division

multiple access) technology that allowed Verizon to use a 4G LTE network. Verizon has also

adopted EV-DO (evolution data optimized) technology, which has successfully improved data

transmission rates. Many of the strategies that Verizon has used would not have been possible

without its impressive reserves of capital resources. Recently, Verizon implemented Verizon

Wireless, to focus its strategy on the wireless sector of telecommunications. Verizon has also

taken initiatives in order to differentiate its brand. These initiatives include roaming agreements,

VoIP (Voice over Internet Protocol), new spectrum acquisition leading to the new XLTE

bandwidth, and an increase in its number of retail stores in the U.S (Verizon 10k). Something

that Verizon has yet to improve is its poor service in the global wireless industry. Unlike AT&T,

which has made great efforts to improve this aspect, Verizon has invested a substantial amount

of capital primarily in the U.S. wireless industry. Another weakness that Verizon carries is its

fairly poor customer service and sub-par online customer accounting.

AT&T is close behind Verizon in terms of bandwidth. However, AT&T is ahead of all

other wireless communications players in terms of geographic coverage considering its

impressive international presence. AT&T also has the fastest wireless network speed, based on a

study by PCMag. Unlike Verizon’s strategy to focus on the U.S. wireless market, AT&T’s

newest strategy involves focusing on the global market. Another difference AT&T has from

Verizon is that it is more focused on selling devices rather than data and service plans. Similarly

to Verizon, one weakness AT&T has is that its impressive size compromises its flexibility.

T-Mobile’s strategy is to expand by acquiring customers from other carriers, particularly

Verizon and AT&T, and new customers without carriers. T-Mobile aligns itself competitively by

pointing out the flaws of other carriers and offering an effective alternative. T-Mobile has been

awarded best customer service by JDPower, positively reflecting its competitive strategy to meet

specific customer needs. With their recent “Un-Carrier” promotion, they have taken several steps

in the right direction as far as exposing the flaws of their competitors and gaining new customers

with their unique offerings. This plan seems to be working considering T-Mobile’s significant

wireless revenue growth rate of 21% from 2014 to 2015. Although T-Mobile’s cost leadership

strategy is proving effective, it does not yet have the abundance of resources pertaining to

capital, human resources, and spectrum.

It must be acknowledged that T-Mobile is implementing the most potentially effective

strategy. As is apparent in the strategic map in Appendix Figure III, T-Mobile is the fastest

growing wireless network provider. They have the best customer service with a 5/5 star rating

from JDPower. Although Verizon’s market share dwarfs T-Mobile’s, Verizon must be cautious

for T-Mobile may be their next prime competitor in the near future if they keep growing at such

a high rate. The strategic map reinforces the notion that AT&T is Verizon’s current primary

competitor. Meanwhile, Sprint has the worst customer service rating as well as the lowest

revenue growth rate and the highest revenue per employee. This implies that Sprint must boost

its customer service rating and, therefore, increase its revenue by hiring more employees.

5) Key Success Factors for Competitive Success

In order for the wireless communications industry to stay profitable, these are the three

key success factors KSFs: consumer satisfaction, technological innovation, and cost

minimization. Since the subscribers are the ones that the industry is targeting, their satisfaction is

important because transferability of services to another provider is a firm’s biggest threat (as

mentioned in our strategic group map). Technological innovation is a key success because the

technology world of broadband is constantly changing. (Sprint 10-K) R&D is a big expense for

the next innovative technology such as 5G to attract a larger consumer base, pleasing the current

subscribers with better data efficiency. Lastly, cost minimization is notable too because if the

supplier raises the price of a network, then the provider must push the burden of this cost onto

the customers, resulting in higher churn and lower revenues. Also, keeping cost as low as

possible keeps plans competitive so no one company loses due to higher costs of production.

The key success factors do not change across segments nor over time. Verizon, AT&T,

T-Mobile, and Sprint all need to focus on the three keys for remaining staying segmented in the

market. In the future, if Sprint does not increase its customer satisfaction specifically, it will

continue to increase its churn rate and will eventually be too small in the market and will be

forced to exit. Thus, leading to only 3 major dominators of telecommunication and altering

market share. Engineers alongside the research and development team of the players will need to

continue innovating cutting edge technology of new data services in order to entice these new

potential subscribers. Hence, the telecommunication industry requires excellent retention rates

and growth of subscribers through low costs and innovative technologies.

6) Analysis and Summary:

Industry’s Prospects

In summary, the wireless telecommunications industry is a highly competitive one. The

four major players interact with each other, and with key suppliers and customers. Meanwhile,

political and legal pressures dictate the strategic decisions of each firm, while ever-changing

technologies create a turbulent and constantly-evolving playing field for the major providers.

The pressure to maintain profitability, and stay ahead in such a competitive environment is

typical of the wireless communications industry.

There exists a high potential for future growth in the industry, due to the rapidly evolving

technologies. Such innovations challenge competing companies to continually be on the lookout

for the next big product or service. Meanwhile, competitive forces will only grow stronger, as

pressures to increase customer service efforts by all industry competitors become harder to

avoid. Certainly, for Sprint, the lesson must be that customer service and proper branding are key

to high revenues, and ultimately, company success. The driving forces of customer service,

technological innovation, and cost minimization will certainly increase profitability for the firms

that abide by these principles. Given current trends of revenue growth, we expect T-Mobile to

become a prominent player in the coming years. Meanwhile, Sprint will likely fade from the

competitive field without a change in its strategic focus. Finally, AT&T and Verizon will

continue to lead in the industry, due to their high capital resources, and emphasis on R&D and

customer service. In general, those companies that differentiate themselves appropriately in the

industry will remain viable competitors in the future.

The question remains how the competitors in the wireless telecommunications industry

can protect their success, and safeguard against industry threats. Given the volatile nature of

technological change in the industry, it is apparent that innovation of products and services is

vital to survival and success for the leading competitors. Strategies pursued by AT&T and

Verizon, which emphasize high capital stock and extensive research and development programs,

lend themselves to corporate success. Failing this success, it will be easy for another player to

capture market share by outpacing competitors in technological innovations. On the other hand,

the cost of maintaining high capital growth is the risk of falling into debt. Without a contingency

plan for removing budgetary deficits, long-term profitability could be impacted. For a company

like T-Mobile, gaining a loyal customer base will pay off in the long run by increasing revenue

growth, allowing for future capital investments. Despite this, the uncertainty of relying upon

customer service is reflected by the ease at which customers can switch from one company to

another for alternative phone plans, or better coverage. Brand loyalty is largely volatile for

cellular customers. This could be significant for any competing firm, due to the inherent risk of

lost revenue due to high churn rate of its customers. This impact is especially severe for T-

Mobile, which differentiates itself in part through superior customer service.

The wireless telecommunications industry is certainly an attractive one. The four biggest

players all have potential for growth and high profits in the coming years. With that said, entry

costs are high enough that the industry remains off-limits for many smaller firms. Nevertheless,

the dynamic nature of the industry promises high return to any firm that can orient its strategy

towards product differentiation and technological innovation. The potential for long-term

profitability, contingent on these success factors, remains a lucrative draw for firms both inside

and out, to compete within the industry.

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Appendix

Table I. Wireless Telecom Customer Satisfaction, Revenue/Employee, & Growth Rate

Table II. Forbes US Wireless Carriers 2014: Year in Review

Table III.

Graph I. Company Growth: Customer Satisfaction vs. Efficiency