Americans Phone More at Lower Prices!

The European and American cell phone markets present two key differences. In Europe, GSM (2nd generation) and UMTS (3rd generation) are the two sole standards, while in the United-States, competition between standards is a de facto, especially between GSM and CDMA. The second key difference lies in tariffs. In the United-States, the «Receiving Party Pays» applies; the called party pays the call termination received on his/her cell phone. In Europe, the caller pays for the call ( «Calling Party Pays»).

Graph 1 : Mobile penetration rate in the population and prepaid share in the overall client base in 2006

In the United-States, cell phone penetration appears below European levels. In the United-States, SIM card penetration at end-2006 in the overall population totaled 78%, much lower than the average European penetration rate of 109%; Italy even announces a 138%penetration rate. Moreover, the US market posted a 9% cell phone take-up between 2005 and 2006 versus 8% over the same period in Europe. The prepaid market accounts for close to 87% of active SIM cards in Italy. Given this context, the number of people who concomitantly own at least 2 active SIM cards is very high and contributes to « boost » the penetration rate. The proportion of prepaid cards in the subscriber base is much lower in the United States, where it does not represent more than 15% of the base, versus Europe's average 59%.

American market dynamics have favored (postpaid) calling plans, appealing to consumers with deep pockets and heavy phone use. In Europe, France shares characteristics of the US markets: a low penetration rate, with a small number of prepaid plans. Across Europe, the dual SIM card holder reflects cell phone marketing pushing prepaid plans. In short, America's cell phone penetration mirrors Europe's. Penetration rates can, therefore, be defined as individuals having access to and regularly using a cell phone within the overall population.

Amazing! Americans call four times more than Europeans! An American cell phone subscriber averages 833 minutes (outbound and inbound), whereas in Europe, average consumption across the same perimeter totaled a mere 176 minutes, with Finnish consumption totaling an average 315 mn/habitant/month1.

In 2006, European users averaged 45 SMS/per SIM card/per month with major differences between the countries. In 2006, Denmark posted an average 158 SMS/subscriber/month versus 27 SMS for France.

In the United States, interconnection between operators for SMS messages has been effective since April 2002. The number of SMS messages exchanged between subscribers has grown quite rapidly, from 0.25 in 2001 to nearly 39 SMS in 2006.

Graph 3 :2006 EBITDA margin and revenue growth 2005- 2006

Vodafone EU 15: Germany, Spain, France, Greece, Ireland, Italy, Netherlands, Portugal, United Kingdom

Orange EU 15: Belgium, Spain, France, Netherlands, United Kingdom

Telefonica EU 15: Germany, Spain, Ireland, Italy, United Kingdom

T Mobile EU 15: Germany, Austria, Netherlands, United Kingdom

The price of a cell phone minute in the USA is much lower than in Europe, or 5 ct$/mn versus 17. Compared to France, where prices are deemed competitive, price per minute is three times less, and five times less than Germany where prices are relatively high.

The American market counts some 180 telecoms operators and more than 60 MVNOs. But, with mergers between AT&T, Cingular and BellSouth in 2004, followed by Sprint with Nextel in 2005, the American market has furthered consolidation around four operators. Today, these four operators control 85% of the market. While two operators use the GSM standard (AT&T/Cingular and T-Mobile USA), the other two operators apply the CDMA standard (Verizon and Sprint/Nextel). The four key American operators, akin to Europe's top four cell phone companies, post EBITDA margins averaging 33%. In 2006, the American cell phone companies grossed higher revenues on their domestic market than their European counterparts. This difference can be attributed to external growth operations which the European operators have carried outside of Europe.

In 2007, Verizon acquired 3 regional operators. Sprint, recently purchased a local cell phone company local, and
AT&T‘s acquisition of Dobson is awaiting approval by the FCC. Moreover, fixed-cell phone-Internet convergence is speeding up mergers amongst operators, and contributing to the overall consolidation of the American telecommunications market.

Graph 4: Cumulated market shares of the leading two operators HHI index

The current cell phone consolidation taking place in America is, however, limited compared to the number of national markets across Europe (see Figure 4).

First, the United States is nearing the United Kingdom in terms of cumulated market shares held by the leading two cell phone operators. Indeed, both countries post 52%, while in both France and Finland the two leading operators have a combined share of 80% of the market. Further, in the United States the HHI1 concentration index is less than in Europe.

Generally speaking, the American cell phone market is more competitive than most European countries. American competition level stems from its license granting process, which created a high number of small cell companies, operating either on a local or regional basis. More, the 60 MVNOs have reinforced the diversity of the offer. In 2006, MVNOs counted more than 16 million subscribers, representing close to 7% of the subscriber base. Two MVNOs dominate: TracFone, a subsidiary of America Movil, targeting the Hispanic community and Virgin Mobile, a joint-venture between Virgin Group and Sprint Nextel targeting the youth market, and mirroring Virgin's target in Europe---which has been successful.

Voice consumption for Europe was calculated using the American method which includes calls received.

Price per minute was calculated by divding Voice ARPU by average consumption per subscriber which is expressed in minutes.

Quantifica
is an independent information and telecommunications research and quantitative market research firm. It is headquartered in Paris, France. It was known as Omsyc (World Observatory of Communication Systems) until 2008. Quantifica has many clients worldwide, and they include other consulting companies as well as telecommunications operators, regulators and equipment manufacturers. Its database currently counts more than 247 000 data items and 1 500 variables.

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