FCC Chairman Julius Genachowski laid out his priorities for the wireless industry at the CTIA IT event last Wednesday. He wants to:

• Bring more spectrum to market to handle rapidly increasing demand for wireless data
• Remove red tape to allow wireless carriers to expand networks faster
• Conduct the regulatory process at the FCC more openly and on a fact-based, data-driven basis
• Codify and enforce net neutrality with special considerations to wireless

I am sure the wireless industry is welcoming the first three priorities of the new Chairman. They represent a welcome and overdue recognition of the situation we are in – more than 270 million American wireless subscribers and more than 42 million of them using smartphones to access the Internet. While the discussion continues about the need for the codification of net neutrality for wireless, it is very encouraging that Chairman Genachowski has recognized that wireless networks deserve special consideration.

Some examples:

1. Wireless data networks that are available to most Americans have only modest throughput.
   Today’s technology allows CDMA network operators (Verizon Wireless and Sprint) to provide a theoretical maximum throughput of 2.4 to 3.1 Mbit/sec and UMTS carriers (AT&T and T-Mobile) a combined theoretical maximum of 3.6 Mbit/sec. For simplicity sake, let’s assume the throughput of a particular cell site sector to be 3.6 Mbit/sec. This theoretical maximum is achievable if only one person uses the cell sector and is standing next to the antenna. The farther the person is from the tower or the more mitigating circumstances there are in between, ranging from interference from other sectors to mundane circumstances like leaves on trees, the less throughput available to an individual.
2. Wireless networks are a shared resource.
   The throughput is shared among all people actively using the network at any point in time.
3. Adding capacity is not always possible due to limited spectrum availability.
   Unlike wireline, where you can always put another fiber cable in the ground or light up another strand of fiber already laid, wireless service providers can’t manufacture more spectrum.

For most applications this does not pose insurmountable problems because a subscriber uses the bandwidth for only a short period of time, the duration of a call or while loading a web page. Such usage patterns are easily sustainable on current networks and are generally described as “bursty” traffic.

Complications start when we move from bursty traffic to streaming. With streaming, a constant amount of throughput is needed by the subscriber to maintain the connection and enjoy a satisfactory quality of service. The constant throughput cannot be used by anyone else. Streaming audio from an application like Pandora or Rhapsody typically uses about 40 kb/sec and can support around 90 concurrent users (a theoretical best case scenario of 3.6 Mbit/second divided by 40 kb/sec) in a cell sector. Wireless carriers allow and even sell streaming audio, which would indicate that there are significantly fewer than 90 concurrent listeners in a cell sector.

It gets difficult when the mobile subscriber uses streaming video in general and with an uncapped video frame rate in particular. Take the Slingbox, a popular device that lets people watch their home television service away from home on a laptop or mobile device. The quality of the picture depends on the uplink speed from their home Internet provider (between 384 kb/second and up to 10Mb/second) and on the download speed of their wireless carrier., In the best case scenario nine people (3.6Mbit/second divided by 384kbit/second) can watch TV concurrently via their Slingbox, effectively preventing any other activity. Without the ability to manage the amount of throughput allocated to these nine individuals, other mobile users in the sector will be out of luck. Currently, wireless network operators do not throttle data throughput, but this exposes them and consumers to a negatively impacted user experience caused by only a few heavy users. Traffic shaping could safe guard against the general slowdown of the data throughput in a cell sector for every consumer, but negatively impacting the viewing pleasure of nine subscribers to enable all users in the sector to receive service. This dynamic, real-time dance of RF engineering would be a forbidden under a purist net neutrality approach.

Another implication of a purist net neutrality rule that would negatively impact wireless subscribers’ service is if one person uses their wireless modem to power their web server – and yes it has happened.

How big is a cell sector? Anywhere from the size of the city block that houses Madison Square Garden in Manhattan, to the size of Capitol Hill in Washington DC to several square miles of corn fields in rural Nebraska.

Considering the relatively fragile nature of RF networks and the reasonable expectation of a majority of subscribers that they can make and receive calls and download the applications they are paying for, it is only a matter of fairness to the majority of wireless consumers that carriers be permitted to allocate network throughput in a fair and equitable manner among all customers.

Over the past few months, the government’s interest in the practice of handset exclusivity has intensified. On the heels of Congressional hearings in July, Verizon Wireless agreed to dial back its exclusive deals with cell phone manufacturers to accommodate smaller carriers. This week the FCC, which has already begun a review of handset agreements, has made the issue a focus of its regular monthly meeting. But no matter what the setting or circumstances, whenever U.S. lawmakers and regulators discuss competition in the wireless industry, the elephant in the room these days is almost always the iPhone.

Since Apple first gave AT&T exclusive rights to carry its groundbreaking device in the United States, concerns about unfair competitive advantages have become a hot-button issue. Apprehensions increased as AT&T sought to extend the deal beyond the 2009 deadline, and reached a fever pitch when Apple rejected a Google Voice application earlier this summer.

Nonetheless, many both inside and outside the industry question the need for more government intervention.

Indeed, before the iPhone came along, far fewer consumers (or lawmakers and regulators for that matter) cared a great deal about handset exclusivity, because most cell phones were utilitarian at best. According to Nielsen’s Mobile Insights report, which surveys 300,000 wireless users every year about their opinions and behaviors, in Q3 2006 – a full year before the iPhone launched – “device” was only the seventh most important factor in choosing a wireless carrier. The percentage of respondents on device has since increased from 2.9% to 6.4% in Q1 2009, yet the category remains in seventh place.

There is no doubt AT&T has benefited from the arrangement. New subscribers between the first quarters of 2008 and 2009 who signed up for “a phone not offered by my carrier” (i.e., the iPhone) jumped from 11% to 23%, and the company has reported that 40% of its iPhone customers switched from other services.
Still, the mobile industry is home to many operators who sell a wide variety of handsets. Currently, there are more than 100 different phones offered by the nation’s “Big 4″ service providers in their retail store, plus hundreds more from the large carrier’s websites and the more than 100 smaller carriers that are operating in the United States.

Even if every handset were required to be accessible across all four networks, only the largest of manufacturers could invest in the infrastructure necessary to produce identical products with different technologies. Neither legislation nor regulation could nor should be expected to change that situation.

It can be argued that exclusivity actually enhances innovation and creates more choice. If, for example, Apple’s iPhone or Motorola’s RAZR were initially available on all U.S. carriers, there would have been minimal incentive for handset manufacturers to create rival products. Though competition would exist, the options would be considerably less diverse.

What is more, the iPhone’s significant technological lead over virtually every other smart phone would probably have virtually destroyed the market for the other handset manufacturers. T-Mobile, like several other carriers, would have had less reason to invest in the development Android-based devices. Palm would not have been able to build the Pre and sell as many as it did in the first few weeks without the support of Sprint. In fact, Palm would have likely died without the Centro, which was custom built for Sprint under an exclusive pact that has since expired.

Beyond the iPhone’s distinct technological advantages, AT&T’s infrastructure would almost certainly limit competition as well. Early on Apple had decided to build its phone on a GSM technology path, the most popular standard for mobile phones in the world. But in the United States there are but two GSM networks – AT&T and T-Mobile. Were the iPhone originally available on both, consumers would pick their carrier based largely on price and coverage. Since pricing can be easily matched, T-Mobile’s nascent footprint would have a hard time going up against AT&T’s more built-out network.

In time – perhaps as early as next year – Apple will likely drop its AT&T exclusivity and build an iPhone in the U.S. that can be used across other wireless technologies. That is about to happen in Europe, where the company is reportedly moving away from exclusive deals because it can now derive greater profitability by not having restricted relationships with only single providers. At that point, new and current iPhone users will migrate to carriers that makes that the most sense for them – still driven by the factors other than “device.”

A version of this article also appeared at FierceWireless.com.

While public awareness of Apple’s iPhone has been significant since its summer 2007 launch, its influence on consumer purchasing decisions remains up for debate.

To try to better understand the iPhone phenomenon, I took a look at the most recent data from The Nielsen Company’s Mobile Insights survey, which asks 25,000 wireless users every month (a total of 300,000 per year) about their wireless attitudes and experiences, including why they chose their current wireless service.

When the results of 1st quarter of 2009 are compared with the 3rd quarter of 2006 as a control for the “iPhone-effect,” some interesting insights emerge. Q3 2006 was the last quarter without solid iPhone news that could sway consumers in their purchasing behavior.

At first glance, the most striking difference between 2006 and more recent data is what changed and what did not. Price remains the most important factor in choosing wireless service. Yet, even with the prominence of the iPhone, surprisingly the availability of a specific phone stayed flat as the 7th most important factor. While increasing in importance from 2.9% to 6.4% handset-choice alone did not bump up in the rankings. It seems that what makes for an outsize share of newspaper headlines, and congressional and regulatory attention, leaves the average American cold.

Not as surprising, economic factors are increasingly important. Family plans that let consumers call other family members for free and free in-network calling have shot up to near the top. Payment options, including pre-paid and unlimited calling and texting offers, are also substantially more important.

This translates into opportunity for:

• Pre-paid providers such as Tracfone
• Unlimited providers Boost Unlimited, Metro PCS, and Leap, each who offer unlimited calling and texting for as low as $40 per month
• The two largest wireless operators in the U.S. Verizon Wireless and AT&T due to the larger free calling circles

Perhaps the most unexpected outcome is the declining importance of network quality as a major factor from 2nd to 5th place. A testament to the success of its consistent advertising message, the number of consumers who perceive Verizon Wireless as having the best mobile network has shot up over the last two years and it leads its closest competitor now by an almost 2:1 margin. Consumer perception of the carrier’s quality has shot up over the last two years and it remains the single-most important reason consumers choose them. While handsets represent popular topics of conversation, economic factors are actually the major driver in the purchasing process.

Roger Entner, SVP, Head of Research and Insights, Telecom Practice
As widely expected, Apple announced the new iPhone 3GS at its Worldwide Developers Conference in San Francisco. This latest iPhone offers incremental improvements over the iPhone 3G at the existing $199/$299 price points. The bigger news that few, if any, expected was that the older iPhone 3G was going to continue to be sold, but at the new $99 price point.  It is self-evident that this price cut will drive sales. According to Nielsen’s Mobile Insights survey, which asks 25,000 Americans every month about their wireless attitudes and behaviors, the second most important factor-noted by 20% of respondents-as to why people did not pick the iPhone was its price.

What has been largely overlooked is the impact of the iPhone 3G price cut on the industry as a whole.  It is hard to overestimate the impact that a $99 iPhone has on the wireless carriers and handset manufacturers in the US. The new $99 price point for the iPhone 3G completely changes the value proposition of every handset at every carrier in the US. Some observers have commented that the $99 price point “kneecaps the Palm Pre,” but the kneecapping does not stop there. The dozen or more Google Android handsets that are being launched in the second half of the year will have prices that either make them look non-competitive or extremely margin-challenged. Actually, any device over $49 looks outright overpriced, and the feature phones in general have become a commodity. As a result, the relative value proposition and price matrix of every carrier’s handset portfolio has to be remapped. This has massive repercussions for the entire handset business model. Handset subsidies have to go up while the price to consumers has to go down to maintain a relative value proposition. Carriers will share the pain of lower handset prices with device manufactures whose margins will be further compressed, adding to the pressure they feel with the slowdown in the global economy. Carriers also have to think about if they can or want to shift the up-front cost of owning a device to the monthly recurring charge. It remains to be seen how much price elasticity exists in an economy that is still struggling and will shed jobs for a long time. AT&T could scorch the earth for its competitors by introducing a lower cost data plan that brings the minimum monthly cost of carrying an iPhone below $70, addressing the number one reason people passed on the iPhone. The competitive reaction to such a move would demand would be as value destructive as Verizon Wireless’ introduction of the $99 unlimited plan, which was simply matched by the competition without a meaningful realignment of market share — it would be another example of how industry players have acted diametric to Pareto-optimality.

The implied point of view and resulting strategy is that voice has been commoditized and has become table stakes. Defendable differentiation will come from devices and data. Now that might be true in the longer run, and especially as long as one has the iPhone exclusively. While the exclusive Apple relationship is a pillar of strength for AT&T and a large factor in its continued and future success, AT&T has to be painfully aware that its fortunes are tied to that exclusivity. More than 80% of AT&T’s net adds in Q1 2009 came from the iPhone. While the other carriers have to plan on how to compete in the next few quarters, AT&T has to figure out what success will look like after the Apple exclusivity runs out and it has to live in the world it delivered.

• As of April 2009, Nielsen estimates that there are 6.4 million active iPhone users in the U.S., up from 2.1 million a year prior. The most impactful iPhone announcement this week may be the price reduction of $99 for the 8 GB version: cost has been one factor (in addition to AT&T exclusivity) that’s kept the overall iPhone audience modestly sized.
• 37% watch video on their phone (6x as likely as the typical subscriber)
• The iPhone audience is age-diverse: a device this powerful isn’t just for kids. There are roughly as many iPhone users 55 and older as there are 13-24.

• iPhone users look good to mobile marketers. Forty-percent have household incomes of $100K or more – twice the ratio among all subscribers (19%). That income may also be helpful for current iPhone owners who want to upgrade: in-contract iPhone owners may have to pay an additional $200 to upgrade before their contract expires.

• It’s not just for looks. 98% of iPhone users use the data features of their phone, services that should improve with the enhanced speed promised by the iPhone 3G S.

• 88% use the Internet (making them 4x as likely as the typical subscriber)

• 75% download apps (5x as likely as the typical subscriber)

• 72% used location based services (7x as likely as the typical subscriber)

Apple’s announcement came on the heels of the release of the latest so-called “iPhone killer” the Palm Pre smartphone. However, iPhone buzz continues to dominate the blogosphere.

Today, the Big 4 national carriers are increasingly challenged by regional carriers that exclusively sell unlimited plans. These “All You Can Eat” (AYCE) carriers offer unlimited service in the $40-$50 per month range. Their services lack many of the capabilities of the Big 4’s offerings, but for budget-challenged consumers who don’t travel frequently, they are an attractive option.

The largest AYCE carriers, MetroPCS and Cricket, serve 13 and 78 metropolitan markets, respectively. Boost Mobile, a subsidiary of Sprint, recently launched a similar service nationwide. In total, there are only 12.1m subscribers on AYCE plans in the US or 5% of the total wireless market. However, because the AYCE carriers only provide service in certain markets, the national subscriber numbers don’t tell the real story.

Nielsen measures subscriber counts and market share in each of the top 75 metropolitan areas in the US via its Subscriber Flowshare Metrics service, and tracks growth of AYCE carriers to analyze their long-term impact on the category. One of the most interesting markets is Las Vegas, where both Metro and Cricket launched over a year ago. Boost launched its unlimited service there in January 2009.

Across the U.S., AYCE services still claim a relatively low 6% of total market [chart]. However, AYCE carriers have been gaining subscribers [chart] (positive net additions) for each of the last 12 months while the Big 4 as a group have lost subscribers (negative net additions) for every month except during December’s holiday push.

Why Does It Happen In Vegas?

There are several reasons Las Vegas is an extra attractive market for AYCE carriers. It has been hard-hit by the recession. Its flat topology allows new carriers to build network coverage cost effectively. It is an insular market without any closely adjacent metropolitan areas, making local-only wireless service more attractive.

However, even considering these local factors, subscriber growth in AYCE services in Vegas has been impressive and the message for the Big 4 is cause for concern. Both Cricket and Metro acquired significant amounts of new spectrum aiding their reach. T-Mobile is clearly concerned that what happens in Vegas may not stay in Vegas. The smallest of the Big 4, T-Mobile began offering an Unlimited Loyalty plan that provides unlimited calling for $49.99 to subscribers with longer than 22 months tenure.  Most recently, TracFone has launched its Straight Talk service on Verizon’s network at $30 per month for 1,000 minute, 1,000 text messages and 30 MB data, clearly aimed at the more budget-conscious buyers of the AYCE target audience. This offer is a competitive response from Verizon to increase the pressure on AYCE providers in their existing markets and scorch the earth in their expansion markets.

Nielsen’s Guide To March Madness, tracks a range of consumer and media information surrounding the event including advertising trends and demographic reach of the multi-week event. Ad buys for CBS’s coverage of the NCAA Tournament have risen steadily over the last five years – from $434 million in 2004 to $580 million in 2008 – a surge of almost 34 percent.  Spending for the Final Four Championship game has grown 47 percent over the last five years.  Last year’s final game saw $97.5 million in advertising, with the cost of a 30-second commercial over $1 million.

Over the last five years, General Motors has spent the most on ads with a total of $317 million. Last year, the auto company was the top spender, with $64.7 million in spending.

The automotive category was the top-spending category for each of the last five years.  Last year, automotive was top, followed by financial – investment services, fast food restaurants, wireless phone services and beer.

Scoring With Fans?

Are these advertisers reaching their targets?  According to Scarborough Sports Marketing, a joint venture between Nielsen and Arbitron, the answer is a resounding “yes.”  Viewers and listeners of the tournament are likely to be male, educated and married.  They have higher than average annual household incomes and and a wide range of interests, hobbies and consumer preferences:

An NCAA Fan Is…

• 10 percent more likely to have visited a casino in the last year
• 17 percent more likely own three or more vehicles in their household
• An avid fast food consumer, and is 34 percent more likely than the average adult to have visited a fast food chain 10 or more times in a week
• 33 percent more likely to have consumed any beer in the last month, with Bud Lite, Budweiser and Corona the leading brands in the light domestic,  regular domestic and imported categories.

Download Nielsen’s complete Guide To March Madness

Nokia: the name is synonymous with mobile phone innovation and leadership everywhere in the world but in the US.  Its handsets comprise about 40 percent of the worldwide marketplace. It has not always been this way.  Once the leading brand of phone in the US, Nokia’s share of the market has dropped to about 10 percent.  Brands such as LG, Samsung, Blackberry, Motorola and Apple’s iPhone tend to lead in market share and mindshare respectively.

But cell phones have evolved a great deal since Nokia was a major player in the U.S.  It’s a rare person these days whose cell phone is used only for calls; texts, e-mails, calendars, digital music players, cameras – the list of applications is practically endless – are standard now on most handsets.

One way Nokia hopes to get its phones in more American hands is with the launch of the 5800 Music Xpress handset, which is rumored to include its “Comes With Music” (CWM) service sometime this year.  The 5800 Xpress Music handset is selling for between $350 and $399, and features a touch screen, 3G speed and a host of other features similar to the iPhone.

Services such as CWM are reshaping the music landscape. The music industry has largely concluded that it will not be able to be profitable at the levels it deems necessary with a la carte song purchases. The only viable solution, which also conveniently will solve other issues, is to persuade music lovers to purchase an unlimited subscription to the music.  CWM enables a subscriber to download an “unlimited” number of songs from its vast library to the handset (as well as one PC) and keep the songs after the subscription expires. Based on an analysis of the service in the U.K., where it launched in October, CWM costs about £80 per year (or about $113 at 1.42 dollars to the pound) compared to an identical phone without the CWM service. Compare this to other similar services already available in the U.S.:

• Rhapsody — Approximately $180 with Verizon Wireless ($15 per month); handset free
• Napster – AT&T ($7.49 per month for 5 song downloads; $1.99 song thereafter)

And of course, iTunes offers subscribers songs for 99 cents each.

In the U.K., where the handsets are contrary to the folk lore in the United States, often subsidized by carriers, oftentimes given free with a one-year or longer contract, “initial sales had been okay, but not earth shattering” according to an unnamed source quoted in the Financial Times.

While the pricing for the service appears competitive, Nokia faces two huge challenges: the cost of the handset in a market where consumers are not used to pay anything close to the true value and cost of the phone and the potential lack of a carrier agreement that would enable it to subsidize those costs.  Of the major U.S. carriers, T-Mobile is the most likely to partner with Nokia on CWM, given AT&T’s alliances with Apple and Napster and Verizon’s partnership with Rhapsody.  The T-Mobile partnership would be a win-win for both companies; T-Mobile would be able to provide another innovative service to its younger customer base and Nokia would get major US carrier distribution.

Greenville, SC and Greensboro, NC maintained their spots as the top DMAs for this year’s race, scoring 21.2 and 19.9 ratings, respectively. Dayton, OH surged to the #3 spot with an 18.0 rating.

 2009 DAYTONA 500: TOP-10 LOCAL DMA RATINGS

At its peak (5:48pm ET), the race scored a 10.5 HH rating, with 18.1 million viewers tuning in. According to Repucom International, which provides exclusive integration of Nielsen data in measuring brand exposure in sports telecasts, those 18.1 million viewers were exposed to the following brands within the next 30 seconds: AAA, Red Bull, Red Bull Cola, Toyota, Sprint, Sunoco, 3M, Fedex, Goodyear, Taco Bell, EA Sports, Dodge, and Chevrolet.

As a sport tied so directly to sponsorships and the struggling auto industry, NASCAR offered a steady dose of positive exposure for American car companies. According to Repucom, Chevrolet and Ford had the most brand exposures during FOX’s telecast, combining for 419 exposures and a total of almost 30 minutes. AT&T had the third-most exposure time at almost 14 minutes. More extraordinary, those 14 minutes were an accumulation of just 36 exposures – meaning AT&T enjoyed an impressive average of 23 seconds per exposure.

2009 DAYTONA 500: TOP-10 BRAND EXPOSURES

Overall ad spending dropped 0.6% in the first nine months of 2008, compared to the same time period in 2007. 

The drop came despite overall growth in TV advertising.  Four of the top-five growing media were TV-based.

The top three ad spending industries — Automotive (-8%), Pharmaceutical (-4%), and Local Auto Dealerships (-3%) — all decreased their advertising, compared to last year.  The remaining top ten industries either showed increased or flat ad spending.  Direct Response Products, which increased ad spending by 27% in 2008, showed the largest growth.

During the first three quarters of 2008, Procter & Gamble continued to outspend all other advertisers, despite reducing its ad spending by 7% — to $2.3 billion — vs. the same time period last year.  General Motors and AT&T were the second and third largest advertisers, with $1.7 billion and $1.3 billion in ad spending, respectively.

View the press release.

Read coverage of Nielsen’s findings by the Associated Press and in Broadcasting & Cable, Multichannel News, The Hollywood Reporter, Adweek, and Media Life.