The anecdotes documenting the love affair between teenagers and texting are countless. Many parents can attest that their offspring text rather than talk, even when they sit next to each other in the back of the car. Their children text in the morning before they brush their teeth and continue late into the night with the last text messages, also called SMS, sneaked in under the covers right before they close their eyes to sleep. Until now, there has been very little firm data available about how pervasive texting has actually become among the under-aged.

Source: Nielsen CVM, Q3 2009

Nielsen analyzes more than 40,000 mobile bills every month to determine what consumers actually are spending their money on. The results are staggering: American teenagers are using 3,146 messages a month, which translates into more than 10 messages every hour of the month that they are not sleeping or in school. Even the under 12 segment are sending 1,146 messages per month, which is almost four text messages per waking hour that they are not at school.

While the 13-17 year old age bracket is already highly saturated, the last holiday season was good to the under 12 segment when it came to text messaging. A full 8 percent increase in SMS usage was measured combined with a near doubling in text message volume for that segment in the following quarter (Christmas, Hanukkah, and Kwanzaa are late in December, so usage increases will be recorded in Q1).

There has been a lot of discussion regarding the cost of texting, mainly driven by the increasing individual per message price. Looking at the same bill panel we can see that only a very small percentage of people who text message are doing so on a pay-as-you-go basis at the 20 cent per message rate with the vast majority of users subscribing to plans. When we actually incorporate the effect that the significant uptake of messaging bundles has on the actual price that customers are paying for each text message, we find that wireless customers are actually paying only 1 penny per message.

Source: Nielsen CVM, Q3 2009

The text messaging market in the United States is very similar to the newspaper or magazine market. For example, the Wall Street Journal’s newsstand price is $2, but if you subscribe to the Journal, it is $119 per year–a whopping 80 percent discount. For People Magazine, the cover price is $3.99 while the annual subscription is 47 percent off at only $2.09 an issue, a great deal if you are subscribing. For text messaging, the discount is more than 95 percent, due to the heavy prevalence of large texting bundles. What is even more interesting is that from first quarter 2008 to third quarter 2009, the effective price of a text message has decreased by 47 percent.

After all the negative publicity that text messaging has received, a look at the facts is showing quite a different picture. When one takes into account usage, text messaging is very affordable and cheaper than ever before, especially when compared to various European countries where texting has been widespread for years. While U.S. carriers offer unlimited texting for between $10 and $20 per month (if it is not already bundled into the plan), not every country in Europe is as competitive as the United States. For example, Germany, the largest European market, wireless providers charge about €25 for between 300 text messages and 30 MMS and up to 3000 text messages per month.

Overall, text message usage is also expected to grow as the heavy text messaging population ages and entices the older generations to text with them in order to stay in contact with them as any parent of a teenager can probably attest to. The average text message number has increased every year, but the huge room for growth that is still remaining has been underestimated given the penchant for texting among the 17 and under segment.

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.