International Comparison: The Handset Replacement Cycle

International Comparison: The Handset Replacement Cycle

Roger Entner Analyst and Founder 617.823.3363 Roger.Entner@ReconAnalytics.com

June 23, 2011

www.reconanalytics.com | The Handset Replacement Cycle 2

International Comparison
Myths, outdated information, and sometimes plainly misinformed opinions about the U.S. mobile ecosystem are plentiful Mobile Future and Recon Analytics are committed to providing facts and solid analysis about the U.S. mobile ecosystem and how it compares to other countries in the world First in a series of reports and webinars, we are looking at the handset replacement cycle and its impact on innovation

www.reconanalytics.com | The Handset Replacement Cycle

A Diverse Selection of Countries for Comparison

Brazil Canada Finland France Germany India Israel Italy Japan Korea Mexico South Africa United Kingdom United States South Americas largest mobile market A similar but different neighbor Highly developed Scandinavian market First market to outlaw handset exclusivity Europes largest wireless market Most rapidly growing competitive market Home of many wireless innovators Large, affluent market that is highly prepaid Leading wireless Galapagos market Home of some of the largest handset makers Rapidly growing neighbor to the South Africas most developed market Developed data market similar to the U.S. Most advanced data market in the world
4

www.reconanalytics.com | The Handset Replacement Cycle

Competitive Options
Operators have various options to compete against each other Service price voice and data Technological innovation Coverage Quality of service Customer Service Handset portfolio Handset subsidization

www.reconanalytics.com | The Handset Replacement Cycle

The Handset Replacement Cycle

The rate at which existing wireless customers are replacing their current handset: Does not take into account the addition of new handsets Is a critical measure because it: Determines how engaged wireless customers are with mobile services and devices Establishes how competitive a market is through the rapid adoption of new technology Ascertains how quickly new and innovative hardware and software are available to customers and thereby foster further usage and innovation

www.reconanalytics.com | The Handset Replacement Cycle

There are Significant Differences in the Length of the Handset Replacement Cycle
Countries with a rapid Handset Replacement Cycle in months
60 50 40 200 30 150 20 100 10 0 2007 Canada Mexico United States 2008 France Japan 2009 2010 Korea United Kingdom 50 0 2007 Brazil India South Africa 2008 Finland Israel 2009 2010 Germany Italy 350 300 250

Countries with a slower Handset Replacement Cycle in months

www.reconanalytics.com | The Handset Replacement Cycle

Rapid Handset Replacement Cycle Comparison with Key Drivers

Prepaid Income in 2010 Subscriber PPP$ Brazil Canada Finland France Germany India Israel Italy Japan Korea Mexico South Africa United Kingdom United States 80.8 33 74.5 30.8 45.7 93.6 76.5 51.5 46.3 26.9 39.6 38.2 22.4 21.7 80% 20% 14% 30% 55% 96% 53% 87% 1% 0% 86% 80% 54% 22% $11,239 $39,057 $34,585 $34,077 $36,033 $3,339 $29,531 $29,392 $33,805 $29,836 $14,430 $10,498 $34,920 $47,284

Handset replacement cycle varies greatly by country Americans change their handset every 21.7 months or in less than 2 years Indians change their handset every 93.6 months or in slightly less than 9 years Prepaid subscription rates vary from 0% in Korea to 96% in India Incomes vary from $3,339 in India to $47,284 in the United States measured in PPP$
8

www.reconanalytics.com | The Handset Replacement Cycle

Handset Subsidization: The iPhone Case Study

2010 Brazil Canada Finland France Germany India Israel Italy Japan Korea Mexico 80.8 33.0 74.5 30.8 45.7 93.6 76.5 51.5 46.3 26.9 39.6 38.2 South Africa United Kingdom United States Handset Subsidy $67 profit $529 $84 $379 $473 n/a n/a $351 $556 $499 Income in PPP$ $11,239 $39,057 $34,585 $34,077 $36,033 $3,339 $29,531 $29,392 $33,805 $29,836

iPhones are a great handset subsidization case study Small number of SKUs allow reliable ASP calculation, which in turn allows handset subsidy calculation Interesting trends appear
Less affluent countries treat iPhone and often phones in general as luxury products and price accordingly because subsidization cannot be recouped through voice and data plans More affluent countries treat the iPhone and other devices as every day products and price the device lower due to widespread willingness and financial ability to use voice and data plans
9

$303 profit $14,430 $1,309 profit $10,498

22.4 21.7

$660 $460

$34,920 $47,284

www.reconanalytics.com | The Handset Replacement Cycle

Handset Subsidies Drive Handset Replacement Cycle

www.reconanalytics.com | The Handset Replacement Cycle

10

Handset Subsidization Benefits

Through handset subsidies consumers enjoy a greater value for money experience than when paying full price Empirical evidence shows that consumers prefer subsidized handsets with contracts over full-price devices without contracts
1st Generation versus 2nd Generation iPhone is a good example

Early termination fees are no significant impediment to replacing handsets

Common contract in the U.S.: 2 years handset replacement cycle 21.7 months Common contract in Canada: 3 years handset replacement cycle 33 months

Through a quicker handset replacement cycle, consumers are able to take advantage of new capabilities quicker, such as:
Higher speed networks Larger screens Faster processors Better cameras More storage
www.reconanalytics.com | The Handset Replacement Cycle 11

Handset Subsidization Drives Innovation

Innovation happens in new products and services Innovation really takes off when there is a large market that is constantly willing to try new handsets and take advantage of new products and services The more companies get rewarded through sales of their new products the more likely the are to innovate and the more likely it is for new companies to enter the market. New devices can take advantage of the newest network features and speeds that allow developers to realize new ideas and bring innovation to consumers This is a virtuous cycle where all participants benefit consumers, device manufacturers, software developers, service providers, operators, and the government

www.reconanalytics.com | The Handset Replacement Cycle

12

Tangible Consumer Benefits

Through rapid innovation caused by the fast handset replacement cycle in the United States, mobile devices are now Handheld computers with a constant connection to the internet More powerful than what NASA used to bring men to the moon and back Using built-in cameras that are more powerful than $10,000 cameras 10 years ago Through the fastest handset replacement rate in the world, the United States has become a hot bed of wireless innovation and Leads the world in: the adoption of smart phones overall data consumption mobile application usage Last but not least: a multi-billion dollar industry

www.reconanalytics.com | The Handset Replacement Cycle

13

Roger Entner Analyst and Founder, Recon Analytics 617.823.3363 Roger.Entner@ReconAnalytics.com

Download the pdf report: www.mobilefuture.org/page/handset-replacement-cycle.pdf

14