The Saturation Myth: Why US will grow far past 100% cellphone penetration

I am so annoyed when I see some 'expert' publish their opinion on something that is proven to be a myth. Something that even th emost rudimentary reserach and discovery into the industry would reveal that all major analysts agree - it is a myth. So today once again, I spotted a news story - coming from the USA (I will not link to that clueless analyst house's website as they do not deserve any attention for this type of incompetence). But yes, the point is, that you still do read, from time to time (luckily ever less often) that the US cellular industrym(or perhaps Canada or some other country) is nearing the 100% level and thus it must be 'nearing saturation' or 'approaching an end to growth' or words to that effect. It sounds very reasonable.

Paging Mythbusters. Imagine rock n roll theme of Mythbusters playing, tonight's episode - lets do mobile telecoms myths... coool. 

That is the core of a good myth, a long-lasting myth. That it sounds reasonable. That there seems to be some internal logic to it. That we feel intuitively that it must be correct. But with hindsight, after facts come in, myths are ridiculous. There was a time scientists believed that lung cancer was not caused by cigarettes, they thought it was caused by the asphalt pagement on new highways. Aerophysicists felt that the sound barrier could not be penetrated because early jets attempting it crashed and many test pilots died. There was a time learned people thought that the passing of a steam engine train would turn cows' milk from fresh to sour and yes, several hundred years ago people thought the planet was flat. Funny these things, myths, when we look at them with hindsight.

ABSOLUTE CEILING

So what of the 100% saturation myth for mobile phones. There is very sound logic to thinking we can't have phones exceed the human population per capita. I know this myth inside-out as I was literally the world's first person to examine the first statistics to prove the myth wrong when still working for Elisa Corporation (Helsinki Telephone, Finnet and Radiolinja among our many units. Radionlinja is the world's first GSM carrier/operator also being thus the world's first modern digital 2G network. At Elisa I developed the world's first fixed-mobile service bundle and thus was sitting on the numbers exactly when Finland was leading the world in mobile phone penetration rates.. So I saw these numbers even before my bosses did at Elisa haha)

But yes, there are two parts to the logic in the saturation myth. The first part is, that there are parts of the population who literally cannot use a mobile phone. Mostly it is the very young. For Americans they probably still think pre-teens don't need a cellphone but in more advanced countries in Europe and advanced parts of Asia we know 9, 8, 7 year olds will want cellphones - and will get them - and now the first-time mobile customers tend to be 7 and 6 year olds in the most advanced markets.

But that doesn't matter. The point is that a 2 year old or 3 year old who doesn't know numbers enough to 'dial' a phone, will most likely not get a cellphone. And a 1 year old who can't even hold a phone - wont' need a phone. So yes, in the low end of the age pyramid, whether the limit comes at 11 years of age, or 8 years or 6 years or 4 years, there is a point where below that age, there is literally no market for any kind of cellphones.

Makes sense. Cannot be everybody. Then we get the very elderly. Not the 60 year olds or 70 year olds, but the 90 year olds and older. Some are still sharp and bright and active, but others are weak and suffer from memory loss like Altzheimers and have lost motor skills so they can't dial a phone or have lost hearing or speech ability and can't really use any kind of phone anymore. Before that happens, as the elderly grow older, if they already have a fixed landline phone - and know still how to use it, but are way too feeble to say drive a car (and as they don't leave their home much, don't need a 'mobile' phone). Makes sense. It doesn't really matter if this is half of those over the age of 90 or a quarter over the age of 70 or what level - there is definitely an increasing proportion of the very elderly who do not 'need' a cellphone.

All this makes very much sense. I remember in the mid 1990s there were very esteemed and reputable forecasters with many a mathematical formula that predicted with the best of logic, the exact 'ceiling' to how far mobile phones could theoretically supplant the fixed landline penetration rate.

WHEN FACTS DON'T FIT THE THEORY

Luckily I am not a slave to dogma. I trust the facts. And numbers are my buddies. So we saw for the first time in 1998 in Finland, that the facts did not fit those nice theories. The penetration rate of mobile had started to exceed landline penetration rates (something that current theory suggested was impossible). As we were literally the first country to see it, and as it was part of my 'domain' with my fixed-mobile service bundle, I of course wanted to understand why. Could it be some accounting annomaly or perhaps something very peculiar about Finland or out technology, our networks, etc. And I studied.

And sure enough, we found out that families who had one fixed landline phone - shared by mom and dad and sonny and sis - were now getting two mobile phones - one for mom, one for dad - and then three mobile phones - one for sonny - and then four - another for sis. And astonishingly (again Finland was first to find this) some families were starting to abandon the fixed landline althogether. What we learned was that it was indeed possible for mobile phone penetration rates to exceed fixed landline penetrations - and then came the study of where is the 'ceiling' if the landline penetration rate level was not a ceiling after all.

And Finland spotted the other big trend that changed everything - the multiple subscription. We saw that initially with the tech related industries and the young employed white collar workers - some young adults started to have two phones. The first cases were simple and easy - you might get a good white collar job, middle manager, which included a phone benefit (a nice benefit at the time, an employee phone). Then in came the tax-man, wait - its a benefit - it can be used in private use - it needs to be taxed! (trust European tax authorities to figure out how to tax anything)

So, you had the choice - you could keep your phone at the office, not use it for private use, and not pay tax on it (but get a private mobile phone). Or you could use the company phone also as your private phone - and then pay tax on the benefit.

As the new services came along - paying for a coca cola at the vending machine, paying for parking, movie tickets, McDonald's hamburgers etc via the phone - suddenly employers also started to restrict what kind of services you were allowed to do on the company phone. Suddenly you wanted a private phone so you could do whatever you wanted on it. And we started to see more and more users - usually young employed adults - with two phones. A company phone and a private phone. And as Finland telecoms service costs kept coming down and phones themselves became ever cheaper, soon many young adults were getting second phones.

Fast forward to 2010 and the USA today. It is no secret today, that many employed white collar workers who have a Blackberry from work, can have a second private phone like an iPhone for personal use. It is no secret that many US homes have abandoned the fixed landline altogether. And the US cellphone penetration rate is already at 91%. All of those issue that we discovered in Finland over a dozen years ago (Finland was at 91% penetration rate back in 2003), have now also happened universally, even in the USA. Most importantly, it is no longer strange for a young employed adult to have two phones. So the 'absolute limit' of one person equals a maximum of one cellphone - no longer holds true.

Now its a matter, of will 'multiple cellphone subscriptions' actuall exceed the very young and very old who won't get any phones. If that happens, then the supposed 100% barrier would indeed be a myth.

PREPAID ACCOUNTS

So, in the 1990s Finland used to lead all cellphone penetration statistics. Then at the end of the decade, Italy started to challenge Finland and then passed Finland. Today Italy's penetration rate is over 150% when Finland's is 'only' over 130%. We had another phenomenon that was invented somewhat simultaneously in Portugal and Italy - for taxation reasons - the prepaid cellphone account. Rather than register for a 2 year contract and get a monthly billl to your home address, just buy a 'SIM card' with prepaid minutes on it, pop that into your GSM phone, and off you go. No credit checks, no address requirements or bank accounts etc. Pay cash at the store, buy a SIM card and get an unlocked GSM phone and you are now able to place and receive cellphone calls (and send messages, buy ringtones, surf the internet, etc). And if you run out of minutes, go to the nearby convenience store and buy a top-up to your account.. Easy.

The prepaid account created a rapid expansion of the total subscriber base. And now very different dynamics of telecoms competition came to play. If you found that the network coverage was bad at your home but you still had a year to go on the contract account, you could go get a pre-paid (pay-as-you-go) SIM card on a rival network who had good coverage near your home. If you had some family or friends on a rival network, you could get a SIM card on that network and swap networks depending on who you talked with. The networks started to use this as a competitive gimmick, so one network gave a good deal on voice minutes during the day, another a better deal during the evenings; one network gave x number of free text messages, the other gave lower cost incremental text messages, etc. If you were very careful about your choices - and as SIM cards typically don't cost anything (their initial price includes a nominal amount of minutes or messages to match the face value of the card) - why not get a couple of separate accounts with the rival networks.

Now we saw the split of 'one cellphone account equals one phone' - as some less affluent customers could own one cheap GSM phone but then have 4 separate SIM cards to each rival network. One customer, four accounts, yet only one phone. Soon the phenomenon spread and new accounts could be set up for example for sole proprietors to keep work related telecoms and private telecoms separate - even having two SIM cards with the same network (I've done that haha). All this was before we got more exotic digital device like 3G datacards, dongles and netbooks (and the iPad 3G) which also use SIM cards ie cellphone subscriptions but will be for additional devices, not replacing the primary cellphone.

NOW THE NUMBERS

So that was the theory part. It was a perfectly logical assumption that was totally reasonable, thinking we can't have more than x number of cellphones or cellphone subscriptions. But the facts came in and we studied and found that actually something else has happened. The saturation ceiling was indeed a myth.

So lets look at the numbers. And we need a uniform number for all countries by an independent source. The ITU is that body (International Telecommunication Union) where for example US government via the FCC (Federal Communciations Commission) and the US cellular industry trade and standardization body CTIA Cellular Telecoms Industry Association are members. The latest ITU numbers for all countries that are available are for the full year 2008 (in the latest World Bank statistics for example). So, lets look at end of 2008, about 16 months ago. What was the score. The US cellular phone penetration rate was 89%. Sounds impressive? A cellphone for almost every 9 out of 10 Americans (oh, and Canada was at 66%). Very good?

Actually no. That 89% penetration rate per capita ranks the USA as... ...84th among all countries. Yes, not first, not fifth, not tenth, not even 50th. 84th. So what kind of levels do we see? Just ahead of the USA we find countries like Jordan, Thailand, South Africa, Colombia, France and Algeria. Yes, mostly 'Developing World' countries with slightly better cellphone penetration rates than the USA. (Obviously I am now excluding the very tiny nations like St Kittis or Luxemburg or Bermuda etc. Lets stick to 'real' countries with populations in the millions..)

If we look at those who have recently already passed the supposed 100% ceiling in penetration rates, we find Jamaica, Malaysia, Australia, Uruguay and New Zealand. These sit in the 101% - 109% range. Lets move further. If the USA had 89% penetration rate, if we grow that number by a third - we get to 119%. Lets call it 120%. Any countries at this level? Yes, Ukraine, Ireland, Hungary, Israel, Greece, Netherlands, UK, Germany and Finland. Yes, very literally and concretely, such major countries as Great Britain and Germany have one third MORE cellphone subscriptions per capita than the USA (effective end of year 2008 obviously). If the UK and Germany (and Israel, Greece, Ukraine, Holland etc) can grow one third beyond 90%, then yes, obviously its very likely that the USA will not stop at 100%..

But thats actually not the limit. Do we find countries with 50% more cellphone subscribers than the USA? So do we find countries with over 134% ? Sure we do.. Bulgaria is at 138%, Portugal at 140%, Russia - yes, crippled former Soviet Union 'economic basket case' Russia yes, has more than 50% better mobile phone penetration rate than the USA - Russia was at 141%. Saudi Arabia at 146%, Lithuania at 150%, and Italy at 151%. Here in my home town of Hong Kong we were at 166% at the end of 2008 (and are still growing now in 2010).

Were there any countries with twice the penetration rate of the USA? Funny you should ask. Bahrain, granted a modest sized Arabian Peninsula wealthy sultanate, with barely one million inhabitants yes, but its cellphone penetration rate was 186%. More than double that of the USA. Estonia goes even better. Another small nation, the Northern European cousins to Finland with a population of yes only 1.3 million but their cellphone penetration rate was at 188%. And even that is not the world leaders. The world's highest per-capita cellphone penetration rate in 2008 was not the 'USA', it was the 'UAE' (United Arab Emirates, ie Dubai, Abu Dhabi etc). While not a giant country by population, its considerably bigger than Bahrain and Estonia. UAE population is 6 million so this is very legitimately a proper country haha. Oh, sorry, what was their cellphone penetration rate in 2008? Try 209%. Yes, 2.3 times bigger penetration rate than the USA.

IS A STANDARD GLOBAL PATTERN

There is absolutely no doubt by any of the credible experts of the cellphone industry - including all public statements by the CTIA itself for several years now, that the USA (and Canada) will follow on the same pattern as the rest of the advanced world in cellphones. The consensus among US cellphone industry forecasters has formed years ago - years ago - that the US penetration rate will grow past 100%.

There are 'accelerators' which cause some countries to surge ahead of others. GSM standard with its open SIM card system is more conducive to multiple subscriptions than the CDMA system which normally does not include a SIM card (but in some markets like South Korea for example, they have instituted SIM cards in CDMA as well). As the USA and much of North and South America used to be CDMA dominated, it was not moving as rapidly in the multiple subscriptions as the rest of the world. As Latin America switched to mostly GSM standards (And its migration path including WCDMA and LTE) before North America did, Latin America surged ahead of North America.

A second factor is the prepaid subscription. The USA is still more than 80% contract account, so less than 20% of US cellphone accounts are on the prepaid basis. The world is already almost at 70% prepaid. That is another accellerator. But we are seeing the gradual transition of the US to more prepaid. And then of course is the multiple phone. That was a near universal trend that was delayed in the USA until the iPhone arrived. Today it is not at all strange for some US consumers to want two phones. Half of Europeans with a cellphone actually have two phones.

The US currently has 285 million cellphone subcribers ie 91% penetration rate at the end of 2009, according to the latest numbers by the CTIA. The growth is not about to stop. There is a global pattern to the penetration rate and until numbers grow past 130% they have not turned into decline. Now, lets be very cautious about this. Lets take a fair comparison sample of industrialized major countries. Lets take Austria, Czech Republic, Germany, Greece, Hong Kong, Hungary, Italy. Netherlands, Portugal and the UK (Their combined population is about 275 million - a little less than the USA). All of these countries had passed 120% penetration rates by 2008. Lets just assume the US will reach that level. Why is this relevant?

WHY DO WE CARE?

If its true, that the USA will eventually match the cellphone industry adoption rates in major industrialized rival countries like Germany, Italy, and the UK - and reach just the bottom of their level ie 120%, growing from the 91% it is today - that means that there is still solid growth in the cellphone industry in the USA of.... 91 million new cellphone subscribers to add. Thats more than two full Californias or more than three complete states of Texas or more than four New York States to add. Who says the US is anywhere near saturation in cellphones?

And thats assuming the US reaches the bottom level of where its big rival nations were in 2008. Italy at the top end was not at 120% like Hungary or Greece, Italy was at 151%. If the USA were to grow to Italian levels then it means they need to add another ...188 million new cellphone subscribers (!!!). You see now why I am so frustrated when some clueless 'expert' suggests the USA is 'near saturation' today.

PS - if you'd like to have all the FACTS of the mobile industry - 2 pages of just all the numbers and stats fresh for 2010 - I have my 'Cheat Sheet' 2 page pdf statistics collection that I am happy to email to you. Just send me an email to tomi at tomiahonen dot com asking for it, and I will send the Cheat Sheet by return email. And don't worry, I won't be spamming you with any newsletters (I don't have time for one) and of course I won't sell your address or share it with anyone.

Comments

[Reda]

Interest and pleasant read, as usual. one thing you forgot to mention though is the growth curve, which is not linear (I think ;-) ) and it does affect the speed of growth you experience, the results you get compared to your efforts (e.g. by copying other business models with a similar proposition), etc.

[Marat]

Tomi, I partially agree with you. But I don't think we'll see "an emerging market" type of penetration in US. Main points - it's NOT prepaid based, and won't be for the foreseeable future. Double subscriptions will be rare and few in the US due to its culture and mobile tariff structure (keep in mind that it's NOT the calling party pays system like in Europe where you get free incoming calls, you pay the same whether to your network or off). But things like iPad, netbooks or in-car navigators will definitely drive the market for new subscriptions for mobile data services.

[Tomi T Ahonen]

Hi Reda and Marat

Reda - good point, yes the growth curve of subscribers is generally an S-shaped curve (as is in most technology adoption rates) but in mobile phones we have already observed several such points of discontinuity that distort the shape - as I mentioned, multiple subscriptions, second phones, prepaid, etc. But yes, it also means that we should be seeing a slowing down of the adoption in the most advanced markets before the growth ends. We have not seen that yet.

Marat - I appreciate your comments and I am sure they are well considered. The facts, however, prove otherwise. Already today, the majority of new subscribers in the USA are prepaid, not postpaid customers (according to the CTIA) and there is a rapidly growing proportion of second phones. I remember seeing the number of 11% second phones (but can't find that stat right now, I vaguely recall it was a CTIA number). Very definitely at 285 million mobile subscribers in the USA, it does mean there is an increasing proportion of multiple subscriptions - and very specifically, as most of those are not SIM cards with prepaid accounts - that is more than in many other countries - that a second subscription means also a second phone.

Trust me Marat, the pattern is exactly the same as the rest of the Industrialized World, only with some lagging factors - the USA will follow the penetration rates of Europe and advanced Asia and Australia-New Zealand and all the phenomena will replicate there. Please please do give me this benefit of the doubt, and just monitor the data. The US market follows like clock-work that of Europe, in EVERY way, in 2G, in 3G, in smartphones, in SMS, in mobile advertising, in EVERYTYHING including subscriptions, penetration rate and multiple phone ownership. Since you read this blog, please Marat, don't accept the 'conventional wisdom' that the USA is somehow going to behave differently. EVERY forecast I have made about the US cellular industry for which the truth can be determined - EVERY ONE - has proven true. (Its really easy to forecast lagging markets if you have some trusted early adopter markets to forecast from haha).

But we agree that the iPad and netbooks, telematics etc will accelerate the mobile subscriber penetration rates. The CTIA said that 4% of all active cellular subscriptions were for datacards to laptops etc. (In Sweden the ratio is 20% already)

Thank you both for writing

Tomi Ahonen :-)

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[Polly]

Please please do give me this benefit of the doubt, and just monitor the data. The US market follows like clock-work that of Europe, in EVERY way, in 2G, in 3G, in smartphones, in SMS, in mobile advertising, in EVERYTYHING including subscriptions, penetration rate and multiple phone ownership.

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it is a myth. So today once again, I spotted a news story - coming from the USA (I will not link to that clueless analyst house's website as they

[doğal taş]

m so annoyed when I see some 'expert' publish their opinion on something that is proven to be a myth. Something that even th emost rudim

[gelir vergisi]

A company phone and a private phone. And as Finland telecoms service costs kept coming down and phones themselves became ever cheaper, soon many young adults were getting

[doğal taş]

Its still the same forecast and we cannot know about the possible peak of iPhone annual market share

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I spotted a news story - coming from the USA (I will not link to that clueless analyst house's website as they do not deserve any a

[kimya]

We will not know until the earliest in January 2011 if I was right, and latest January 2012. The forecast period has not changed

[devlet vergisi]

level and thus it must be 'nearing saturation' or 'approaching an end to growth' or words to that effect. It sounds very reasonabl

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he point is, that you still do read, from time to time (luckily ever less that the US cellular industrym(or perhaps Canada or some other country) is nearing the 100% level and thus it must be 'nearing saturation' or 'approaching an end to growth' or words to that effect. It sounds very

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Meanwhile, I am totally satisfied with your kind response here, and please consider all your commenting privileges maintained and looking forward to many more discussions with you.