Greetings from snowy Nashville (where I was a technology speaker at the 2020 Country Radio Seminar) and Charlotte, NC. This has been a very busy week for all of us (our Mobile-World-Congress-canceled schedules were quickly filled), and there is a buzz in the telecom industry that I have not heard for some time.
A quick thank you for the dozens of comments on last week’s column. We had our strongest week since the Sunday Brief was relaunched last July, and the depth of questions were substantial. I think I addressed everyone’s questions and am reposting one response as a part of a larger follow-up column this week.
Device Transition from Sprint/ Boost to New T-Mobile (Better than Expected)
Several of you asked that we talk about device compatibility from Boost and Sprint to the new T-Mobile (referred to going forward as just Sprint). As we hinted in the column last week, there’s not as much transition for smartphone customers as existed in the Metro PCS acquisition. The chart below (and avail as a PDF here: device compatibility) summarizes 50+ devices using the categories “Easy,” “Firmware Update,” and “Avoid.”
The best scenario for an existing Sprint customer is to have a device that works well on the existing Sprint and T-Mobile networks – in industry jargon, a “Universal” or “U SKU” device. Ideally, this device would also have T-Mobile’s low-band LTE spectrum available as well (LTE Band 71). All of the devices shown in the chart carry T-Mobile’s 700 MHz spectrum (LTE Band 12), but in-home and rural coverage will significantly improve if the customer has LTE Band 71.
On top of this, all Sprint smartphones sold since 2013 (and perhaps earlier – we only went back seven years) have the Clearwire (2.5 GHz) band (LTE Band 41) which, as we discussed in last week’s column, is going to be more robustly deployed by New T-Mobile in the coming months.
Here’s a summary of the rows in the above chart:
Best case: Sprint device has LTE Bands 2, 4, 12, 41, 66 and 71 (top of page)
Good case: Sprint device has LTE Bands 2, 4, 12, 41, and 66
Base case: Sprint device has LTE Bands 2, 4, 12, and 41
Apple: Good news for current Sprint Apple customers. Starting with the iPhone XS/XR introduction in 2018, all devices were compatible across all US carriers. So the iPhone XS/XR/11/11Pro/11 Pro Max are easy conversions to New T-Mobile (in fact, new activations are likely roaming on some T-Mobile bands already – expect to see roaming changes to incorporate more T-Mobile low-band networks in the near future). All of the above models would be classified as “Best case” using the designation above.
All is not lost, however, for earlier Apple models. The iPhone 8/ 8 Plus and iPhone X models that worked on Sprint also had all of the T-Mobile networks except for the 600 MHz spectrum (Band 71). So iPhone 8 and iPhone X will work really well in the metro areas (and will use T-Mobile’s 700 MHz/ LTE Band 12 if existing device signal degrades and will have T-Mobile’s AWS spectrum for additional data throughput).
It’s important to note that even iPhone SE, 6S/6S Plus and 7/ 7 Plus models that worked on Sprint should have a very smooth transition to the New T-Mobile network. (And, existing T-Mobile customers also have the benefit of having the Clearwire spectrum already on their devices since the iPhone 6S, so when New T-Mobile augments their spectrum, device performance will improve).
Sprint has not announced what percentage of their base is using Apple smartphones, but, if other carriers are any indicator, it’s in the 4X+% range. For a little less than half of all Sprint retail customers (and probably 3X% on Boost), the transition should be a breeze.
Samsung Galaxy: Most Samsung devices made after 2018 (Galaxy S9 series) were built on a single platform (for the S9, it’s the SM-G960U model). These devices can be upgraded from Sprint to T-Mobile with a SIM card change and a firmware upgrade. So the Samsung Galaxy S9, S10, Note 8, Note 9 and Note 10 series (USA Versions, includes all variants) should be able to be upgraded to include the T-Mobile radios and bands. While the S8 (and Note 8) series, like the iPhone 8, does not have T-Mobile’s lowest-band spectrum (600 MHz), the Galaxy S9 (Note 9), S10 (Note 10), and S20 line-ups do (and a new Samsung Galaxy S9 is now $399.99 on Samsung’s site before trade-in value. Note 9 is also attractively priced at $549.99).
Samsung Budget Android: Currently, Sprint retail carries one Samsung budget SKU, the Galaxy A20 (note: they previously carried the Galaxy A10e model and the builds/conclusions are the same for the A10 and A20 series). This version has both Band 12 and Band 71 and should be easily transitioned to New T-Mobile. According to the Samsung website, however, this SKU does not have LTE Band 66 so there may be pockets where download improvements are limited. Also, the Unlocked version of the device (popular at places like Best Buy and B&H) does not have LTE Band 71 (but has LTE Band 66 – confusing). While we hope we are incorrect, it does not appear that an Unlocked version of the Galaxy A20 will be able to access T-Mobile’s 600 MHz spectrum. (Note: Owners of the T-Mobile variant of the Galaxy A20 will be able to access Sprint’s LTE Band 41 out of the gate).
Boost still carries the A10e, A20 and A6 models as well as the low-budget J3 Achieve and the J7 Refine. The A6, J3 Achieve, and J7 Refine all have T-Mobile’s legacy bands (including Band 12) but do not have LTE Band 66 or LTE Band 71.
The bottom line for Samsung Budget comes down to these two important questions:
- Did the device start on Sprint (is it the Sprint version as opposed to an Unlocked version)?
- Is the Device two years old (2018 version) or newer?
If the answer to these questions are both “yes” then the device’s performance on the New T-Mobile will be improved and no upgrade will be needed (assuming this is not a power user). If, for example, the device is the 2017 version of the J3, it’s probably worth looking into an upgrade.
Samsung (Galaxy + Budget) is likely 35-40% of the Sprint retail base and 30% of the Boost base. For ~ 75% of the Sprint retail base and ~65% of the Boost base, a firmware upgrade should be the biggest change. And, with some changes to how roaming settings are configured, improvements could show up very quickly after close. As we have noted previously, this is greatly needed in states like Florida where Sprint’s network ranking is a distant fourth.
LG: Like Samsung, there’s a compatibility split between the premium and budget models. The following models have all bands and should be fully compatible:
LG V40 ThinQ LG V50 ThinQ 5G LG G8 ThinQ
LG G8X ThinQ LG Tribute Royal
These models do not have either LTE Band 66 or LTE Band 71 but do have LTE Band 12:
LG Stylo 4 LG Stylo 4 Plus LG Tribute Empire
There was not enough information on the LG Stylo 5 but, since it was launched last June, it’s probably safe to assume the Sprint version it has LTE Band 12 and LTE Band 66 (the T-Mobile version has LTE Band 71).
LG has a lot of brand loyalty and their device performance tends to be consistently good. But LG’s importance in the premium level is diminishing, and the budget device space is becoming crowded. Motorola has been a leader in the budget segment along with the J (and now A) series from Galaxy. And companies such as BLU are eager to integrate LTE Band 41 into their new devices. While Sprint and Boost were important customers for the last decade, in the New T-Mobile world, the future of LG is more uncertain.
Moto/ Google: Moto had strong demand for their G7 series (G7, G7 Play and G7 Power). For $159.99, you can get a fully compatible Moto G7 Play (G7 is $199.99 and G7 Power is $219.99). And, for bargain shoppers, the Moto e6 is on sale for $99.99 and is fully compatible with all New T-Mobile networks (note: the Moto e5 was more of a carrier-specific device so ask about compatibility prior to purchasing). Even the Moto G6 Play and G6 devices (which you can find on Amazon) have LTE Band 12 and LTE Band 66.
Google has had a long-standing policy of making universal devices. The Pixel 3, 3XL, 3a, 4, and 4XL are all fully compatible and should have an easy migration to the New T-Mobile. Even the Google 2 and 2XL have LTE Band 66.
Bottom line: As the chart shows, and as our estimates indicate, the conversion process to New T-Mobile for either Boost or Sprint will be modest. Approximately 70-80% of all devices will deliver a better LTE experience than prior to the merger (or at least the roaming agreement). T-Mobile customers will likely enjoy LTE Band 41 quickly as well. Of the remaining 20-30%, there are universal devices at all price points that can address Android needs.
- Apple retail’s 4Q stellar iPhone performance – aided by Apple Card! One overlooked section of the Apple earnings conference call dealt with Apple Store performance following the Apple Card rollout and related fourth quarter promotions (6% discount if purchased in-store). Here’s Apple CEO Tim Cook describing the impact of both trade-ins and monthly payments through the Apple Card:
“Thanks in part to a doubling in iPhone trade-ins versus last year, our retail and online stores set an all-time record and delivered strong double-digit growth in iPhone.”
“So, retail stores did fantastic on iPhone, very strong double-digit growth in iPhone from a year-over-year point of view. And one of the factors that enabled that was … getting to monthly payments on the Apple Card to make it very simple.”
The synchronicity between Card, Care, and iPhone within each store is impressive. With all of the talk about a smartphone super-cycle, one has to think about the headwind Apple is creating for increased carrier store device sales.
- Verizon’s Pixel relationship – a story appeared in Android Police stating that Verizon would be ending their relationship with Google to sell the Pixel in their stores. Panic ensued. The next day, that story was retracted after Verizon indicated that they would be selling Pixel devices in the future. Everyone calmed down.
Does this mean that there will be less exclusivity and marketing? Maybe less exclusivity, but certainly no less marketing. YouTube TV is now a fixture in the Verizon FiOS lineup, and the Pixel has been a solid seller for Verizon (it’s a very good device, although non-5G).
- Google Fiber Webpass is the new name of Google Webpass. Starting with the Nashville launch of Webpass on February 11, Google changed their name (and logically extended their reach) to Google Fiber Webpass. As we noted in a popular TSB titled “Fiber Always Wins (Until it Doesn’t),” Google has struggled with their Fiber division. Perhaps Webpass can breathe some new life into it (we are doubtful).
- Altice raises monthly wireless prices by 50%. To no one’s surprise, Altice rescinded their introductory pricing on their Altice Mobile service and raised all monthly prices for new customers by $10 (from $20 to $30/ mo. for existing Optimum Internet customers, and from $30-$40/ mo. for everyone else in the serving areas). This will put the Altice MVNO on firmer financial ground as they gain access to T-Mobile’s network.
- Softbank and Deutsche Telekom renegotiate their deal in less than a week. As one of my colleagues posted – “Wow, that was fast!” – the merger deal was renegotiated without fanfare or the need for an additional vote. In summary (SEC document is here), Softbank will give T-Mobile USA 48.8 million shares once the transaction is complete. Softbank can regain these shares, however, if TMUS stock goes above $150/ share for any 45-day period between 2022 and 2025. At T-Mobile’s current share price ($98.57), that implies an ~9% average annual share price increase from today to reach the $150 trigger price (and, as we noted in a previous TSB, T-Mobile had a 24% price appreciation in 2019). It’s also important to note that to reclaim the shares, the $150 price only needs to be achieved for a 45-day period. One cable merger rumor could easily trigger that.
As the saying goes “He who laughs last laughs best.” This amended agreement will likely result in the return of the 48.8 million shares to Softbank (which will then have a value of $7.3 billion).
There’s another disclosure in the link, however – Softbank agreed to indemnify T-Mobile from all future liabilities above $200 million related to the ongoing LifeLine overcharging investigation and other third-party claims. T-Mobile and Softbank will share the risk evenly for all amounts up to $200 million. This eliminates nearly all of the financial “gotchas” that started to surface last September.
Next week, we will dive into the future of the incumbent telco after we hear from Frontier (Feb 25) and quickly check in on Samsung Galaxy S20 sales. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
One last pic from the CRS 2020 show – I had the privilege of seeing several “up and comers” on the Universal Music Group label including Mickey Guyton singing “What are You Going to Tell Her” at the Ryman Auditorium in Nashville this week. After several new artists, out came Luke Bryan, then Carrie Underwood, then Keith Urban (who closed his set with a duet with Carrie). Then the big surprise when Reba McIntire came out and brought the house down. The closing picture is of the Queen herself (Carrie Underwood looking on behind curtain). An unbelievable performance.
Greetings from Atlanta, GA (Dwarf House, a.k.a. the Original Chick-fil-A restaurant pictured), and Charlotte, NC. This week’s issue will be entirely devoted to the implications of Judge Marrero’s decision (here) on the telecommunications industry. Because of word constraints, we are going to push several TSB Follow-Ups to next week’s issue.
At around 4:30 p.m. ET last Monday, there were signs that something was happening with respect to the case. Just the previous week in a Colorado Wireless Association (COWA) speech, I indicated that, based on the judge’s previous rulings, if a decision came prior to Valentine’s Day, it would be a “box of chocolates” for T-Mobile and Sprint. When Monday’s after-hours trading indicated Sprint’s stock was up 50+%, it could only mean one thing – the deal was on. The Wall Street Journal and The New York Times confirmed the rumor, and the decision linked above was released on Tuesday morning. Lots of relief, smiles and high-fives especially in Bellevue, Berlin, Tokyo and Overland Park.
There are a few remaining items left prior to formal closure of the merger (Tunney Act review, California PUC approval, possible appeal of Judge Marrero’s decision by New York and California, and post-announcement renegotiation of the share exchange), but it’s highly likely that we will have a new T-Mobile company sometime between St. Patrick’s Day (March 17) and Easter Monday (April 13).
In this week’s Sunday Brief, we will begin to recap our many merger analyses (here and here and here and here and here and here and here and here) and start to answer the question “How can we tell whether this merger represents a passing shower or a catastrophic hurricane to the telecommunications industry structure and dynamics?”
Item #1: T-Mobile’s 2.5 GHz Advance Prepping
Last September, Braxton Carter, Mike Sievert, and Neville Ray appeared at the Goldman Sachs Communicopia conference (link here – registration required – quote below from Neville Ray begins just after minute 9). It was held at an awkward time (Sept 17, just a few weeks before end of the quarter), so, in lieu of asking questions that Mike or Braxton would have had a hard time answering, the focus turned to the Sprint merger. After a few opportunities to allow Mike and Braxton to reiterate their strong advocacies for New T-Mobile, Brett Feldman, the lead telecom managing director for Goldman, asked the following question: “A key reason for the merger is that by uniting your low-band spectrum with Sprint’s mid-band spectrum, the new T-Mobile is going to be in a position to really aggressively challenge AT&T and Verizon in the 5G market. What are the key ways that you believe new T-Mobile is going to have a 5G network advantage? And how quickly can you factor that into your go-to-market strategy after you close the deal?”
Neville’s response, while lengthy, is quite telling:
“Braxton, Mike and John have authorized me to do some work at risk this year in getting ourselves ready to deploy the 2.5 gigahertz spectrum as soon as the deal closes. Nobody is more impatient for this thing to close than me. I wish I was deploying 2.5 radio on the network right now, but we’ve done work at low cost in terms of securing, permitting, and authorization to deploy 2.5. So as soon as this deal closes, we’re in a position where we can start laying down 2.5 radio on the new T-Mobile network.”
“So, why is that important? Well, one, that allows us to commence and move Sprint customers off of the redundant assets on to the new T-Mobile. That then is the path for us to decommissioning the redundant sites and generating the synergies that have burned the hole in my head. $4 billion run rate on synergies from the network side is a phenomenal opportunity.
“…When we go into that post-close environment, we can start to very rapidly lay down 2.5 gig spectrum and start to deliver a very transformative 5G experience, more sites, a lot more spectrum, and spectral efficiency of 5G. And the combining effect of those three factors allows us to lay down the network that moves from 30 megabits per second today to 400 megabits per second, a transformative increase in speed and capacity, 8x over the term of the program for capacity, 15x for speed. I want to do that as fast as humanly possible.
“…Our intention is, we move ahead of them incredibly quickly, and we start that move ahead in 2020 and it accelerates in 2021. So, this business has been heavily reliant on network brand, the network perception for so long. We still have our work to do on perception. But our opportunity, now we’ve leveled the playing field with those guys on LTE, is in this 5G era with the spectrum assets we have, to rapidly move ahead of AT&T and Verizon.
“And I want those guys to be chasing my network and my team and our execution. And it’s going to be very, very difficult for them to do with the spectrum assets they have in their hands to date to compete with our experience on the network, which is very high speed, and very strong capacity.”
I would highly recommend that you re-listen to the entire interview in the above link to get a perspective on how the New T-Mobile will unfold. What’s important to Neville’s quote above is that the pre-planning moved from a whiteboard to a purchase order (see first sentence in the quote). What was ordered in August has likely been pre-provisioned by today. And it’s likely (just a hunch) that that was not the only purchase order completed.
What if we wake up in April (no fooling) and find out that 2.5 GHz (LTE Band 41) has been already integrated into the wireless experience for 150-200 million POPs? That would certainly increase store and on-line traffic as well as upgrades (ironically, having listened to AT&T and Verizon presentations where they talk about equipment revenue uplift, the real uplift opportunity is at New T-Mobile, at least for low-end Android devices which likely lack Sprint’s 2.5 GHz radio).
But what good is 400 Mbps if the plan constrains video speeds to 480p (3-4 Mbps)? That’s like drinking a Chick-fil-A milkshake though a coffee stirrer straw. The next step is (at a minimum) 1080p (5-6 Mbps) or better yet UHD (20-25 Mbps) speeds for all video. And a very generous 100-200 GB allowance for every hotspot (for an extra fee).
The level of 2.5 GHz advance prepping referred to above will directly determine whether New T-Mobile can meaningfully impact 3Q 2020 net additions. My hunch is that the T-Mobile network team has not been idle and that there’s a lot of 2.5 GHz being deployed very quickly.
Bottom line: Don’t be surprised if T-Mobile’s 2.5 GHz rollout seems to occur unusually quickly after the merger closes. We were warned last September. Also, for most Apple and some Android users, the benefits of T-Mobile’s low-band (to current Sprint customers) and Sprint’s mid-band (current T-Mobile customers) will be apparent shortly after close without clunky roaming changes or costly hardware upgrades. This is a different transition than Metro to T-Mobile because there will be far more firmware-only upgrades than hardware changeouts.
Item #2: Enterprise
T-Mobile inherits not only a trough of spectrum with the Sprint acquisition, but hundreds of seasoned enterprise sales executives. As Mike Sievert recently acknowledged in his appearance at the Citi conference a month ago, T-Mobile is under-indexed in enterprise.
Sprint’s enterprise roots are significant, having commanded close to 20% of the enterprise data market as recently as 2006. There are many sales executives who cut their teeth with fleet management solutions (Nextel and Sprint), wireless access solutions (Clearwire and Sprint) and IP MPLS (Sprint).
I was reminded of the wireless (and wireline) growth opportunities while I was watching the Verizon webcast. Matt Ellis, Verizon’s CFO, showed this slide during his presentation (we discussed these trends in last week’s TSB):
While service revenues are relatively flat over the 2017-2019 period (re: 2017 was the year Verizon introduced unlimited pricing), Verizon’s Business growth has continued unabated, representing 74% of net additions in 2017, 56% in 2018 and 49% in 2019. And service revenues grew 2.7x faster for the business wireless group than their consumer counterparts. Why? One reason is the business environment has been less competitive than consumer, partly because of the “Sprint jitters” that have started after the Nextel merger integration more than a decade ago. Even with T-Mobile’s gains (largely in the small/ medium business segment), it’s likely that Verizon and a FirstNet-enabled AT&T narrowly beat Magenta in business phone growth in 2019.
New T-Mobile has healthier balance sheet. They have enough spectrum to truly enable last mile access solutions for branches that, at a minimum, serve as a part of business continuity efforts (especially in rural markets). They now have a Private LTE and IoT story that can, with DT’s and Softbank’s help, add a global dimension. And, while not as strong as in past years, T-Mobile inherits a Tier 1 Global IP backbone called SprintLink (see map below). It’s a big leap for both companies – to a point.
Sprint and T-Mobile lack in-building expertise. One of the cutbacks resulting from the Nextel merger was the extension of Sprint’s Metropolitan Area Network (MAN) infrastructure into office buildings. The presence of in-building fiber (and in-building wireless for Private LTE) would put T-Mobile on the same stage with Verizon and AT&T. This is not going to happen without partnerships (Zayo, Level3, others), some of which might need to come with equity stakes. But in-building and data center expertise is not as robust at the New T-Mobile as it is at their larger peers.
Verizon announced at their Investor Day on Thursday that they had already deployed 30,000 route miles of out-of-territory fiber across 60 markets in their first several quarters of their ambitious One Fiber initiative. They indicated that they probably have several more quarters to go. Those fiber providers that just lost their ability to expand in these 60 metros need to quickly partner with New T-Mobile. It would allow them to provide a better private LTE story and hasten the secular declines of their competitors’ cash-generating legacy wireline businesses.
Bottom line: New T-Mobile needs to leverage the existing enterprise relationships (and rekindle some old ones) to keep Verizon and AT&T honest. It’s going to take partnerships to do this, and, thanks to Verizon’s One Fiber initiative, there are near-term opportunities to grow metro fiber quickly. This may be T-Mobile’s greatest remaining Un-carrier opportunity.
Item #3: Managing the Board
There is no doubt that, even with nearly two years to plan, there will be hiccups, mistakes, and unkept promises. Some of them could be big and create short-term earnings pressure. This is where strong executive leadership including an active and understanding Board comes into play. Just as a reminder, here’s how the structure looks prior to any change in the share exchange terms:
Masa Son is not going away after the transaction closes regardless of the share exchange ratio. He will be the largest shareholder after Deutsche Telekom (DT) and should have the financial capacity to purchase more shares. Clearly, if Softbank and DT are aligned on a strategy for T-Mobile, life will be a lot easier on Mike Sievert and whomever replaces Braxton Carter.
As a background, the new Board will consist of 14 members: Nine from DT (which includes Tim Hottges), Four from Softbank, and Mike Sievert. We have included Tim and Mike below for continuity purposes, but there are plenty to choose from the current T-Mobile USA (TMUS) Board.
From current T-Mobile USA (TMUS) Board, here are the likely candidates:
Tim Hottges: Current Chairman of TMUS – will remain Chairman of the New T-Mobile
Mike Sievert: Current COO of TMUS – CEO of New T-Mobile (May 1)
Mike’s replacement: If the current Board structure holds, Mike’s COO replacement will have a Board seat
John Legere: Current CEO of TMUS – committed to stay on the New T-Mobile Board
Braxton Carter: Current CFO of TMUS – hopefully takes a short-term New T-Mobile Board role
Dr. Christian Illik: Current DT CFO
Srini Golopan: Joined the TMUS Board last June – Head of DT Europe
Teresa Taylor: Current TMUS Lead Independent Director
This would leave three additional appointments from the current board (see list here).
From the current Sprint Board, here are the likely candidates:
Masayoshi Son: Current Chairman of Sprint and Softbank, will be on the Board
Marcelo Claure: Current non-executive Chairman of Sprint – likely Board member
Ron Fisher: Current Vice-chairman of Sprint and 25-year Softbank employee
Stephen Kappes: Former Deputy Director of the CIA, likely needed for NSA designation
Julius Genachowski: Former FCC Chairman, and current Carlyle Group partner
It’s highly likely that the first four names will be the designees from Softbank. For the rest of the current Sprint board, click here.
Fourteen members that span multiple continents can make for interesting Board dynamics. Hopefully the closing process ends gracefully for both parties, especially since TMUS has already gained $15.5 billion in market capitalization since the beginning of the year ($18.06 per share * 855 million shares), more than all of 2019.
Bottom line: While “Managing the Board” seems like an esoteric (and perhaps academic) topic, business history is filled with examples where boardroom froth results in short-sighted and poorly formulated management performance. Given the four-year share lockup on both DT and Softbank, it’s unlikely that there will be a lot of disagreement, but it’s worth mentioning given the personalities involved.
New T-Mobile could be the biggest telecom event of the decade, and it appears that some pre-planning has set the company up for some quick wins. To best AT&T and Verizon, a balanced business/ consumer strategy is needed which will require new partnerships and potential investments. A united Board + quick wins + business balance = hurricane status for New T-Mobile. AT&T and Verizon missteps will determine the hurricane category.
Next week, we will pick up the remaining uncovered events of this week, including Altice USA and CenturyLink earnings and the Samsung Galaxy G20 announcement (hint: every wireless carrier engineering staff changed their upload requirements when they saw the G20 64/128 MP camera!). Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a great week – and Go Davidson Wildcat Basketball!
 Without going through all of the details it’s important to note that the Apple iPhone 7 and iPhone 8 (and their variants) have the 2.5 GHz band already installed in the GSM (T-Mobile) version, and that the CDMA (Sprint) version of these devices already has T-Mobile’s Low Band 700 MHz spectrum, a.k.a. Band 12 (and Band 66 in the case of iPhone 8) already enabled. The CDMA version of the iPhone SE also has Band 12 enabled. Bottom line: there is the potential for backwards compatibility within the current handsets. And the iPhone XS (and variants) and iPhone 11 (and variants) are universal devices and include T-Mobile’s 600 MHz band which will be have a big benefit for Sprint customers.
Super Game Sunday greetings from Kansas City (H&R Block Headquarters pictured) and Charlotte. The Patterson household is eagerly awaiting the 49ers/ Chiefs matchup and the return of the Vince Lombardi trophy to the City of Fountains. Regardless of the outcome, there is no doubt that the AFC Champions have generated city-wide enthusiasm not seen since hundreds of thousands packed the Union Station plaza to celebrate the Royals 2015 World Series pennant (great pic in the link that will bring back memories for fellow Kansas City fans).
This week, we will cover two fourth quarter earnings announcements (Charter and AT&T) and do our best to correlate our findings into common themes. Due to the overwhelming amount of material to cover, we will not have any TSB follow ups this week.
One final reminder for the Denver TSB faithful – I’ll be keynoting the 5th Annual Colorado Wireless Association Education Conference this Wednesday (February 5th). It’s a full day of panels, speakers, and networking. More on the conference here.
Charter Earnings – Why is Tom Rutledge Smiling?
We’ll start our earnings analysis with Friday’s earnings announcement from Charter which blew away all expectations (link to material is here) . Like our discussion of Comcast, Charter lost video and voice subscribers versus the previous quarter (105K and 152K respectively). Unlike Comcast, Charter got a jump start on a video price hike and grew sequential revenues (+$113 million) in video. The fact that Charter was able to successfully implement price increases in the fourth quarter is one reason Mr. Rutledge is smiling.
We would argue, however, that the greatest reason for optimism going into 2020 is Charter’s High Speed Internet (HSI) performance. Here’s a chart outlining their growth in subs, penetration, and revenue per Personal Subscription Unit (PSU) over the last several quarters:
There’s a lot of information in this analysis, but here’s the punch line: Charter is growing volumes of their HSI product and growing yields. They are doing this as a result of capital spent prior to 2020 (DOCSIS 3.1 investment – roughly $450 million) and this product does not have the retransmission renegotiation cost burden that video carries (60-65% of every video PSU dollar earned goes directly to programmers). Outside of Bloomberg/ Trump/ Steyer/ DNC/ RNC election-driven advertising growth in 2020 (which also cracks a smile), High Speed Internet growth is highly profitable and desired.
Not only was Charter able to grow video revenues, but they also hiked prices on High Speed Internet (new and base), a bold move when you consider their territory includes fiber-rich areas such as New York City (Verizon FiOS), Los Angeles (AT&T U-verse), Atlanta (U-verse), and Dallas/ Ft Worth (also U-Verse with a bit of Frontier FiOS). As the chart shows, Average revenue per PSU/ mo. rose from $55.29 in 4Q 2018 to $58.51 in 4Q 2019 (+5.8%) and ending subscribers also grew 1.3 million.
So what turns Mr. Rutledge’s grin into a full toothy smile? That nearly 25 million subscribers in 2020 will be paying $3.22 more per month for their Internet and that underlying costs to manage this base are falling on an absolute basis. 24.908 million * $3.22/ month = $80 million per month or ~$960 million in annualized (nearly) free cash flow happiness for 2020. This is before additional household growth (which continues into 2020) and DOCSIS 3.1 upgrades. Mr. Rutledge has more growth options than Andy Reid’s offensive playbook.
This price-up (to use a Verizon term) covers a lot of debt repayment and investment (re: Charter had a 4.45x leverage ratio entering 2020 or 4.31x excluding mobile losses). It also covers a lot of mobile investment. As the revised chart shows, Charter added 288K net subscribers to their base, crossing the 1 million threshold and garnering 7% more subscribers in their first six quarters of operation than Comcast. Together, the two cable MVNOs had ~550K net additions (note that substantially all of these are coming from smartphones and should be compared to wireless carrier phone net additions figures as a result).
While wireless revenue grew 23% sequentially, Charter CFO Chris Winfrey was quick to point out that the majority of that revenue came from handsets ($138 out of $236 million or about 58%). Charter sold a lot of devices in the quarter as a percentage of gross additions (this was helped in part by the retail store investments described in their earnings release).
This also indicates that Charter had $98 million in quarterly service revenues (management did not give the exact mix between unlimited and by-the-Gig but seemed satisfied that the mix was “healthy”). Using an average customer base of 938K wireless subscribers in the quarter, this translates into a ~$35 ARPU for their current base. If we assume that 47% is unlimited ($45 ARPU) and 53% is by-the-Gig, this equates to ~$26 ARPU for by-the Gig. As we have stated, and as Charter’s comments largely supported, the by-the-Gig gross profit is supporting what is a gross margin breakeven proposition at best for Unlimited. In his comments about profitability, Winfrey stated that “in 2021, our mobile service revenue will exceed all regular operating costs, excluding acquisitions and growth related mobile costs.”
One of the ways to improve profitability is to extend the offload footprint. This could take the form of greater public Wi-Fi Hotspot deployment/ alliances, or to find additional offload partners like AT&T. In this regard, and to no one’s surprise, Charter indicated that they would be a likely participant in the CBRS Priority Access Licenses (PAL) in June (CBRS is a 3.5 GHz spectrum band further explained in this TSB here and in the TSB Deeper post here). PALs will be auctioned on a county basis (smaller than MSAs or BTAs – see 2018 RCR wireless article explaining the difference here). Charter described this decision as separate from the ongoing capital allocation process – “a separate business case” that needs to stand on its own ROI.
One of the interesting stories to unfold is how (or even if) all of cable embraces CBRS and significantly builds out capacity in their markets. Given Apple’s and Google’s votes of confidence in the spectrum band (and potentially adjacent bands as we talked about in last week’s TSB), the offload opportunity could be significant, causing Charter and Comcast’s relationship to resemble a C Spire or US Cellular relationship with Verizon, and less like a traditional MVNO. More on this topic in upcoming briefs.
Bottom line: Price hikes are sticking, margins are growing, operational efficiency is improving, and debt loads are decreasing in an advertising-intensive election year. Cable has won the broadband battle for now against AT&T and Verizon in most rural locations (it’s hard to actually categorize any ILEC as an incumbent on a go forward basis), and, while video is transitioning to streaming, Charter has growth in business and mobile to offset. While they still have a lot of debt ($78.4 billion and shrinking), there’s growing cash flow to keep investors and management smiling.
AT&T Earnings – What’s the Growth Plan (besides HBO Max)?
AT&T had a quarter where each major business line except for mobile service posted lower operating revenues versus 4Q 2018 (full results can be found here). Here’s the fourth quarter and full year picture for the Communications Segment:
And here’s the WarnerMedia segment:
The dynamics of each group are very different, but we contrast the tepid performance assessment seen from AT&T with the upbeat assessment by Comcast last week (where cable revenues rose 2.6% including 8.8% in business revenues and EBITDA rose 5.4%, and NBC Universal revenue only declined by 2.8% and EBITDA by 4.7% with Olympic tailwinds in 2020). While there are some differences between the programming and production assets each company owns, the Comcast portfolio once again beat (and in the case of cable vs. wireline, trounced) their closest broadly diversified competitor.
Rather than do a full dissection of AT&T this week (we will save that for after the CenturyLink earnings release), our attention will be focused on mobility earnings. AT&T Mobility grew 2019 revenues thanks to higher prepaid (Cricket) customers and marginally higher postpaid ARPUs (0.4% or $0.24/ user/ month – contrast that with Charter’s HSI growth) per postpaid phone user (see nearby chart). The overall postpaid base decreased 861K versus 2018 driven by feature phone and data plan decreases. Lower subscriber bases place pressure on AT&T to raise revenue per user on the remaining base (HBO Max), sell more prepaid, and the like. Churn rose for both postpaid as a category and for the important phone subset to their highest levels in recent memory.
While the fourth quarter is seasonally weak, AT&T’s prepaid net additions continue to decrease at a very steady clip. Part of that competition comes from T-Mobile’s continued suburban and rural expansion (nearly 100K subscriber gap between T-Mobile and AT&T in 4Q net additions), as well as by-the-Gig options from cable.
On the postpaid side, it’s interesting to note that AT&T grew their total base of smartphone users by 302K (and phone overall by 229K). In their Business Solutions proforma, wireless solutions revenue grew by $141 million versus 4Q 2018 but only $15 million versus 3Q 2019. Even at $15 million, however (at $55 ARPU), approximately 91K of the 229K comes from business (40%). This highlights two key issues: 1) Business wireless service growth slowed significantly in the fourth quarter versus the previous three, and 2) Even with the slower growth, Business (and likely FirstNet as a proportion of this) played a major role in overall net additions.
Bottom line: AT&T’s real consumer phone growth, factoring in prepaid losses, was closer to 120K which was weaker than 2Q and (likely) 3Q. When weighed against Comcast+Charter growth (4-5x stronger) and T-Mobile’s growth (likely 8x stronger when factoring out business net additions), AT&T is losing ground. To grow mobility service revenues more than 2% (which will likely be required to meet the overall 1-2% growth level), AT&T will need to create a more competitive consumer value proposition.
Based on the earnings call, this is exactly what AT&T executives envision with the addition of HBO Max to select wireless plans. As reference, to get HBO Max for free, customers need to either be existing HBO Now customers or be on the AT&T Unlimited Elite plan (see plan features here). In addition to HBO, this plan includes 100 GB of High Speed Data per line, 30GB of which can be Hotspot, prior to prioritization.
For every 100,000 wireless who upgrade (assuming the ARPU impact is ~$11/ month), AT&T’s full quarter revenues will rise $3.3 million. To grow mobility service revenues 1% from their current levels ($13.93 billion in 4Q), revenues need to grow $139 million. To have HBO Max account for all of this increase, they will need to have 4 million upgrades immediately to show service revenue growth (4 million upgraded lines * $11 increased ARPU per line * 3 months = $132 million in increased quarterly revenue). That seems a reasonable initial adoption rate, but 3-4 million per quarter throughout 2020 is another issue.
Then there’s the thought mentioned on the conference call that 5G speeds would drive conversions from metered to unlimited plans. Here are AT&T COO John Stankey’s comments from the call:
“We also expect a higher adoption of our unlimited plans. We’re at a little more than 50% penetration today, but we expect the 5G device upgrade cycle will bring into our stores lots of customers not on unlimited plans today. Increasing the adoption of our best unlimited plans is obviously an ARPU growth opportunity for us. And when you add into the mix the customers on select unlimited plans will get HBO Max for free, it’s a great opportunity to also improve our overall churn, which we’ve seen happen from giving HBO to current unlimited customers. A reduction of 1 basis point of wireless churn across the base is worth about $100 million to us annually. To sum it up, we’re expecting growth of more than 2% in mobility service revenues this year.”
Underlying this statement are two fundamental questions: 1) After being conditioned during capacity scarcity over the past three years that standard definition video resolution is OK for normal use, will customers be convinced by advertising and in-store representatives that it’s finally time to upgrade simply because they purchased a new and improved device? and 2) This clearly assumes that 1080p remains a premium product and not the new standard, especially for 5G, for baseline plans. If the T-Mobile/ Sprint merger is approved, what are the chances that T-Mobile will keep HD at their current price points versus launching a new Uncarrier initiative called “HD for All?” Or, if the merger is not approved, what are the chances that Sprint will use HD baselining as a differentiator in those markets where it has chosen to deploy 5G? The inertia is too great to price a valuable product feature (same GB cap) at lower rates if capacity exists. And, either way (and especially if the merger is approved), capacity will be available for this feature in late 2020/ early 2021.
We will need to pick up the Verizon and Sprint earnings analysis (as well as wireline analysis overall) next week. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Have a great week – and (with extra emphasis this Sunday) GO CHIEFS!
Late January greetings from Charlotte, where one of the start-ups I am advising, Lucid Drone Technologies, won two awards this week (pictured are the happy founders David Danielson, Andrew Ashur, and Adrian Mayans). The Charlotte Inno Fire award includes a red blazer which Adrian is wearing. For more on what Lucid does, check out this YouTube video. They will be demonstrating their capabilities in Atlanta this week, so keep your eyes to the skies if you are in the Big Peach (especially downtown)!
This week, we will do our best not to over-extrapolate Comcast’s quarterly earnings announcement. The Philadelphia-headquartered global media and infrastructure giant exceeded on nearly every front, confirming that consumer spending is strong and broadband competition isn’t. We also have a large number of TSB Follow-Ups thanks to articles and notes that you sent in (we appreciate and read every one!).
One reminder for the Denver TSB faithful – I’ll be keynoting the 5th Annual Colorado Wireless Association Education Conference a week from Wednesday (February 5th). It’s a full day of panels, speakers, and networking. More on the conference here.
Before diving into Comcast’s earnings, one erratum: We incorrectly attributed the “Let them compete” quote last week to the T-Mobile defense team and were reminded by an advisor to that team that the quote should be attributed to Mr. Glenn Pomerantz who represented the 13 Attorneys General. My apologies to both Glenn and David Gelfand.
Comcast’s Earnings – Implications for the Telecommunications Industry
In earnings season, it’s hard to go first because there are no other company comparisons. And it’s always hard to live up to expectations when, at a highly publicized event a week prior to the announcement, your chairman touts a “record year and an exceptional fourth quarter.” How did Comcast do? Here’s a brief summary of their customer metrics, courtesy of their news release:
The most striking aspect of the nearby schedule is that 97% (342/352) of residential customer fourth quarter relationship growth is coming from single product customers, and the predominant new revenue generating unit (RGU) is high speed internet (HSI). In the year ago quarter, 37% of net new customer relationships came from double or triple play bundles– that number is now 3%. And, for all of 2019, Comcast, even with their innovative X1 set top box, lost 3% of their customer base, roughly double the rate of 2018.
It’s also important to note that this slowing growth is occurring as new home construction is picking up (Denver, Houston, south Florida, and Atlanta are all growing faster than the rest of the country). In their cable customer metrics disclosure, Comcast indicated that their new homes and businesses passed grew by 181K in 4Q and 904K for all 2019, up from 136K and 565K for 2018 and 791K for 2017. They are still grabbing share (and arguably the foundational HSI relationship) as shown by net additions of 1.4 million Internet customers, but the incremental revenue per new residential relationship is down – significantly – versus 2018. Peacock cannot come soon enough.
What is surprising is the continued strength in Comcast Business (revenues +8.8% 4Q 2019 vs. 4Q 2018) and the iPhone-driven growth in wireless (+261K net additions). The commercial services business unit is now chugging along at an $8 billion annual run rate across 2.4 million customers (roughly $280 monthly ARPU per customer), with roughly 55% of them taking voice and 40% of them taking video. The vast majority of customers are still on the “small” or “very small” side of SMB, which makes them prime wireless targets (with the exception of T-Mobile, the remaining wireless carriers have struggled for decades to effectively manage the needs of multi-line small business customers). Just a 10% penetration of the existing business base would help immensely, and the product line (including data usage distribution) for small business customers is slightly favorable to family usage (fewer high-bandwidth users as a percentage of the total business base).
This leads us to wireless. Nearby is a chart showing actual net additions for Comcast and our estimate for Charter/ Spectrum (we tend to be less optimistic than others about Spectrum’s performance in the quarter, although we do think that they will slightly outpace Comcast’s performance). Assuming our estimates for Spectrum are correct, they will have achieved ~ 7% more net additions in the first six quarters of operation than Comcast.
Comcast’s wireless unit had an EBITDA loss of $116 million for the quarter (4Q 2018 comparable figure was $191 million) and $401 million for the year (2018 = $743 million). While these are certainly an improvement, each customer is still, on average, losing $20/ mo. (4Q 2018 was ~$56/ mo.). And, most importantly, we estimate that slightly less than half of their 2.052 million ending subscriber base is on their profitable “by the Gig” plans. If our estimates are correct, then ~1.1 million unlimited customers are still breaking even or slightly losing money at the gross margin level (meaning that data volume increases are outpacing voice and data rate declines). Offload solutions (CBRS, more Wi-Fi options, etc.) and core control cannot come soon enough, and adding Peacock streaming to a large subset of unlimited wireless (5G?) customers in a few months is going to create additional bandwidth requirements and EBITDA pressure.
When asked about wireless during the earnings conference call, Comcast executive (and Comcast Cellular veteran) Dave Watson commented:
“In wireless… the keys there are a little bit of maturity. We talked about the reasons why we’re doing it. We’re real pleased with broadband retention. The area that’s beginning to pick up that we’re really pleased that we wanted to focus on is just growing consideration using wireless because I think it does help broadband. But getting people into retail stores, they didn’t really think about doing that before, beginning to see real traction in retail. Most certainly, when you see a solid product introduction, like Apple, that they had, and other wireless devices, I think we benefit. We’re in a good position for Bring Your Own Device. I think we’re uniquely positioned in the ability to have a combination of unlimited and by-the-gig pricing. So you add all those things up, and we’re really pleased with our overall wireless momentum as well.”
Brian Roberts later commented that this quarter’s performance “shows we can get some scale.” All of these comments are true, and we have to be careful about any further extrapolation, other than to say that there will be great relief when an Apple launch quarter is accompanied by positive EBITDA and wireless can stand on its own attributes and not be dependent on being a churn-reducer or brand-builder.
Bottom line: Comcast has the best High Speed Internet product (and in most locations, value) in the US, and it’s only going to get better in 2020. Despite increased fiber competition, they are holding their own and establishing a stronger foothold in the residential and SMB markets. Slowly, cable revenues are beginning to concentrate as viewing habits shift away from the set-top box. Stand-alone 5G is coming, which will lower the cost to enter the wireless market as a facilities-based provider (and unleash a new home broadband competitor). Wireless results will continue to improve, but there’s the lingering issue of addressing the profitability of unlimited Xfinity Mobile subscribers.
Given the bevy of upcoming earnings releases (which are going to take up all of next week’s TSB), we thought we would go ahead and address five this week. Here they are (in no particular order):
- Verizon announces the introduction of a credit card in conjunction with Synchrony Bank. The previous sentence is not much longer than Verizon’s press release on the topic (and was likely driven by Synchrony Bank’s earnings release last Friday). Many TSB subscribers are long-time industry veterans who remember the launch of the no-fee AT&T Universal card in 1990 (which grew to 13.5 million customers before they sold it off to Citi in 1997 for $3.5 billion), and a smaller Midwestern TSB subset remember the Southwestern Bell Mastercard issued by Mercantile Bank in St Louis that surprisingly attracted 500,000 customers in the first few months and was quickly withdrawn (the ill-timed card termination announcement occurred in December 1996 during the height of the Holiday purchase season).
Verizon is seeing something in their 4Q numbers which is driving this decision. We’re sure that they will talk about it more on their earnings call, but this could be as much about improving their cross-product rewards proposition as it is about responding to the Apple Card (we doubt that this is the case – it’s all about Apple). As we discussed in the original TSB concerning the Apple Card (see here), there’re a lot of things that can be combined with consumer credit which can be very attractive, and top line discounts do not need to be front and center to make it more attractive (in fact, if “5% off your bill for signing up for the Verizon Card” is the headline, it’ll pressure profitability just like the Southwestern Bell fiasco 24 years prior).
No doubt, a credit card option will make family switching/ 5G adoption easier and strengthen the customer relationship (versus a Verizon month-to-month contract with Apple or Samsung financing the device). Our guess is that the mix of BYOD upgrades and gross additions spiked at Verizon with the iPhone 11 launch. More details after we look at equipment revenues in their earnings release on Thursday.
- Cincinnati Bell of the Ball! On Friday, Cincinnati Bell disclosed that they had received an unsolicited, non-binding bid of $12 cash for all shares of the company from an “infrastructure fund” (see release here). This tops the $10.50 bid from Brookfield Infrastructure made a month earlier. Here’s the 5-yr chart on CBB:
The company entered last August with a share price below $4, caught up in the Windstream/ Frontier valuation downdraft. As of Friday, they had recaptured all of the 2019 losses but the share price still isn’t back to 2018 levels. This is not a story of acquisition windfall, but rather a reward for management investment discipline and operational perseverance through the storms of financial uncertainty that plagued many of their peers. Kudos to Leigh Fox, Andy Kaiser and the rest of the management team.
- T-Mobile enters the private-label accessories business with their GoTo lineup. On Friday, T-Mobile announced that they would be selling chargers, screen protection, and cases in store and online for most smartphones offered by the company. We think this is a very good move provided that they reinforce the GoTo and T-Mobile brands and do not overextend their product reach (a T-Mobile branded large Bluetooth speaker, if offered, would seem a little far-fetched). A well-managed accessories program could add $200-300 million to the bottom line in 2021 and keeps the stores more relevant as the sole destination for wireless needs. Another good move for magenta.
- Tutela releases the results of their AT&T Florida survey. We discussed this in several previous Sunday Briefs (including the inverse question concerning Sprint’s network quality deterioration in Florida over the past year), but research firm Tutela released the most comprehensive look at AT&T’s coverage throughout Florida since they implemented FirstNet. While the bandwidth improvement was a relatively modest 2.3 Mbps on average, the impact of the overall program on data utilization throughout the day is significant:
While not eliminating capacity issues (there’s still some orange and red times throughout the week), the impact of AT&T’s latest efforts is significant. With data growing at 30-40% this year, we expect this is not a “set and forget” event for AT&T, and can only wonder what the before and after pictures will look like for both Sprint’s and T-Mobile’s networks if their merger is approved.
- Following up to our discussion of AT&T’s Connected Vehicle comments last week (one of our earnings questions), the Asst. Vice President for Global Public Policy, Legal & External Affairs for AT&T, Jeff Stewart, touted the connected car segment as a “key component of our overall IoT business” at the Washington Auto Show (full article from RCR Wireless here). This comes on the heels of a small but not insignificant win for Verizon with Audi that was reported earlier this week (Light Reading article here). What’s important to this new Audi agreement is the use of eSIM as the vehicle (pun intended) to select the car’s network connection. If this becomes the standard going forward, then AT&T’s dominance will fade as new car sales accelerate (and more competition will inevitably lead to more innovative products and services).
That’s it for this week. Next week, we’ll comb through Verizon, AT&T, Charter and other earnings releases in what promises to be a super TSB issue. Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a great week – and GO CHIEFS!
Greetings from Davidson/ Lake Norman/ Charlotte, North Carolina where winter has finally begun its return (picture is from earlier in the week when our dog, Abby, was chasing ~40 ducks into the Lake). Thanks again for the emails and comments on last week’s column – much appreciated and thought provoking. This week, we will have some thoughts on the closing arguments made at this week’s AG v. T-Mobile/Sprint/ Softbank/ DT trial but spend most of our time focused on the earnings outlook for the telecommunications sector. We will conclude with a few TSB follow-ups (although admittedly it reads more like the “Five You May Have Missed” feature of previous Briefs).
For those of you in Charlotte, there are still a few seats left at the table for the inaugural Launch LKN book club. I’ll be leading the discussion on the first book (Tim Wu’s The Master Switch) – we are reading this book (and other lengthy tomes) across two months and splitting our discussion accordingly. Sign up here – only a few spots left – thanks to The Hurt Hub at Davidson for providing the facility and Launch LKN for providing the forum.
Separately, I will also be delivering keynote addresses to a couple forums in the next new months. The first one is the 5th Annual Colorado Wireless Association Education Conference. If you are living in Colorado and not aware of the session, you should check it out. It’s a full day of panels, speakers, and networking. More on the conference here.
Finally, I am pleased to announce that one of the start-ups I am advising (Lucid Drone Technologies) recently won another “Best Charlotte Start-ups” award, this time from CharlotteInno. Read more on their recognition and the other recipients here.
The Unintended Consequences of an Attorneys General Victory
On Wednesday, Judge Marrero heard closing arguments from the states’ attorney, Glenn Pomerantz, and from the defendants’ attorney, David Gelfand. Both made strong cases for their clients, and the judge committed to render a verdict “as promptly as possible.”
Based on our readings of the Findings of Fact (summary: AG Findings of Fact read like a Law School final exam response; Defendants’ Findings of Fact read like a Business School final exam response), this is by no means a slam dunk for either side. The future of M&A transaction second-guessing hangs in the balance, which could be very important for all industries (airlines, energy, insurance, health care, retail specifically come to mind in addition to telecom/ cable). If you don’t like the opinion of the Feds, you could shop the decision to a coalition of like-minded AGs and hold up approvals for months or even years. In a recent article with the Wall Street Journal, Assistant Attorney General Makan Delrahim echoed these points, saying “I think if the states win, it creates major uncertainty in M&A.”
In addition to the practical matter of altering the M&A approval process going forward, there’s the issue of Sprint. In his closing statement, Mr. Pomerantz stated “Let them compete” and there’s an erroneous assumption that an unmerged Sprint would be in a similar position that T-Mobile faced at the end of 2011 when the AT&T merger failed. Let’s correct this faulty assumption with some data. Pictured nearby is the T-Mobile 2011 and 2012 balance sheet from their 2012 news release (the 2011 release was not available). The right column of figures reflects the balance sheet as of December 31, 2011. T-Mobile had just over $1 billion in payables to affiliates (Deutsche Telekom) and slightly more than $15 billion in long-term payables to affiliates. That’s it – $16 billion in debt with one primary debtholder who is also the primary shareholder. As reference, T-Mobile had $5.3 billion in adjusted OIBDA and $2.3 billion in operating income in 2011, and was in the process of collecting a $3 billion break-up fee plus spectrum from AT&T.
Sprint is in a very different situation today, as shown by the following chart from their Investor Relations website:
Paired with this debt schedule is the following quarterly reconciliation to free cash flow:
The economic reality for Sprint is as follows:
- Last four quarters of cash provided by operating activities of $9.9 billion.
- Network spending requirements (using previous 12 months as a proxy) of $5 billion
- An additional $7 billion in cash required to finance leased devices (this assumes no Apple 5G device super-cycle)
- $1.6 billion in debt due within 2 months and another $3.8 billion in the subsequent 14 months (and another $20 billion due in the 36 months after that).
At current trends, Sprint will need $7.5 billion over the next two years to remain solvent. Add in additional 5G expansion to remain market competitive (something CEO Michel Combes mentioned in trial testimony), and that figure easily exceeds $12 billion.
Back to T-Mobile for a moment. Here’s the slide outlining what they were able to do in the 12 months following the AT&T merger dissolution:
T-Mobile entered 2012 with mostly mid-band spectrum (1900 MHz). They picked up AWS spectrum from AT&T as a result of the merger failure (1700 MHz/ 2100 MHz) and added additional spectrum through their Metro PCS acquisition. Then they swapped some additional AWS spectrum with Verizon (announcement here). Then they bought $2.4 billion in 700 MHz spectrum (called the A Block) from Verizon in 2014 (article here) and additional spectrum from other carriers in 2016 (article here). Then they bought $8 billion of 600 MHz and additional $1.8 billion in AWS-3 spectrum. Bottom line: T-Mobile scrambled to fill in low-band spectrum gaps to more effectively compete with AT&T and Verizon. This type of spectrum is not available to Sprint today, hindering their ability to be competitive in suburban and rural locations.
To use a card analogy, Sprint needs the face cards of low-band spectrum, a long-term oriented bondholder ready to finance $10-15 billion over the short-term (the approval process to engage another major shareholder is uncertain thanks to the recent AG action), and a solution to provide another $20 billion in debt restructuring for those redemptions due in 2021-2023. T-Mobile, Verizon, and AT&T are holding those spectrum face cards and don’t plan to sell them to Sprint. An investment from Google or Apple (both very unlikely) would draw extensive scrutiny from the same AGs who objected to the T-Mobile purchase. And another foreign investor, even from Canada or Mexico, would be difficult (but not impossible), if they could afford it.
“Let them compete” under these conditions has clearly defined but unintended consequences: Sprint either a) declares bankruptcy, sending shares to pennies and wiping out Softbank’s investment (and the Japanese banks that helped finance them), and then sells to a cable company (or consortium) if the DOJ, FCC and state AGs allow it; or b) as was stated in the trial, Sprint ceases to be a national provider, which might preserve competition in New York City but will drive up prices in Binghamton, Syracuse, Schenectady, Henrietta, North Chili and Medina. Hopefully the pithy “Let them compete” soundbite is ignored by Judge Marrero and math prevails – that’s why this case is still a coin flip.
Fourth Quarter Earnings Questions
In last week’s TSB, we started to outline the key themes we expected to hear during earnings calls. As a reminder, the earnings season starts next week with Comcast (Thursday, January 23, 8:30 a.m. ET). The remaining calendar (as of Jan 19) is as follows (Neither Sprint nor T-Mobile have indicated times, but, if last year’s schedule is any indication, it’ll be either January 30, January 31, or the week of Feb 3. No info on Windstream):
Apple: January 28 (afternoon)
AT&T: January 29
Verizon: January 30
Spectrum: January 31
Google: February 3
CenturyLink: February 12
US Cellular: week of February 10 (est.)
Altice: week of February 17 (est.)
Frontier: week of February 24 (est.)
Here’s five general questions and five specific-company questions we think should be asked:
- How is the healthy economic picture translating into telecommunications spending? While more agricultural purchases by the Chinese help the overall economy (especially in the Midwest), it does not have a direct tie to telecom spending. But more Roku/ Fire stick/ Chromecast/ Apple TV device sales do drive more residential broadband consumption, more Apple iPhone 11/ 11 Pro/ 11 Pro Max sales drive higher application usage levels (and tonnage if those apps are video-capable), and newly launched Disney + content was likely consumed at an equal or greater rate over mobile devices (call it the American Idol network congestion moment for the 2020s).
Our take is that a strong economy drives device and bandwidth upgrades, but only to a point. Bad debt is going to stay low in 2020 (not only due to economic conditions, but also because of increased relative importance), and all attention is going to be on the wireless and wired broadband tonnage impact of increased content launches as Quibi, Comcast/ NBC/ Peacock, Apple, HBO and others all bring new services to or expand current services in the market.
- How are the overall retail environment struggles impacting wireless carriers? We have written about this extensively, and see the struggles faced by all retailers (in malls, in parking lots near malls, etc.) as a headwind for each carrier, even if it’s not a company-owned store. Couple this with the 6% off all Apple Card/ Apple Store purchases promotion continued through January (as well as Apple Stores being a destination for the hottest product of the Holiday season – AirPods Pro), and there’s a good chance that the lines were shorter at many Verizon, Sprint, T-Mobile and AT&T stores.
- With a possible 5G iPhone launch many months away, will customers continue to upgrade? The initial thought behind slow iPhone 11 sales (which ended up being quite robust) was “Customers will wait for the 5G iPhone.” Then, as reports leaked out that Apple may not have a fully robust 5G version until 2021, customers decided to make the switch (a 3-yr old iPhone upgrade completed in December 2017 would have been from the iPhone 7 which would be a worthy upgrade). AT&T recently reiterated their belief that there could be a 2H 2020 super cycle driven by upgraded 5G device sales (note: this is not publicly shared by any other wireless carrier).
- How quickly will 5G (and specifically mmWave) be deployed? T-Mobile is in the process of deploying 5G over their 600 MHz spectrum band (200 million people; 1 million square miles), giving them 20-25% improved speeds (and really speedy bandwidth in areas not on Verizon’s or AT&T’s 2020 5G deployment radar). AT&T has committed to a nationwide 5G deployment this year (which we interpret to mean that they will have 5G Plus deployed in many areas throughout the country, but that there will still be suburban and rural areas that predominately use 4G LTE). The answer to this question impacts the answer to question #3.
- How quickly are customers cutting their cable cords? Are we moving from OTT as a supplemental content service to being primary? Comcast and Charter lost 313,000 video customers in 3Q 2019 – this could easily go to 400,000 this quarter even with Sony’s PlayStation Vue shutting down (Comcast will set the tone this Thursday, but we expect the greater acceleration at Charter). Revenue concentration is increasing at the cable companies, and some broadband price hikes are holding (for now), but one has to wonder how the long-term health is impacted as others (re)enter the home broadband market.
- For AT&T. What’s the rationale for continuing to hold on to local telephone exchanges, particularly where AT&T is poorly clustered? We have discussed this ad infinitum, but there’s a great opportunity for the larger players in the local telephone industry to swap exchanges (see North Carolina map here). Why AT&T continues to operate in island exchanges such as Lumberton, North Carolina is a mystery (picture of downtown from Wikipedia is nearby). Let CenturyLink serve Lumberton and swap it for a Tennessee or other property that AT&T can serve efficiently. That’s how you compete against cable’s wireline juggernaut.
- Also for AT&T. In-vehicle M2M was enormously successful for AT&T in terms of number of embedded vehicles (24 million cars and 3 million commercial vehicles as of 3Q 2018). But the total annual data consumption from the embedded modems in these vehicles was a scant 45 million GB (3.75 million GB per month or about the equivalent of 450,000 smartphones on unlimited plans). In the link above, AT&T also prominently reveals that they have 1 million retail postpaid subscriptions across the 24 million embedded base – is a slightly more than 4% share something to be proud about? Did AT&T spend a lot of money to get a lot of subpar subscribers, or did the payments from the auto companies (car performance data, which is paid for separately) justify the IT and product development efforts?
- For Verizon. How many Verizon-branded customers left postpaid retail and signed up for Xfinity Mobile and Spectrum mobile? Are any returning? T-Mobile implied at a recent investor conference that many of Xfinity and Spectrum’s gross additions are coming from Verizon retail. We think that their gains are far broader than that, but will see what color is released by Verizon and the cable companies.
- For T-Mobile. How many gross additions remain in 2020 and 2021 from 600 MHz network expansion? As we saw with their 700 MHz deployment, there’s a long runway for T-Mobile in the suburbs and rural markets. If the merger is rejected, we expect T-Mobile to significantly “thicken” these areas (including outdoor CBRS deployments) and aggressively pursue customers.
- For Sprint. How will Sprint “right the network” in Florida? We spend a lot of time looking at network quality for one of our clients, and noticed that Sprint really fell off in all performance areas at the end of 2019. Here’s the RootMetrics RootScore chart for Marcelo Claure’s adopted hometown, Miami:
It’s amazing to think that in the first half of 2018, the spread between Verizon (sole winner in Miami) and Sprint was slightly more than 4 points, at the end of 2017 was 3.7 points, and at the beginning of 2017 was 2.0 points). Regardless of the specific weighting or other quibbling about how RootMetrics conducts their surveys, this is an undoubtedly troubling trend, and it’s not confined to South Florida. Orlando (1.5 pt spread in 1H 2017 has grown to 9.3 pts in 2H 2019), Tampa (2.9 pt spread to 10.1), and Jacksonville (4.6 pt spread to 8.4) have all deteriorated.
Perhaps this is all prepping for the T-Mobile merger, and there’s a plan in place to turn all of Florida into a 5G heaven, but their recent performance signals that they are falling behind – fast.
There are many more questions, but time and space force them to next week’s column. We welcome your thoughts and feedback on which questions you would pose.
Here’s a few of the many follow-ups that we thought would make for additional interesting reading:
- If you have not watched the NBC Universal Peacock unveiling, take the time and view it here. It’s an amazing production. One of you described the day as “beautiful” – that pretty much captures what we saw.
- Verizon introduced a privacy browser called OneSearch that is powered by Bing. Article from The Verge is here and actual website that you can try out is here. Kudos to the company for building it – hope they can effectively market it even with their very strong Google relationship.
- Everyone tried to interpret the latest Goldman Sachs earnings report to figure out how successful the Apple Card has been. It does not appear to have slowed much if at all, but the exact quantities are vague. More here (earnings call transcript) and here (earnings presentation).
- FierceWireless has a great article on Tracfone’s SmartSIM program. According to Jeff Moore of Wave7 research, the largest MVNO in the US appears to be pulling back from the idea for now (we think this could have to do with the overall economics of the program). As the article indicates, the method and algorithm used by Tracfone are unknown at this time (but likely a license of Google Fi which is its own headline).
- One of the best research reports on edge computing is the State of the Edge, a collective research project funded by ARM, Ericsson, Packet (now Equinix), Rafay and Vapor. They updated their 2018 report last month and it’s available for download here (I am about 50% through the 2020 Update and it’s even better than the original).
That’s it for this week. Next week, we’ll comb through Comcast’s release and hit on a few other topics that were raised from our CES article. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Have a great week – and GO CHIEFS!